Laws restricting predatory lending are popping up all over the nation, but Ohio appears ready to leave its citizens to their own devices for at least two more years.
A bill approved Oct. 18 by the Ohio House of Representatives would effectively delay until December 2003 any new regulation of the loan and credit industry. House Bill 386, which passed by a vote of 73 18, would also reserve to the state — not cities, counties and townships — the power to regulate the industry.
The bill calls for a 13-member committee to study the issue, meeting at least every 90 days and filing a report by December 2003. The Ohio Senate is expected to take up the bill early next year.
Consumer advocates aren't happy about HB 386. While they acknowledge it makes sense for the state to handle these regulations, they say it doesn't need two years to do it.
"It's an insult," says Ohio Rep. Sam Britton, D-Cincinnati.
"It's clearly a delay tactic on the (lending) industry's part," says Bill Faith, executive director of the Coalition on Housing and Homelessness in Ohio (COHHIO). "I'm not sure a study committee is even necessary."
Nor is there any guarantee the legislature will pass any laws in two years, after term limits will have turned many of the current members out of office.
Britton was the only one of Hamilton County's eight state representatives to vote against the bill.
Making out like bandits
During the 1990s more banks and mortgage brokers began offering loans to higher-risk borrowers at higher-than-prime interest rates, helping boost home ownership rates — and the profits of the financial services industry.
Now more Americans than ever before, 67.1 percent, own homes. But fair housing advocates see a dark side to the boom. Bankruptcies doubled in Ohio from 1995 to 1999, and foreclosures in Hamilton County nearly tripled from 1995 to 2000 (see Collateral Damage issue of June 21-27, 2001).
Advocates believe some of the bankruptcies and foreclosures are tied to high-pressure mortgage brokers who scammed thousands of dollars in fees from elderly people with lots of home equity and little cash.
Or they target the undereducated for similar bad loans, making thousands of dollars in fees and leaving borrowers saddled with debt they can't possibly repay. Sometimes the loans are so large the payments equal 60 or 70 percent of a borrower's income.
In recent years, attorneys at the Legal Aid Society of Cincinnati and other Tristate consumer advocates have been working on a steady series of cases in which slick salespeople left customers mired in financial quicksand.
Legal Aid recently filed a lawsuit on behalf of Samuel and Juanita Johnson of Avondale, ages 75 and 69, against a local mortgage broker, local contractor and Texas lender. The retired couple's monthly income, including the husband's part-time job, is about $2,000.
The Johnsons, who bought their home in 1965, refinanced it in 1998 into a $48,875 mortgage. In 1999 another lender refinanced it into a $55,250 mortgage at a 10.69 percent interest rate, requiring a monthly payment of $550 — on a home valued at $51,400 in 2001 by the county auditor.
In 2000 a local broker, according to the lawsuit, refinanced the Johnsons' home mortgage to pay about $4,000 in utility bills, among other debts. The loan totaled $82,060 at 14.69 percent interest, with payments about $1,000 a month.
A contractor worked with the broker to sell the couple vinyl siding. The contractor originally estimated the cost at $18,000, but reduced it to $5,914 when he learned that was all the remaining equity. The siding deal provided the couple with a total of $68 in cash from the last refinancing, the lawsuit says.
The lender also paid the local broker a fee of 2 percent of the loan's value — in this case, $1,720 — to get the couple to take a loan for 2 percent higher than the couple qualified for. This arrangement, known as a "yield spread premium," happened without the couple's knowledge, according to the lawsuit.
The Johnsons also didn't know they were agreeing to a prepayment penalty, the lawsuit says.
In total, the broker, contractor and lender netted $10,946 in fees and other expenses, according to the lawsuit.
Every business has bad people in it, according to Wells Coalfleet, president of the Cincinnati Mortgage Bankers Association. The smartest way to avoid them is to shop around, especially if you're getting a lot of pressure from a broker or loan officer to sign a deal.
"The market is very good at policing itself," Coalfleet says.
Coalfleet, of course, doesn't support predatory lenders. But legislators must beware the unintended consequences of laws, he says.
A proposed city ordinance backed by the Legal Aid Society, for example, would limit broker fees to 2 percent of a loan's cost or $1,000, whichever is greater; outlaw yield spread premiums or other payments to a broker that don't benefit the consumer; and force the broker or lender to disclose all terms of a loan.
Coalfleet says the ordinance obviously wasn't written by someone who understands the lending industry. Limiting brokers' fees to a specific amount is a one-size-fits-all approach that would limit the amount of credit available to higher-risk borrowers, he says.
Coalfleet believes the proposal would allow borrowers to sue brokers and lenders for not giving the best possible deal, even if it's only slightly different.
The proposal is on hold, according to Steve Olden, a managing attorney with the Legal Aid Society of Cincinnati. Vice Mayor Minette Cooper, chair of city council's Finance Committee, tabled the bill in October after CMBA objected to parts of it and because House Bill 386 passed.
Coalfleet acknowledges yield spread premiums probably aren't in a consumer's best interest and probably shouldn't be allowed.
