BODY: WASHINGTON -- Unscrupulous lenders are forcing
people out of their homes, and Congress must act, Senate Banking Committee
Chairman Paul Sarbanes says.
The Maryland
Democrat commented at the start of a 2-day hearing on predatory
lending. The panel heard borrowers detail a litany of abuses that, for the
most part, are within the law.
Mary
Podelco, a retiree from Montgomery, W. Va., told lawmakers how aggressive
lenders hounded her into foreclosure just 2 years after she took out her first
loan against a home she had owned outright.
Podelco says she initially borrowed in 1995 to pay for new windows and
heating. A series of lenders persuaded her into seven refinancings. Each rolled
new equity-eating fees into higher and higher loan balances, a practice known as
"flipping." Her monthly house payment rose to $ 434, nearly consuming the $ 470
a month Social Security check that provided her livelihood.
"I now understand they pushed me into loans I couldn't
pay," she said.
Calling predatory lending
"a national scandal," Iowa Attorney General Tom Miller told the committee of
other practices by lenders intent on raiding equity built up over years by
low-income, unsophisticated homeowners:
*
Use of "bird dogs," or loan prospectors, paid to identify easy targets.
* Use of balloon payments that hold down
initial monthly costs until a specified date, when borrowers face a huge balance
they have no chance of paying. That triggers foreclosure.
* Prepayment penalties that lock in the deal even after
the borrower recognizes the problems.
Industry representatives condemn such practices, but say laws are in
place to deal with the troublemakers. The Federal Reserve and the Federal Trade
Commission each have authority to crack down, they say.
But Sarbanes, who became chairman with the Democratic
takeover of the Senate in June, says tougher laws are needed.
Both sides agree that any action to curb cheaters must
allow legitimate lenders to continue operating. Some of those lenders charge
higher fees and interest rates to offset the higher risk of making loans to
borrowers with impaired credit.
A recent
wave of state and local legislation has caused reputable lenders to withdraw
from certain locales. The losers in that, industry officials argue, are the
low-income borrowers who lose access to credit.
"It's a problem that needs to be addressed with a hard head as well as
a soft heart," said Charles Calomiris, an American Enterprise Institute
economist. He says the only role for Congress now is to stop the growing
patchwork of laws aimed at predators but which stifle legitimate mortgage
firms.