Predatory Lending Video Program

Part 1 Panelists

Mark Ireland, assistant attorney general in the Consumer Enforcement Division, specializing in protection of consumers against fraud and other abuses.

Maritza Mariani, associate director of the Neighborhood Development Alliance on St. Paul's West Side. She specializes in educating home buyers and preventing foreclosures.

Kristin Siegesmund, an attorney, supervises the consumer unit of the Legal Aid Society of Minneapolis. She has worked against discrimination in housing.

Paul Satriano, himself a victim of a predatory housing loan, is on the board of directors of ACORN, which stands for Association of Community Organizations for Reform Now.

The program was hosted by freelance journalist Gary Gilson and produced by the Department of Human Rights in collaboration with Saint Paul Neighborhood Network (SPNN). Check SPNN’s web site for the latest airtimes.

Part One Transcript

Introductory comments -- Gary Gilson:

I'm Gary Gilson, and I'm here to moderate a discussion produced by the Minnesota Department of Human Rights on the topic of predatory lending, the kind of lending that can lead to foreclosure, to the destruction of a person's credit, and to the deterioration of neighborhoods. Predatory lending derives its name from the word "predator," a word that describes a person or a beast that preys upon the weak for its own gain. Until now, in Minnesota and in other states that have had no laws against predatory lending, a lender could make a loan he knew would eventually result in financial disaster for the borrower. Those states and ours did not require a lender to consider a borrower's ability to repay.

That changed in Minnesota this year when the Legislature passed and Governor Pawlenty signed a law against predatory lending that takes effect on August 1st. Brokers and lenders will have to consider a buyer's ability to repay. The law also prohibits other abuse of lending practices, the very thing we'll be talking about in this program and the one to follow. The push for these laws comes when a lot of Minnesotans have been losing their homes. Foreclosures in Hennepin County in the first three months of 2007 were twice the number in 2006. People can lose their homes for many reasons, but predatory lending is a major cause. It's been happening in greater Minnesota, in metro area suburbs, and in the inner cities.

We brought together several people, including a victim of predatory lending. They all have special knowledge about these problems, including loans that promise to tide you over until payday and other illusions of security. We'll also talk about discrimination in housing and what's considered illegal under the Minnesota Human Rights Act and under the federal Fair Housing Act.

Panel Discussion -- Part One

Gilson: Mark Ireland, tell us what the main abuses are when it comes to lending.

Ireland: Well, I don't think that there's one set definition of what predatory lending is, but there are certain things that big warning bell should go off if you encounter it. One is, you've got high fees and costs. Two, you've got shock payments, and that can come in the form of an adjustable rate mortgage or maybe some sort of balloon payment where you've gone in to a mortgage broker and you've said, you know, I've got 600 or 700 or $1,000 to pay a month. And they give you a mortgage. And that is what your payment is for the first two, three, five years. And then after that, all of a sudden your mortgage payment just skyrockets. And, of course, you haven't gotten a raise that would cover that or maybe there have been other expenses or circumstances.

Gilson: Well, why haven't you known that it was going to happen?

Ireland: I think a lot of times there's been some misrepresentation by the broker. The disclosure that this balloon payment was going to come wasn't clearly disclosed or explained to people. Or the adjustable rate mortgage. I mean, this is pretty sophisticated stuff. And I think most people just understand, this is what my monthly payment is going to be starting out. And they don't understand that that interest rate is going to change.

Siegesmund: One of the problems with the adjustable rates under the current law is that brokers and lenders can obey the law and not disclose what can happen to the loan. They're not required to. It's not illegal, even though if someone thought about it, they would realize that it would necessarily increase after the initial term. But that isn't shown to them. All they have to show is what the rate is right now.

Gilson: That's going to change with this new law on August 1st?

Siegesmund: Well --

Satriano: Yes, it is. The new law says that they have to tell them what the payment's going to be. And they have to tell them if there's a balloon. They have to notify them that the insurance is not mandatory because that's what happened with my situation. They took out a $100,000 policy on me saying, well, we got to protect, you know, ourselves in case anything happens to you.

Gilson: What happened to you?