Hurry up and wait
State Rep. Steve Driehaus, D-Cincinnati says he voted for HB 386 because he agrees the state should be the sole regulator of the lending industry, not because he backs predatory lenders.
"There are a lot of people who are concerned about predatory lending," he says.
Democrats were divided on whether or not to support the bill.
"The problem is that it's a Republican-controlled legislature," Driehaus says.
Bills that help cities or come from a Democrat have no chance of passing, but Republican bills are on a fast track, according to Driehaus.
"All of the legislation is rushed through," he says.
Tom Brinkman Jr., R-Cincinnati, agrees.
"The whole thing is cooked by the time it hits the floor," he says.
Driehaus says he voted for HB 386 because it's the best predatory lending bill he's going to get to vote on. Brinkman also says he didn't really like the bill but thought it a small step forward.
"It wasn't a home run, but it was a single," he says.
Britton doesn't believe the bill deserves support.
"This does nothing to stop predatory lenders," he says.
Olden, the Legal Aid Society attorney, says people are sold bad loans all the time.
"Why wait until hundreds of other people lose their homes and get pulled into these loans?" he says.
Faith was also concerned how little debate the bill received and how effectively the financial industry lobbied for it. Faith says at least eight lobbyists worked the floor before the House voted, but only two people — he and a person from the American Association of Retired Persons — campaigned against it.
"It was well-orchestrated in terms of those who pushed it," Faith says.
The bill passed only 10 days after Ohio Rep. Chuck Blasdel, R-East Liverpool introduced it.
Meanwhile, Britton's predatory-lending bill, HB 43 — patterned after a North Carolina law restricting high-cost loans — still awaits its first hearing.
Another predatory lending bill by Ohio Rep. Jon Peterson, R-Delaware is almost finished, Faith says. But he doesn't expect that bill to get far, either, because everyone will point to the study committee as a sign of progress.
"The people that represent the lending industry did their job," Britton says. "You can't blame them for representing their clients."
Britton has no hope the Senate will reject HB 386.
"It will be passed by the Senate," he says.
Faith sums up the state's current regulations in one analogy.
"You have more legal protection buying a TV in Ohio than you do getting a loan on your house," he says. ©
Housing and Lending Contacts
Better Housing League of Cincinnati — A consumer advocacy organization counseling citizens on home ownership and finance, 513-21-6855, www.betterhousing.org
Housing Opportunities Made Equal (HOME) — A local fair housing organization focusing on discrimination and unfair housing practices, 513-721-4663, www.cincyfairhousing.com
Home Ownership Center of Greater Cincinnati (formerly Neighborhood Housing Services of Cincinnati) — provides short courses and longer-term counseling on buying a home and related topics, 513-961-2800, www.hometoday.cc
Greater Cincinnati Mortgage Counseling Service — offers classes and counseling on credit, mortgages, home ownership, how to avoid predatory lenders and a variety of related topics, 513-948-8820
Hamilton County Department of Community Development — Offers a low-interest home repair loan program for certain county residents living outside of Cincinnati, 513-946-4883, www.hamilton-co.org/commdev
People Working Cooperatively — A non-profit organization that provides a wide variety of home repairs for lower income residents, 513-351-7921 www.pwchomerepairs.org
Legal Aid Society of Cincinnati — provides free legal services to income-qualified residents, focusing on housing, consumer, family, employment, education, plus other topics, 513-241-9400, www.lascinti.org
American Association of Retired Persons — An advocacy organization for older Americans, 614-224-9800, www.aarp.org
Cincinnati Mortgage Bankers Association — A trade group of Tristate bankers and related professions, www.cincinnatimba.com
A Few Key Loan Terms
secondary/B or C market/subprime loans — The segment of the loan market that includes higher-risk borrowers.
mortgage broker — a person who, for a fee, brings together a borrower, such as a home buyer, with a lender, such as a bank.
interest rate — the percentage of the loan charged by the bank for the service of loaning money.
annual percentage rate — the annual cost of the loan expressed as a percentage. This includes not only the compounded interest payments but also all fees, and therefore is a better picture of the loan's cost than the interest rate alone.
(discount) point — a fee equal to one percent of the loan amount. For example, one point of a $100,000 loan is $1,000.
single premium life insurance — insurance that pays off the loan if the borrower dies. Some brokers, however, extend the payments years or decades beyond the day the policy's coverage ends.
balloon payment — a loan structured so that the borrower only pays the loan's interest until a specified date, when the borrower begins paying the original loan amount plus the interest. Some brokers have disguised this arrangement from borrowers, instead passing off the earlier low payment as the amount to be paid for the entire loan.
pre-payment penalty — a fee sometimes charged for paying off a loan before its due.
yield spread premium — a bonus some banks pay to mortgage brokers for getting a borrower to sign up at a higher interest rate. For example, a bank offering a standard 9 percent interest rate might pay a broker $1,500 for getting a borrower to accept a loan at 11 percent.
reverse mortgage — a method of withdrawing the equity from a home without making a payment, often used as an alternative to loans with interest. This keeps the owner from taking on more debt than the home is worth and allows the owner to pay for home repairs and other items.