Snaring Home-Loan Sharks

Financial predators who prey off seniors and the poor with shady loan deals need catching.

As interests rates go lower, many homeowners consider refinancing their mortgages. That's bait for the loan sharks who take unfair advantage of borrowers who have poor credit and, typically, a poor understanding of finance. The deals offered often have hidden - and high - fees.

The Federal Reserve Board defines predatory lending as (1) providing unaffordable loans based on the borrower's assets instead of the borrower's ability to pay, (2) inducing borrowers to refinance in order to collect more fees (known as "loan flipping"), or (3) hiding at least some of the costs of the loan.

Critics of such practices would like to add to that list the charging of unusually high (and often undisclosed) prepayment penalties and hiding "balloon" payments (large lump sums due later in the life of the loan). But others argue that toughening the rules will scare off legitimate lenders and thus hurt higher-risk applicants who simply want to improve their lot.

Efforts to find possible predators are improving - from legislation that would cap the fees lenders charge to a Federal Trade Commission suit against Associates First Capital Corporation, owned by Citigroup Inc.

The sub-prime mortgage market (created to loan money to consumers who don't have a stellar, or "prime" credit history) was a $35 billion industry in 1994. It jumped to $140 billion last year. This market cries out for more regulation, but, unfortunately, some lenders are trying to block needed legislation.

Not all sub-prime lenders are predators. Policymakers should be mindful of piling on too many restrictions, lest banks be scared away from lending to the neediest borrowers.

Better education of borrowers can go hand in hand with better laws. With more than 80 percent of Americans 50 and over owning their own homes, AARP, formerly the American Association of Retired Persons, has launched a thoughtful campaign against predatory lending (www.aarp.org/homeloans). Efforts that combine education with legal protection on behalf of borrowers who want to buy or refinance a home should do much to stop the predators while allowing legitimate lending to go forward.

And, oh yes - always read the fine print.

(c) Copyright 2001. The Christian Science Monitor