Satriano: I got hit with a predatory loan and what happened was they were going to pay some of my credit cards off. Yes, big deal. But we wanted just a certain amount. But they said, well, credit rating didn't come back that well. So, what did they do? Then they said, we're going to have to do this. So they did a certain thing. But they didn't tell us there was a prepayment penalty. And they did tell us that the insurance was permanent. They said, we have to charge you insurance in case anything happens to you. And then they didn't tell us that we couldn't argue it. Because it was -- you had to go to an arbitrator instead of going to court. At the end, what happened was, we went to the Attorney General's office, along with the banking commissioner, Jim Burnstein, who was great through this whole thing, and what we did was we sued them, ACORN, and we came up with $475 million for the 50 states. But it was our state that led the way.

Gilson: But did you and your family personally go through some agony?

Satriano: Oh, yes. I mean, basically, you know, you have to come up with the payment. Oh, the biggest one, that's right, I forgot to mention it, every two weeks you had to pay. It wasn't every month. It was every two weeks. But I thought, you know, when you go in and you say to somebody, every two weeks you just pay so much, you know, we take it out of your check, we figure, oh, fine. Because we get paid twice a month, so it must be every two weeks. Some months you paid three. And I said, no, no, no, no, no. I said, that's not the way I understood it. But they said, yes.

Gilson: Maritza, what about the abuse of falsely qualifying a borrower?

Mariani: We're seeing a lot of that in the Latino community. We're seeing families who are, you know, qualifying for, let's say, 160,000 and then they're steered to another broker and the broker puts them in a different loan, like an 80/20, and, again, doesn't explain all the terms of that loan. There's taxes and insurance that are included. And then their payments are 200, $250 higher than what they anticipated. And eventually they do go into foreclosure.

Satriano: That one came up with ACORN where a Spanish-speaking realtor went to Spanish-speaking families, and told them that, oh, I can get you into a house. And the house was maybe worth 120. He was selling it for $200,000. And there was still bad stuff. There was lead paint in the house. But when he -- you know, when they came to fix it up, they found out that it was overpriced. So they said, "Well, we can't do nothing for you."

Mariani: And in a lot of those situations, the issue was not only was that loan was a predatory loan, but the clients thought that they were getting a home inspection and they actually weren't getting a home inspection. They weren't paying. The realtor was telling them that, yes, everything's been done. The city's inspected the property. And when, you know, they purchased that property, it was in terrible condition. And they couldn't afford to fix it up.

Ireland: When you get those inflated appraisals and the housing market slows down or decreases, you get people who have -- owe more than what the house is worth.

Mariani: Exactly.

Ireland: Even if they have been making their payments somehow, struggle to make their payments all along to build their credit rating and to qualify for a refinancing, all of a sudden they can't because when they sell their house, they're going to -- they're going to owe more money and then there's the sleeper, the trap of the prepayment penalty, where they're going to have to pay 5,000, 7,000, $10,000, in addition to what they owe to get out of the loan.

Mariani: They can't refinance. There's no equity in the house to refinance.

Gilson: Where, Kristin, is the responsibility of the consumer in all of this?

Siegesmund: Well, of course that is a very important consideration and one of the reasons to have a program like this. These transactions are very complicated, and the truth is, even very highly educated and sophisticated people are scammed. Most closings, there are a huge stack of documents and almost every closing proceeds with sign here, sign here, sign here, sign here. That said, people do need to ask questions. I think in our office, what we see often is people are extremely attached to their homes. They don't want to lose them. And they very much want to believe that a rescuer has come to them and is going to let them have their dream. People need to ask questions. Are there prepayment penalties? What are the fees? What will be my payments, my total payments?

Mariani: The education component is really important. For the organization that I work at, Neighborhood Development Alliance, we've seen that 98% of our clients coming in for foreclosure prevention counseling have not gone through home buyer education or counseling. So these are people who are being led, basically, by the trust that they've built with that broker or that realtor. So in order for them to learn to ask the right questions, they need to start somewhere, which is the home buyer education.

Gilson: What percentage of the clients that you represent would you say go into these proceedings with a lawyer?

Mariani: Oh, none.

Gilson: Isn't that terrible?

Mariani: Yes, it is. Part of our home buyer education seminars, we bring in an attorney to talk about certain things that they should look at. But right now, most people don't need a lawyer. I mean, they just walk in there with either their realtor or their -- realtor.

