Efforts to prevent lenders from exploiting people with spotty credit histories are gaining momentum on a national level, as well as in Illinois and Iowa.
Last week, the Federal Reserve Board agreed to tighter regulations on "predatory lending," in which financial institutions use a combination of high interest rates and unusual terms to make it difficult for borrowers to build equity in their homes. Illinois Governor George Ryan followed a day later with even more stringent guidelines for lending in the "subprime market," people with no credit or with poor credit histories.
These larger efforts are being bolstered by local initiatives. The Muscatine Center for Strategic Action/Rural Housing Institute (MCSA/RHI) and the State of Iowa are finalizing a one-of-a-kind pilot project on predatory lending funded by the federal Department of Housing and Urban Development (HUD). And in August, the City of Chicago passed an ordinance - the first of its kind in the country - that forbids lenders to engage in predatory lending if they're doing business with the city. Furthermore, the Woodstock Institute in Chicago, which helped develop that city's new law, unveiled a model predatory-lending ordinance for state and local governments earlier this month.
"We need as many tools as possible," said Dan Immergluck, senior vice president of the Woodstock Institute, a community policy and research group.
In predatory lending, customers are often stuck with high interest rates and "balloon payments," in which the balance of a home loan is due at one time, usually within 10 years. Lenders also tend to bundle other costs - such as a down payment or life insurance - into the loan amount, thus raising monthly payments and making the loan more difficult to pay off. (See "Predatory Lending Comes to the Heartland," River Cities' Reader, Issue 282, August 2, 2000.) While most people who receive these loans have had credit problems, predatory lending is also prevalent in rural communities and with racial minorities.
These types of subprime loans have exploded over the past decade, and the effects are becoming more and more obvious. In the Chicago area, home foreclosures doubled between 1993 and 1998. Foreclosures on Chicagoland properties financed by subprime lenders jumped from 131 in 1993 to nearly 5,000 in 1999.
The Federal Reserve's recommendation constitutes a small step that affects some of the more severe forms of predatory lending. The board lowered the interest rate (by two percentage points) below which financial institutions are protected from claims of predatory lending. The move effectively changes the current allowable interest rate on a 30-year mortgage from 16 to 14 percent before a loan is considered predatory.
The changes proposed by Illinois Governor George Ryan would be much more sweeping, affecting loans above 12 percent and forbidding many predatory-lending practices in Illinois. For example, the regulation would force lenders to prove that the borrower can afford to pay back the loan, and lenders would not be allowed to "flip" loans - refinance them without benefit to the borrower.
The proposal now goes to the state's Joint Committee on Administrative Rules, where 12 legislators will decide its fate. The current committee has not been willing to crack down on exploitive financial practices - it killed rules for "payday loan" companies - but a decision on Ryan's proposal won't come until after a 45-day comment period, which puts its consideration after a new legislature and committee are seated.
Yet organizations working to stop predatory lending are concerned that the proposal will meet fierce opposition from the banking lobby and get buried. Immergluck said the Woodstock Institute plans to raise the issue of predatory lending with the media and pressure committee legislators to state their position on the regulation. "We're going to make this a ... public issue," he said.
Ryan's crackdown approach might not be able to survive an assault by lobbyists for financial institutions. That's one reason the Woodstock Institute has developed its model ordinance for city and state purchasing. Instead of trying to force regulation, the ordinance creates an incentive to stop predatory lending. The law operates on the premise that government business is more lucrative for lenders than predatory mortgages. A copy of the sample is ordinance can be found at
It's too early to tell whether the law is changing lending practices overall, but there is some anecdotal evidence. Bank of America, for instance, was considering terminating its relationship with the City of Chicago because of the legislation but has since decided against it, even the law forbids the bank to make about a quarter of its current mortgage loans.
"We think the ultimate tool is better regulation," Immergluck said. "But this is at least one local response."
In Iowa, the MCSA/RHI and the Iowa Finance Authority have been charged with combating predatory lending. The recipients of a two-year, $500,000 grant from HUD, these two organizations expect to sign a contract as soon as this week. The grant is actually a line item in the HUD budget, without many guidelines. The provision merely says the money should be used "to combat illegal and predatory lending practices in Iowa." "It's flexible," said Shelley Sheehy, development director for the Rural Housing Institute, adding that the grant is subject to state and federal audits.
Sheehy said the grant will pay for three related projects: research on predatory lending in Iowa, consumer education, and agreements with lenders to expand their clientele and avoid predatory practices.
"We're pretty lucky," Sheehy said. "We were the only place funded in the country." The predatory-lending grants were originally supposed to cover 10 states and include $3.5 million; the numbers kept getting whittled through the legislative process.
The first component of the grant will help fill out what is now an incomplete paper trail on predatory lending in Iowa. MCSA/RHI already has some data on predatory lending in the Davenport area and Muscatine County, but the grant will fund broader studies of practices in all eight of Iowa's metro counties and in six rural counties throughout the state. "No one collects this data and keeps it in a readable fashion," Sheehy said. For example, the most accessible information about predatory lending comes from reports banks file with HUD, but many exploitive loans are done on a "contract sale" basis and don't show up in those records. MCSA/RHI will use some of the grant money to look at real-estate-transaction records in the areas in question and collect better information. "The data is the truth, and the strength," Sheehy said.
The second component of the grant will be used to educate 100 trainers on predatory lending and how to help their clients avoid it.
While more information and education are important, they don't stop predatory lending. The final component of the grant will include negotiating "investment agreements" with six major financial institutions in the state. The agreements are meant to be collaborative rather than punitive; MCSA/RHI will help lenders get more customers (especially in rural areas) if the institutions promise to give borrowers fair access to credit with reasonable terms, and not engage in predatory lending. Like the Chicago ordinance, the plan is envisioned as a reward for institutions that give credit responsibly.
