Lawmakers seek to stop predatory lenders

Eighty-year-old Edgar Johnson had paid off his Memphis house until a mortgage broker solicited him at a grocery store and talked him into taking out a loan to pay for home improvements.

He signed all the documents for the ,000 loan at home, without the knowledge of his children, and now pays 5 a month for work that wasn't completed and for debt consolidation that hasn't paid off any creditors.

Such stories are common in Memphis, according to Webb Brewer, litigation director for the Memphis Area Legal Services, who represents Johnson and testified before a state House-Senate committee investigating predatory lending practices.

"We see it all the time. It's really amazing," he told The Associated Press.

Last week, the committee chaired by Sen. Roy Herron, D-Dresden, issued a report on its initial findings and on Monday will begin working on legislation seeking to protect borrowers from such abuse.

Herron said he didn't realize the problem was so "pervasive or pernicious" until he heard testimony at six meetings in Nashville, Chattanooga and Memphis.

"There are a number of laws on the books but none of them are adequate in preventing these types of loans, nor are they sufficiently punitive against those who defraud these citizens," Herron said.

He said the legislation may have provisions ranging from credit counseling to stiff penalties, as well as banning most home-closings and prepayment penalties.

There should also be a prohibition against loans where the monthly note totals more than 50 percent of a borrower's income, Brewer said.

The committee heard about a Nashville couple with a combined income of ,700 a month who say they were tricked into signing documents forcing them to pay ,760 a month for their mortgage.

"Loaning people money to buy homes is an honorable and even noble profession, but tricking people into loans so you can take their homes away from them is dastardly and deserving of a special place in the hereafter," said Herron, a Methodist minister.

According to the committee's report, predatory lenders typically target low-income people with bad credit, minorities and elderly homeowners with equity in their houses.

The committee said it had "incontrovertible proof" that some brokers were:

- Charging high fees and interest rates so they would get more compensation;

- Encouraging clients to pay off credit cards and other debts by consolidating them into one loan, which often increased the amount paid in interest;

- Setting borrowers up for "balloon payments," where little to none of the money went toward the principal;

- Loaning homeowners with significant equity more than they could financially handle in hopes they would default and the lender could sell the house;

- Encouraging "flipping," or repeated refinancing of a loan, so that more fees could be charged;

- Adding unwanted extras like credit life or disability insurance onto a loan, making them more expensive on the front end;

- And closing loans in borrowers' homes without witnesses or attorneys present, creating high-pressure situations.

"It's inherently abusive," said Whitney Durand of Southeast Legal Services in Chattanooga. "It causes unhealthy people who cannot easily leave their surroundings to let down their guard. ... It's just not a suitable setting for a business activity."

The committee also found some predatory home improvement contractors acting as loan originators or mortgage brokers and targeting homeowners in low-income areas. State law exempts such contractors from the mortgage broker licensing law, the committee said.

Jack Sullivan, president of the Mortgage Company of America and president-elect of the Tennessee Association of Mortgage Brokers, said he doesn't think predatory lending is a "major problem" in the state, "but we do believe it is a problem and the committee is headed in the right general direction."

He said the state Department of Financial Institutions received more than 300 complaints about mortgages last year, but only about 16 appeared to be predatory lending.

"It's heart-rending and you hear some of the worst cases of abuse and you feel sorry for these individual people and yes, we would like to see that stopped," he said, but added that many cases involve fraud, which already is against the law.

Sullivan said some changes in federal rules regarding home loans were implemented in October and should be given time to work, but that the association supports legislation requiring all loan officers to be licensed and undergo continuing education.

He said "everybody on all sides seems to endorse with some tweaking" the national mortgage brokers' model legislation to do that, including consumer advocates. He said the state organization is working with the state Department of Financial Institutions on a proposed bill.

Brewer said the general idea of that legislation is good, except that it apparently "grandfathers" current brokers into existing law.

"The problem with that is there's such a glut in the market of mortgage brokers, especially unethical ones, that if you grandfather them in, you really take all the teeth out of the law," he said.

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