Gilson: You mean they think they don't need a lawyer?

Mariani: They don't think they need one.

Gilson: That's right, yes.

Ireland: I think that's one of the big changes with the law is that prior to the passage of this law this session, there was no real duty or responsibility of a broker to look out for their client --

Mariani: Their client.

Ireland: That they're helping. Well, most people, they think the broker is their friend, their advisor, their counselor, and I think in their mind, the broker has become that lawyer, that expert --

Mariani: That trusted advisor, yes.

Ireland: That's going to lead them down the path of home ownership and into a loan that they aren't set up to fail. And, unfortunately, that wasn't the case in a great many number of loans that were issued.

Gilson: So these laws, what are they actually going to provide?

Ireland: I think the biggest one is, when you are comparing loans, that comparison of loans is going to include the fees and it's going to include the insurance. So it's going to enable some consumers to actually compare apples to apples, and I think in the past you've had apples to oranges, where people think that they're going to lower their monthly payment and they're not. Another thing is, there's a responsibility now on the lender and the broker to verify that this person has the ability to pay. not just now, but when that adjustable rate comes into play and that interest rate goes up that there is -- it is possible that they're going to pay and then the broker responsibility as we discussed.

Siegesmund: Another aspect is one mark of a predatory loan is very high fees and, of course, most people have no idea what would be a high fee or a low fee, but the truth is, most people don't even know what the fees are because the way almost all of these loans have worked, people don't pay those fees out of their pocket. They roll the fee into their new mortgage. And, so, certainly in our office, I mean, we've had cases, I have a case right now where someone's loan was refinanced four times by the same lender and essentially the person got no money and the lender took out $40,000 of fees because 10,000, 10,000, 10,000, 10,000, but they never saw that, at least they didn't look and see that. This new law will require that if you're going to roll those fees into the loan, the fees cannot be more than 5%.

Gilson: Big question. Who has resisted the coming of these new laws?

Satriano: In '91 it was the bankers association. They fought us tooth and nail. But this year, this year, we didn't have any.

Mariani: There's been agreement across the board.

Satriano: Yes, right across the board. The bankers. The only ones that are really, really saying something are the brokers, but that's because of a bill that the Commerce commissioner is putting through, which is penalizing them on. But other than that, this year, I mean, we had nothing but cooperation all the way through.

Gilson: So some brokers' groups are saying, we don't like this bill because it's going to make us be honest?

Satriano: Well, not honest. I talked to a guy on Monday who is a broker, and he said some of the honest brokers are -- that don't have that much capital are not going to be able to stay in business because of the bill that the Commerce commissioner's trying to put through. But, you know, what I said to him was, but it's going to take care of the crooked one. I mean, and he said, yes. I said, usually the honest ones don't have to worry about anything because if they're honest, they're still going to get a lot of business. But he was saying that it was going to kill them, unless you could --

Ireland: No, I think that's right. And I think the phrase that's been used is "skin in the game." and I think in the past, the brokers, really, there was no bonding requirement, there was really nothing to prevent them from just going someplace else. If they ran into trouble here, if people -- if the authorities were alerted to what they were doing, they'd just leave. And they had their money and they had their bank account someplace. They didn't have any -- any skin in the game. And I think what the Commerce Department's bill does is it forces them to be registered, to have some bonding, to have some capital, to have some of those licensing requirements.

Satriano: You know, they don't come to us all the time. But the only thing I could figure out is talking to this -- this broker on Monday, he said, well, I'm going to have to go work for a bank. And I said, why? And he said, well, because I can't do it on my own. So I'm going to have to go work for a bank. And he said, the one that's going to get the profit is the bank.

Siegesmund: There's another reason he wants to work for the bank, because the banks won't be subject to the law. The banks -- the banks are only governed by national laws. And this Minnesota law won't affect them at all.

Gilson: How much abuse --

Siegesmund: And there is resistance at the national level to impose similar requirements -- at least this is the way they put it -- that some people really can use these very loose restrictions or they wouldn't qualify for loans, and, in fact, there is a significant percentage of loans that have been given with these kind of criteria that haven't failed, so that's what they push on. However, the default rate on sub prime lending is enormous at this point.