The Woodstock Institute's model predatory-lending ordinance can be found on the Web at (http://www.woodstockinst.org/modelordinance.html).
These larger efforts are being bolstered by local initiatives. The Muscatine Center for Strategic Action/Rural Housing Institute (MCSA/RHI) and the State of Iowa are finalizing a one-of-a-kind pilot project on predatory lending funded by the federal Department of Housing and Urban Development (HUD). And in August, the City of Chicago passed an ordinance - the first of its kind in the country - that forbids lenders to engage in predatory lending if they're doing business with the city. Furthermore, the Woodstock Institute in Chicago, which helped develop that city's new law, unveiled a model predatory-lending ordinance for state and local governments earlier this month.
"We need as many tools as possible," said Dan Immergluck, senior vice president of the Woodstock Institute, a community policy and research group.
In predatory lending, customers are often stuck with high interest rates and "balloon payments," in which the balance of a home loan is due at one time, usually within 10 years. Lenders also tend to bundle other costs - such as a down payment or life insurance - into the loan amount, thus raising monthly payments and making the loan more difficult to pay off. (See "Predatory Lending Comes to the Heartland," River Cities' Reader, Issue 282, August 2, 2000.) While most people who receive these loans have had credit problems, predatory lending is also prevalent in rural communities and with racial minorities.
These types of subprime loans have exploded over the past decade, and the effects are becoming more and more obvious. In the Chicago area, home foreclosures doubled between 1993 and 1998. Foreclosures on Chicagoland properties financed by subprime lenders jumped from 131 in 1993 to nearly 5,000 in 1999.
The Federal Reserve's recommendation constitutes a small step that affects some of the more severe forms of predatory lending. The board lowered the interest rate (by two percentage points) below which financial institutions are protected from claims of predatory lending. The move effectively changes the current allowable interest rate on a 30-year mortgage from 16 to 14 percent before a loan is considered predatory.
The changes proposed by Illinois Governor George Ryan would be much more sweeping, affecting loans above 12 percent and forbidding many predatory-lending practices in Illinois. For example, the regulation would force lenders to prove that the borrower can afford to pay back the loan, and lenders would not be allowed to "flip" loans - refinance them without benefit to the borrower.
The proposal now goes to the state's Joint Committee on Administrative Rules, where 12 legislators will decide its fate. The current committee has not been willing to crack down on exploitive financial practices - it killed rules for "payday loan" companies - but a decision on Ryan's proposal won't come until after a 45-day comment period, which puts its consideration after a new legislature and committee are seated.
Yet organizations working to stop predatory lending are concerned that the proposal will meet fierce opposition from the banking lobby and get buried. Immergluck said the Woodstock Institute plans to raise the issue of predatory lending with the media and pressure committee legislators to state their position on the regulation. "We're going to make this a ... public issue," he said.
Ryan's crackdown approach might not be able to survive an assault by lobbyists for financial institutions. That's one reason the Woodstock Institute has developed its model ordinance for city and state purchasing. Instead of trying to force regulation, the ordinance creates an incentive to stop predatory lending. The law operates on the premise that government business is more lucrative for lenders than predatory mortgages. A copy of the sample is ordinance can be found at
It's too early to tell whether the law is changing lending practices overall, but there is some anecdotal evidence. Bank of America, for instance, was considering terminating its relationship with the City of Chicago because of the legislation but has since decided against it, even the law forbids the bank to make about a quarter of its current mortgage loans.
"We think the ultimate tool is better regulation," Immergluck said. "But this is at least one local response."
In Iowa, the MCSA/RHI and the Iowa Finance Authority have been charged with combating predatory lending. The recipients of a two-year, $500,000 grant from HUD, these two organizations expect to sign a contract as soon as this week. The grant is actually a line item in the HUD budget, without many guidelines. The provision merely says the money should be used "to combat illegal and predatory lending practices in Iowa." "It's flexible," said Shelley Sheehy, development director for the Rural Housing Institute, adding that the grant is subject to state and federal audits.
Sheehy said the grant will pay for three related projects: research on predatory lending in Iowa, consumer education, and agreements with lenders to expand their clientele and avoid predatory practices.
"We're pretty lucky," Sheehy said. "We were the only place funded in the country." The predatory-lending grants were originally supposed to cover 10 states and include $3.5 million; the numbers kept getting whittled through the legislative process.
The first component of the grant will help fill out what is now an incomplete paper trail on predatory lending in Iowa. MCSA/RHI already has some data on predatory lending in the Davenport area and Muscatine County, but the grant will fund broader studies of practices in all eight of Iowa's metro counties and in six rural counties throughout the state. "No one collects this data and keeps it in a readable fashion," Sheehy said. For example, the most accessible information about predatory lending comes from reports banks file with HUD, but many exploitive loans are done on a "contract sale" basis and don't show up in those records. MCSA/RHI will use some of the grant money to look at real-estate-transaction records in the areas in question and collect better information. "The data is the truth, and the strength," Sheehy said.
The second component of the grant will be used to educate 100 trainers on predatory lending and how to help their clients avoid it.
While more information and education are important, they don't stop predatory lending. The final component of the grant will include negotiating "investment agreements" with six major financial institutions in the state. The agreements are meant to be collaborative rather than punitive; MCSA/RHI will help lenders get more customers (especially in rural areas) if the institutions promise to give borrowers fair access to credit with reasonable terms, and not engage in predatory lending. Like the Chicago ordinance, the plan is envisioned as a reward for institutions that give credit responsibly.
The Woodstock Institute's model predatory-lending ordinance can be found on the Web at (http://www.woodstockinst.org/modelordinance.html).
