House of Shame: Legislators and Citizens Address Emotional, Legal Sides of Predatory Lending

Glarushia Davis blames "Minnesota Nice" -- and herself -- for falling prey to predatory lenders. A few years ago, she refinanced her mortgage in hopes of using the extra money to get new siding for her St. Paul home. She assumed her lender had the best of intentions and agreed to a loan with an 8.5 percent interest rate that would convert to a fixed-rate loan at the end of two years. But by the end of those two years, she said, the rate had swollen to 14 percent, and that promised fixed rate never materialized. Instead, she struggled with monthly payments that rose from $759 to more than $1,400.

"I'm embarrassed to admit I was that stupid," she said. She was one of several Twin Cities residents who discussed their experiences with predatory lenders at a town hall meeting in north Minneapolis Monday night. Such mortgage brokers offer quick and easy access to loans that benefit the lender while often leaving the borrower with unmanageable debt or hidden costs.

Organized by ACORN and Jewish Community Action, the meeting of about 150 community residents and leaders also included testimony by Guisela Dominguez, who bought a house in Columbia Heights two years ago. As her monthly mortgage payments ballooned from $1,200 a month to $1,500, she fell four months behind in paying. Speaking through a translator, she said the lender told her she'd need to come up with $10,000 in cash, plus an additional $700 in back payments to save her house. She lost her home four months ago. Likewise, Ignacio Garcia purchased a home through a major Twin Cities-based realty company, but within 15 days of closing, he was told the place was uninhabitable, and utilities were shut off.

Their stories illustrate what ACORN organizers and state legislators say are common tactics among predatory, or "sub-prime," lenders: granting loans without verifying the borrower's income or long-term ability to pay, deceiving borrowers about hidden fees that jack up monthly payments, and using "negative amortization loans," ones with payments so low, borrowers actually owe more at the end of a year of payment than they did at the start of the year.

These practices are partly to blame for today's near-record home foreclosure rates here in Minnesota and the country in general, where there were around 1.2 million foreclosures in 2006. According to Michael Calhoun, president of the Center for Responsible Lending, "2.2 million sub-prime home loans made in recent years have already failed or will end in foreclosure. These foreclosures could cost as much as $164 billion -- an amount that could send more than 4 million children through college." Closer to home, there were fewer than 1,000 home foreclosures in Hennepin County six years ago, according to ACORN statistics, but in 2006, there were more than 3,000. In Ramsey County, that number jumped from 300 to more than 1,400 in the same time span.

State Reps. Jim Davnie and Joe Mullery, both DFL-Minneapolis, attended the meeting to discuss the predatory lending bills they'll each be introducing this session. The bills aim to do away with "no-document loans," explained by Davnie as loans "where they don't know what you can afford but they sell you the mortgage anyway." They also aim to rein in negative amortization loans, abolish penalties for borrowers who repay their loans early and ban what the lending industry calls "yield-spread premiums," bonuses paid to mortgage brokers who get borrowers to sign up for loans at a rate higher than what they qualify for.

"The best analogy I can come up with is, if at the end of the day the grocery store owner looked at the till and split with the cashier anything extra she was able to charge you on the bag of carrots," he said. "They've been kicking back some of that over-charge to the broker who sold you the mortgage."

Mullery's bill aims to give citizens the "private right of action"; that means a loan recipient can hire a lawyer who then gets the same legal rights the state attorney general has in defending individual rights. It also criminalizes predatory lending, in some cases. "If it's clearly a violation of the law, then they can be held for crime," said Mullery. "That's a lot more scary to them than a civil action where they may lose some money."

Like Davis, Dave Snyder, an organizer for Jewish Community Action, referenced "Minnesota Nice," admitting that the stories he heard Monday night made him "pissed off." Fair access to credit on reasonable terms is a basic tenet of his organization and his faith tradition. "A 13th-century biblical scholar and philosopher called Moses ben Maimonides teaches us that that highest ethical thing you can do to rebuild the world is to give somebody a fair loan so they can become self-sufficient," he said. "What a diminishment of that principle, what a defilement of that principle, what a corruption of that principle to have somebody giving a predatory loan that promises somebody to fulfill the American dream and then takes their home away."

U.S. Rep. Keith Ellison, D-Minn., capped off the evening with information on a federal predatory lending bill that is now being drafted. He expects it will be similar to -- and possibly stronger than -- a version introduced last year by Reps. Mel Watt and Brad Miller, both D-N.C., along with Barney Frank, D-Mass., new chair of the House Financial Services Committee. He says he'll work to incorporate features of the Minnesota bills in the federal draft.

Ellison, a longtime north side resident and former state senator, said "abusive mortgages" target people in districts like his -- and they contribute to the overall decline of neighborhoods. "In the sub-prime mortgage market, it's estimated that 20 percent of them -- one out of five -- are going to result in a foreclosure. They don't happen evenly everywhere. Yeah, there's a few out in Eden Prairie and Minnetonka, but they tend to cluster," he said. "You'll see multiple houses on the same block that are boarded up. That says this neighborhood is vulnerable. It says to some people who might want to buy there that maybe they might not want to buy. It says that if they turn around and re-rent these units, maybe the landlords will have to lower standards for who lives in those units. And before you know it, it has a negative spiral on the whole neighborhood. We will not allow the creation of slums in our neighborhood."

Vital neighborhoods, he added, rest on citizens supporting each other to expose and resist such lending practices. Bookending Davis' remarks early in the evening, he concluded that action, not shame, are key to defeating "well financed" opposition to lending reforms.

"We were raised to always want to pay our bills, and we get a little embarrassed when we find ourselves in a financial tough spot. We're saying, 'How can we be so dumb?' And we're taking all this shame upon ourselves, and we don't ask for help," he said. "Don't stand alone in this situation. When our friends and our neighbors and relatives tell us they got into a bad loan, we can't engage in shaming behavior. We've got to say the blame is not on the person who wanted to get a good loan, who expected to get a good loan, who had every right to believe they would be treated fairly, but is on the avaricious people who sold them this bad loan in the first place."

Photos: Keith Ellison and Jim Davnie confer (top); Ellison addresses the audience.

Courtesy of TobinRussell.com

Cross-posted at Minnesota Monitor.

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