Gilson: What does sub prime lending mean?

Siegesmund: It basically means lending that doesn't meet the criteria that would be required for a lower rating.

Ireland: If somebody has a bankruptcy, maybe they've missed some payments on credit cards, they have some, I guess, little mark on their credit report that would prevent them from getting that very low 5 or 6% interest rate, that would prevent them from qualifying that usually those folks fall into the sub prime market.

Mariani: Although there have been cases where people should be getting prime loans and they're getting sub prime loans.

Satriano: They're getting sub prime loans.

Ireland: I would say that the people who are being successful with a lot of these looser restriction loans are probably people who would have qualified had they had a broker that was looking out for them, had they had the counseling, they probably could have qualified for a more traditional prime loan.

Siegesmund: And that raises a really important point about lending discrimination in the industry because HUD just finished a study. I'd say in the last 18 months that they sent out testers in five urban areas, including Minneapolis, and demonstrated that people of color were not offered the same loan products. And when they send out tests, what they do is they send out people that have exactly the same criteria, the same credit scores, the same income, in other words, they are completely the same, and they go in, they ask for a loan, and they're offered two different products. That's happening nationwide. When people of color are denied those prime loans, then they do, they have to go to the sub prime market. And, so, there's a real problem, both with discrimination and with targeting of sub prime lending into neighborhoods of color.

Ireland: And that's where the Minnesota Human Rights Act really comes into play, when you have basically people who, on paper, if you take out that race, who are being treated differently, offered different loans, different interest rates, and the only characteristic that's different among these two applicants is their race.

Gilson: Will the new laws offer any protection against that kind of discrimination?

Siegesmund: The law already offers protection against that. It's mostly a problem of proof.

Mariani: I think in many cases, it's just that the customer doesn't know. They don't know what their credit score is, and, again, I think in a lot of situations they trust that person that they're working with. They trust them to put them into a good loan product.

Gilson: Kristin, I hear a lot of ads on the radio for debt consolidation. We're going to put it all in one ball of wax for you, we're going to rescue you, you're going to be able to afford this and that. What about debt consolidation?

Siegesmund: If people go to the mortgage foreclosure prevention counselors, one of the services they can help them with is to say, maybe we can figure out a way for you to redo your finances so you might actually be able to pay for your mortgage. But it is true that there's a lot of people out there that say they're debt consolidators. What they do, essentially, is say, give us all your money and we'll pay your debts. And they take a big chunk of your money as their fee, and they don't really do much for you. They don't go and negotiate lower payments for you. They don't even always get it paid.

Satriano: That's right.

Siegesmund: Right. And, so, even though I think there are legitimate ones, a person would want to get references, look at their track record, find out how much the fees are going to be.

Mariani: Again, its consumer beware. Get the information that you need before you go.

Satriano: And years ago, didn't they have, like, the St. Paul Credit Bureau that used to help people out? The same one.

Siegesmund: I think you're right.

Satriano: And they were probably more reputable than anybody else.

Gilson: Is there any legal protection against rip-offs by bad debt consolidator?

Siegesmund: Well, if they actually commit fraud, if they say, I'm going to do something, and they do it differently, then they can be sued. But if you sign a contract that allows them to take a whole lot of money and all they say they're going to do is pay the bills and that's what they do, then you've agreed to it, really. That's a problem. People need to be conscious of what they're agreeing to do and follow up and pay attention. Another part about education is a lot of the people that have gotten into trouble with lending aren't buying new homes, they're refinancing, they're in trouble on their old loan, they're refinancing, they get a foreclosure notice, but instead of going to the foreclosure counselors who really are good at advising, they wait too long and they then have to go into a last-minute deal. I've heard many people say, well, I kind of knew it wasn't a great deal, but I was at the end of the line. What could I do? I was going to lose my house the next day.

Mariani: And that's a really good point. If we can get people to come to these organizations, nonprofit organizations, earlier, where they can get the foreclosure prevention counseling early on, then we could actually help people. We're sometimes seeing people who are coming through our door who are six, seven, eight months behind, and there's really not a whole lot of negotiation that you can do on behalf of that client.

Satriano: And the other thing is, the sheriff, when he delivers the foreclosure, doesn't he deliver a piece of paper that says there's certain organizations that can help you?

