Seven years ago, Oakland homeowner Earline Goodman took out a $25,000 equity loan to help her son go to school. Wary of getting a bad deal, she took some smart precautions. She told her lender, Household Finance, that she didn’t want her loan to include a balloon payment, or a final payment on the principal that’s worth almost as much as the loan. She argued them out of selling her an insurance policy that she didn’t need as part of her loan. But after seven years of payments, the principal on Goodman’s loan never seemed to shrink; she still owes $21,000, thanks in part to her whopping 13.25 percent interest rate.
Goodman, who supports several family members on the salary she makes as a caregiver for people with mental disabilities, became increasingly uncomfortable with the terms of her loan when she learned that she would be charged a penalty if she tried to pay off her loan early, and that if she couldn’t make payments, her lender could take her house. Worried, she asked Household Finance to refinance her loan. They agreed, but when all the fees for refinancing were added up, she says her total debt would actually be over $25,000, the amount of her original loan. “I’m back where I started,” she sighs. “It’s like they don’t ever want you to pay it down. I guess it’s supposed to drag on for like thirty years.”
Shockingly enough, Goodman’s story of endless debt is mild, at least when you compare hers to the fates of other Oakland borrowers struck by what critics call “predatory lenders.” There are many legitimate lenders who specialize in giving high-interest, long-term loans to borrowers whose financial circumstances or poor credit records generally mean that they would be turned down by other banks; the technical name for this is “subprime lending.” But a subprime lender becomes a predatory lender when the loan is designed to be unpayable, leading either to eternal debt or, if the borrower cannot make payments, the loss of the victim’s home. Predatory loans employ a variety of tricks; some of the more common include hidden costs that dramatically inflate loan payments, interest rates that increase over time or as a penalty for missed payments, frequent offers of refinancing or debt consolidation that end up vastly increasing the borrower’s debt (also known as “flipping”), or the inclusion of something called “financed credit life insurance” that is tacked onto the bill (when borrowers die, their assets go to pay off their debt, rather than to their families). It is not unheard of for predatory loans to have interest rates of between 10 and 22 percent.
In urban areas like Oakland, predatory lending is an increasing problem, and for the last two and a half years ACORN (the Association of Community Organizations for Reform Now) and several other grassroots groups have been fighting to protect people from loan scams. Many of Oakland’s neighborhoods are particularly attractive to lenders who tend to prey on what ACORN organizer Brian Kettenring calls the “house-rich and cash-poor” — generally, senior citizens in poor or minority areas. They may not have much money on hand, but they’ve spent decades building up equity in their homes. “Predatory lending is about the global finance system ripping off your grandmother in East Oakland; it’s a wealth transfer of equity from low-income and working-class homeowners to large predatory lenders,” says Kettenring.
Exacerbated by redlining, or the exodus of mainstream banks from urban and low-income areas, subprime lending has become a lucrative and rapidly growing sector of the banking industry. Nationally, the number of subprime home purchase and refinance loans has grown more than 1,000 percent in the last ten years, and many of these loans are made to people who would actually qualify for a better loan elsewhere. Both subprime and predatory lending have a strong racial component; although the overall majority of subprime loans are made to white borrowers, it’s becoming the dominant form of lending in many minority neighborhoods. An ACORN study conducted in 1999 shows that in Oakland, subprime loans accounted for 36 percent of all refinance loans made to African-American homeowners and 17 percent of those made to Latino homeowners, but only 9.5 percent of those made to white homeowners. The disparity was even more apparent when the researchers controlled for income levels; 53 percent of all loans went to low-income African Americans and 44 percent to Latinos, but only 16 percent of loans to low-income whites.
Predatory lenders are notoriously aggressive about advertising in low-income neighborhoods, blanketing poor neighborhoods with fliers, cold-calling, and paying visits to people’s homes. Lenders sometimes comb through public records of foreclosures and skipped mortgage payments to look for likely borrowers. “My husband passed in October 1999, and shortly after his death was announced in the paper, I started getting ten to twelve pieces of mail a day about loans. Some of them were up to $100,000,” says ACORN board member Fannie Brown. “If I hadn’t been with ACORN working on the situation, I would have fallen for it, too.”
