Sharks patrol these waters
Predatory lenders prey on the weak while Georgia consumer laws remain shallow
You hear the words predatory lender and you think of some shadowy force, a loan shark circling someone's lifeboat. Lillian Cason thinks of getting a job.
Cason, 78, lives in a small white house in Ormewood Park. It was 1976 when she bought the two-bedroom on the corner of Delaware Avenue. In May 1994, she borrowed $24,000 on the equity she'd built up during the previous 18 years. She's now paid her new lender, a subsidiary of Associates First Capital, about $23,000. She's nowhere near done.
In 15 years, Cason, at age 93, is scheduled to retire the loan — after $65,000 in payments.
Like so many elderly homeowners, and like many younger minority and low-income tenants, Cason became the prey of what some call predatory lending. It's a complicated business, a practice the state of Georgia has chosen to take little control over, and a situation that makes it difficult to see the debt's end.
For some, the end is an eviction notice.
"The effect here is to basically take advantage of low-income, unsophisticated borrowers who happen to have a lot of equity," says Marietta bankruptcy attorney Howard Rothbloom. "Ultimately, they lose their homes."
Rothbloom, who in the early 1990s won a class-action suit against Fleet Financial Group over the company's lending practices, recently got class-action status on a complaint filed against The Associates. The lawsuit alleges that The Associates sold illegal insurance mostly to low-income elderly homeowners to add to the burden of their high-interest predatory loans.
The alleged scam, which adds thousands of useless dollars to a loan, is one of several employed by predatory lenders. It's also among the few lending abuses punishable by state law.
Cason couldn't join Rothbloom's class-action lawsuit. She is among the majority of predatory lending victims for whom recovery through the courts in Georgia is unlikely.
Back in 1976, she bought her home for $15,000, in a neighborhood where houses now sell for $250,000 or more. She refinanced over the years, when one or another hardship came up.
Now, she can't see where refinancing got her. Cason receives about $630 each month from Social Security and $70 in retirement funds from Georgia Baptist Hospital. About half of that goes to The Associates.
"I know it's not right what they're doing to other people and to me," says Cason, perched on the edge her couch, glancing around her pink-walled living room with white brick trim.
Bill Brennan, a national expert on predatory lending who works at the Atlanta Legal Aid Society, can barely keep his pitch down when he talks about cases like Cason's. When he describes predatory lenders, he drops phrases like "a system of economic apartheid."
"I've been studying it for 12 years," Brennan says. "There's no excuse for what they're doing."
Predatory lending often is confused with subprime lending, the practice of lending money at high-interest rates to borrowers with bad credit. But Brennan and other advocates say subprime lending, which has blossomed over the past 15 years into a lucrative business, can sometimes amount to predatory lending because its practitioners often take advantage of the most vulnerable borrowers.
"When you're asking these companies to give up abuses, you're asking them to give up a lot of money," says Brennan. "They're not going to do it. They've already said they're not going to do it."
Subprime lenders defend their practices, noting that they're legal.
"I think there is some confusion out there as to what subprime lending is and isn't," says David Sanford, spokesman for The Associates. "I think there has been an attempt to muddy the water between subprime lending and predatory lending."
Sanford says The Associates define predatory lending as lending that is deceptive or illegal. His company, he argues, does not dupe borrowers and in fact warns them of disreputable practices.
"It's not in our interest to make a loan to somebody who's not going to be able to repay it," he says.
He also says subprime lending offers a high-interest option to a "high-risk" borrower — one who might not be approved otherwise for a loan.
Brennan snorts at such justifications. "There's not really a risk," he says. The equity in most borrowers' homes should be sufficient collateral to secure a loan. Also, subprime lenders typically loan less than 80 percent of the value of a home. They therefore are guaranteed to make at least 20 percent should they have to repossess.
Predatory lending abuses fall into at least one of three categories, he says. Some lenders overcharge on interest and points and justify the practice because they're lending to those who they define as "high risk."
A second abuse involves excessive surcharges. There are at least half a dozen creative and abusive surcharges that are not punishable by state law. Among those on Brennan's list is "flipping," a series of refinancing maneuvers that benefits the lender but not the borrower.
The third category is profiling. Lenders seek out low-income, African-American or elderly borrowers. They go so far as to search deed records in the courthouse and compile lists of high-equity, low-income homeowners.
Then, they go in for the kill.
"They target minorities because they think they can get away with it," Brennan says. "They think they don't have access to the court system. They're used to not getting justice."
Brennan says predatory lending is particularly acute in DeKalb and Fulton county neighborhoods south of Interstate 20. Pockets within DeKalb have some of the highest recorded foreclosure rates in the country, and both DeKalb and Fulton report as many as 300 foreclosures in a month. Not all foreclosures are attributable to predatory lending, but predatory lending is at the root of a growing portion.
Brennan sees about 30 new cases of what he calls predatory lending per month. About 15 years ago, such cases were nonexistent. Today, one in five of the victims are able to recover some of their losses. The others can refinance, sell the home out from under the lender, file for bankruptcy or lose the home.
"A lot of the time, there's nothing I can do," Brennan says.
"The vast majority of the work [predatory lenders] do is in the gray compounds of the law," says Jimmy Bennett, director of the DeKalb-Fulton Housing Counselor Center.
In next winter's General Assembly session, state Sen. Vincent Fort, D-Atlanta, plans to introduce legislation that would clarify those gray areas. Drawing from North Carolina legislation that went into effect this year, the Georgia Fair Lending Act would restrict high-cost home loans, create a precedent for borrowers to sue lenders and make it a misdemeanor for lenders to violate certain consumer rights.
"Unless it's drastically changed, it would be very effective," Brennan says of Fort's legislation.
Sanford, speaking for the Associates, says there is danger in such legislation. "You want to be careful that in the move to protect consumers you don't wind up unintentionally hampering access to credit," Sanford says.
Although the North Carolina legislation is the first of its kind, more than half the nation's states at least require lenders to appear before a judge prior to foreclosing. There, in the courtroom, a lender must prove that he can fairly seize a home, and a borrower has a chance to put up a defense.
In Georgia, it's easier for a borrower to foreclose on a homeowner. A family can be evicted within two months of receiving the first foreclosure notice. In Georgia, foreclosure victims don't get their day in court.
"The closest they get to the courthouse is the auction (of foreclosed homes) on the courthouse steps," says Brennan.
Cason says her home won't end up on those steps. Nor will she sell it, not even if she could get $250,000 for it, not even if The Associates were to leave her a fraction of that quarter-million.
It's just that she fell on the ice in January and hasn't been able to work since. Her back's just about healed now. She'll be ready to go back to work, soon, as a caretaker for Alzheimer's patients.
"If I can help it," she says, "I'm not gonna lose my house."