Mariani: Yes.

Satriano: I think we got that changed when we passed the foreclosure law. So, yes, and ACORN housing, you know, we do that, we help people refinance, we help them to help to get their credit back on track, we help them. And we even help them get a house. We work with certain banks. So, we've had in St. Paul, Minneapolis, we've had over 1,000 that we've put into a house.

Gilson: In our next program, we're going to talk more about what the Human Rights Act and the Fair Housing Act do to protect people from discrimination, but, very quickly, Mark, what's equity stripping and what's loan flipping?

Ireland: Well, equity stripping is I think best described as that churning, where you had a perfect storm about five years ago, where you had people with a lot of equity in their house built up, meaning that their house was valued at $200,000 and maybe they had $100,000 mortgage left to pay, so they had $100,000 built up in that house, and then slowly over time someone continues to strip that equity through the 6,000, 7,000, $8,000 finance fees, and it just goes down and down and down. You also see people who are equity stripping by doing the save, where someone has the sheriff sale, they're going to lose their house because they've missed their mortgage payments, somebody goes in and they say, well, why don't you sign it over to me and then you can rent from me. So they sign the house over to them. They pay their rent, which usually they fall behind because the rent is so high. And then they're evicted. And the person has the house, got all the equity. So they stripped all that equity. And the flipping is just that very rapid, and that was more, I guess, in the late '90s, where people were buying a house and selling it very quickly, usually with a fraudulent appraisal.

Gilson: Well, if you want to invite people to come to you for help, how do you go about doing that?

Mariani: We do a lot of marketing. We do a lot of marketing through the radio. We do fliering of the neighborhood. We put announcements in community newspapers. We're doing a commercial right now on Univision Channel 19. We're in churches. We have ads on the backs of the church bulletins. We do announcements at the end of church services. So there's a lot of different ways that we're doing marketing in our community. We're going to the schools and doing presentations. We're meeting with realtors, lenders right now who want more information regarding home buyer education and counseling.

Gilson: And how about legal aid? How do you get people into the tent?

Siegesmund: Well, we have community legal education materials that are in all of our offices. We pass them out to social service agencies. So they're available. We educate as many people as we can at various seminars, and we particularly do outreach with other social service providers because often we feel that when people go in, they're getting benefits or going in for other services, if people are aware of the potential for predatory lending, they can help steer those people to us.

Gilson: And, Mark, if people call the Attorney General's office, there are so many different divisions you can try to talk to.

Ireland: Yes.

Gilson: Who should they ask for to get to yours?

Ireland: The best is to call our Consumer Hotline. I actually have the number. It's 651-296-3353. But if they just call the general number and we have a great Consumer Services Division that are very knowledgeable about all these issues.

Gilson: Say the number once again, please.

Ireland: 651-296-3353.

Gilson: And it's called?

Ireland: it's the Consumer Hotline.

Gilson: Thank you. And how about ACORN?

Satriano: ACORN, I was hoping that everybody around here could get together for a meeting sometime because we want to work on educating from the north of Minnesota to the south because there's so many foreclosures, it's impossible to hit them all. Like, you know, we can do advertising like you do, but most of it is around the Twin Cities area. But we want to go up to Duluth. We want to go down to Rochester. We want to get all these people that are in trouble. St. Louis County is one of the biggest and they can't even tell us what -- how many people are in foreclosure because the sheriff said, there's so many of them, we don't keep track of them.

Gilson: How do you feel now doing this kind of work?

Satriano: Oh, I love it. As long as I can keep somebody from losing their home or if I can get a crooked person off the rolls, you know, I feel great.

Gilson: Well, thank you. Thank all of you for being here and sharing this information. And I hope that people take you up on your offers to help them. So, in our next program, we're going to be dealing with some of these issues in more depth, and especially in regard to discrimination in housing. For the Minnesota Department of Human Rights, I'm Gary Gilson.

Continued: Predatory Lending Part 2

The opinions expressed in these programs are those of the participants, not necessarily those of the Department of Human Rights or of the St. Paul Neighborhood Network. More information about the organizations these panelists represent is available on the Department of Human Rights web site at www.humanrights.state.mn.us.