In conjunction with several unions, faith-based groups, and the American Association of Retired Persons, ACORN has been pushing for governmental reform to protect consumers from predatory lenders since 1999. Within the past few weeks, they have scored a double victory. Though two previous efforts had stalled, two weeks ago the California state legislature finally passed anti-predatory lending bill AB 489. Governor Gray Davis has expressed his support for the bill and is expected to sign it by mid-October. The state’s change of heart was no doubt spurred by a similar, but tougher, ordinance that was unanimously approved by the Oakland City Council in July, and which was officially passed last week. Only one other state (North Carolina) and one other city (Philadelphia) have enacted anti-predatory lending laws, although several other states are currently considering it.
Together, the new regulations constitute a one-two punch. The state law lays down the basics by effectively limiting the fees that can be packed into high-interest loans. It also prohibits excessive prepayment penalties, lending without regard for repayment ability, and refinancing in ways that will not benefit the borrower. The Oakland ordinance, which will take effect in July 2002, goes even further. Although in many areas it simply reaffirms the new state law, it also stipulates that home-loan borrowers must receive counseling from an independent housing or credit counselor before signing anything. The Oakland ordinance also forbids the city to do business with predatory lenders or their parent companies.
According to ACORN members, the state was slow to warm up to a predatory lending ban partially because it hadn’t become a front-page issue. “[State legislators] were wavering on it, and we were getting a message that there was a lot of opposition to the bill,” says Oakland City Councilmember Jane Brunner, who strongly supported passing a local ordinance. “We did it to send two messages: One was that we support [the ban]. Two was saying that if they don’t do it, we’ll do it.” The recent success of several other grassroots efforts added to the momentum. For instance, this summer, after a good deal of pressure from ACORN, both Citigroup and Household Finance agreed to stop selling financed credit life insurance. Ameriquest, a frequent target of noisy ACORN protests, last year agreed to lower interest rates, drop balloon payments, and even gave back money to some Oakland loan recipients.
Both the new state and local regulations will certainly face legal challenges. The American Financial Services Association, a lobbying group that represents many of the nation’s subprime lenders as well as their more prestigious parent companies, sued the city of Philadelphia over their predatory lending ordinance. Both ACORN and Oakland city staff expect a similar lawsuit to be filed here.
Although lending institutions were invited to participate in the formation of Oakland’s ordinance, their response was not enthusiastic. Overall, they’ve indicated that they prefer that any legislation happen on the state or federal level. They complain that allowing cities to pass their own laws will result in contradictory legislation that will be so confusing that some lenders will simply leave town. Others, they say, will have to spend so much money to ensure compliance that they’ll end up having to charge their borrowers more.
It’s a claim scoffed at by most activists and Oakland government employees. “They tell you they’re going to move out of state, that they can’t do business because the laws are too stiff,” says Brown. “That’s an excuse. They’re not going anywhere.” Kettenring chalks it up to sour grapes. “They’re saying that now because they lost in Sacramento. They would have preferred to have no laws anywhere, and they’ve been clear about that for many, many years,” he says. “Now that both Oakland and Sacramento appear to have laws, they’re going to choose the more modest of the two.”
But it does raise a legitimate question: In Oakland, will state or local law take precedence? Jackie Campbell, of Oakland’s Community and Economic Development Agency (CEDA), says that the city ordinance was drafted after a thorough review of state law by the City Attorney’s office, so the Oakland rules are expected to expand, rather than clash, with state law. “We don’t see any conflict,” she says. “The state’s legislation does not preempt local cities from doing their own legislation.”
There is, however, no question that the next stage of Oakland’s battle with predatory lenders will be hashed out in the courts. In fact, the Oakland ordinance was designed with legal action in mind. In a report prepared by the city’s economic development office, staffers wrote that they expect the ordinance to be “self-enforced by aggrieved borrowers or organizations acting on their behalf” who would be filing individual lawsuits. In the past, many private lawyers were reluctant to take cases on behalf of predatory lending victims because they had so little legal ground to stand on; the Oakland ordinance should give them a fighting chance. The city also expects groups like ACORN to do much of the community outreach and borrower education; a door-to-door campaign is already in progress in the Fruitvale/San Antonio area. This June, the city also received a $25,000 grant from Freddie Mac to start a consumer education program called “Don’t Borrow Trouble,” for which Campbell is now the project manager. Potential borrowers who have questions about finances can call 1-866-81-HOUSE for help.
As for Earline Goodman? It’s too late to do much about her costly loan, but she knows she’s one of the comparatively lucky ones. “It makes me feel so stupid that I did it. I think about the senior citizens losing their homes here, and if I wasn’t working and something happened to me where I couldn’t pay, it could happen to me,” she says. “I’m a very trusting person, and it just breaks my heart when I find out that people are not what they’re supposed to be.”