In the late 1980s, when Arnold Schwarzenegger and Jesse
Ventura teamed up for the film Predator,
America was deregulating and otherwise fantasizing its way into economic
trouble. Soon enough, ordinary working people spied some monsters among the
dollar signs. One was called consumer debt, with credit-card marketers getting
top billing.

There are
stealth predators, too. One made the front pages last summer, when Citigroup,
an incredible hulk itself, agreed to stop selling ìsingle premium credit life
insurance.î This type of mortgage insurance requires the borrower to make an
upfront, single-sum payment rather than ordinary monthly premium payments. So
the borrower takes out a secondary loan to pay the upfront ìpremiumî --- and
ends up paying magnum interest. This can lead to a loss of equity, or a loss of
the home altogether. As the New York
Times reported, Citigroup vowed to mend its ways; but Household
International, another big lender, said it would keep providing the insurance.
Days later, though, Household also dropped the hot potato.

Larger
dramas are playing out in the mortgage market --- especially in
what the Federal Reserve Board calls ìhigh-cost home-secured credit.î

In an
explanatory note to its ìRegulation Z,î the Board defines the problems and
names the likely victims simultaneously: ìThe term ëpredatory lendingí
encompasses a variety of [home credit] practices. Oftentimes homeowners in
certain communities --- particularly the elderly and minorities --- are
targeted with offers of high-cost, home-secured credit. The loans carry high
up-front fees and may be based on the homeownersí equity in their homes, not
their ability to make the scheduled payments. When homeowners have problems
repaying the debt, they are often encouraged to refinance the loan. Frequently
this leads to another high-fee loan that provides little or no economic benefit
to the borrower.î

The
regulatory language sounds bad enough. But individual cases of this type could
make a fixed-income seniorís hair go grayer.

Peter
Dellinger, a staff attorney with the Public Interest Law Office of Rochester,
cites one case heís working on. (Dellinger says he canít reveal the borrowerís
or lenderís names.) In this case, he says, a family secured a home mortgage of
$57,000. The 20-year mortgage was quoted at 9.6 percent interest but actually
came in with a rate of 11.2 percent, he says. Moreover, he says, the couple had
to pony up $9,100 in points and fees.

Then came
the clincher: a lump-sum ìballoonî payment due at the very end. ìTheyíre paying
$547 a month for 239 months,î says Dellinger, ìand their final payment will be
$42,700.î In other words, the family will pay yearsí worth of high interest,
only to see their equity drained off in the balloon payment.

But the bad
news doesnít stop there. The family, says Dellinger, also has taken out a
$10,000 home-equity loan at 18.49 percent to pay off other creditors.

Can the
family be helped? Dellinger says thereís not much room for maneuver here. ìThe
legal tools are not very good,î he says. ìThatís one of the reasons we have
this problemÖ and why we need [stronger] legislation.î

High
interest rates and apparently onerous terms may compensate lenders for the
riskiness of certain loans, some of which are sure to go bad. Still, the
amounts that some people have to shell out are staggering. ìItís not the way it
used to be, when you went down to the local bankerî for an off-the-shelf
mortgage, Dellinger says. In many states, he says, anti-usury laws ìwere pretty
much abolished in the early 1980s.î Without these laws, he explains, lenders
have been able to jack up interest rates greatly.

Of course,
the availability of legitimate ìsubprimeî or higher-interest loans has good
effects, too. Such loans allow people with low incomes or checkered financial
histories to get credit. In the old days, they may simply have gone without ---
another sort of burden.

The
world of finance has two minds about predatory lending
--- at least about how stringent the laws should be. But in New York, no one
denies that such lending is a widespread problem. It could hardly be otherwise
in a state with declining cities and large low-income populations.

Thatís why
the coalition New Yorkers for Responsible Lending was formed. NYRLís nearly 100
members include local organizations like the Group 14621 neighborhood
association, Housing Opportunities Inc., and Rural Opportunities; and statewide
organizations like AARP (formerly known as the American Association of Retired
Persons) of New York, the League of Women Voters, and the New York Public
Interest Research Group.

For the
past year, NYRL has made a special push to get strong anti-predatory
legislation passed in Albany. But competing bills (S.5005 in the Senate, and
A.7828 in the Assembly) ran aground. The Assembly did pass one version almost a
year ago, but that died in the Senate. This year the Assembly took up the bill
again, but the Senate adjourned last week without taking action.

The
Rochester-based ESL Federal Credit Union is an influential member of the NYRL
coalition --- but was somewhat on the fence regarding the legislation. ìAs
responsible lenders, we feel itís important to give supportî to anti-predatory
lending bills, says ESL general counsel Tim Pryor. Nonetheless, he says, ESL
doesnít want a law on the books thatís ìinordinately broad.î In other words,
ESL, like many lenders, doesnít want to prevent legitimate high-rate loans from
being made --- loans that could help certain high-risk borrowers get what they
need.

But
high-risk borrowers, like all others, need special protection. And there is
some already. For example, as an AARP backgrounder explains, a federal law
known as HOEPA, the Home Ownership and Equity Protection Act, has been in place
since 1994. HOEPA, says the backgrounder, covers loans whose ìannual percentage
rate (APR) is 8 points higher than the rate on a Treasury bill for the same
length of time.î At this moment, any loan that carries 13 percent interest or
more would be considered high-interest and thus would fall under HOEPAís
protective umbrella. Among other things, HOEPA requires lenders to disclose
crucial information about the loan before a borrower signs on the dotted line,
and it puts limitations on balloon payments.

Trouble is,
HOEPA covers only carefully defined
high-interest loans --- leaving any predatory practices associated with
lower-interest loans untouched. Bill Ferris, New York State legislative
representative for AARP, says HOEPA ìis a very good law.î But, he says, ìit
doesnít capture part of the market where a lot of bad things are happening.î
The bad things, according to an AARP fact sheet, include excessive brokersí
fees or points; huge balloon payments; and ìflipping,î or serial re-selling to
add yet more fees and points.

Hence the
need for a strong state law.

To
help prevent such abuses, anti-predatory-lending
groups like New Yorkers for Responsible Lending want a strong provision in
state law for ìassignee liability.î HOEPA contains such a provision, but again,
HOEPA doesnít cover all the loans out there.

What is
assignee liability? Essentially, it means that a lender who buys a problem
mortgage can be held responsible for the legal defects written into that
mortgage by the original lender. (This is no mere detail, since the defects may
include serious things like deceptive trade practices or outright fraud.) With
assignee liability in the legal toolbox, a borrower can make claims against the
current owner of a predatory mortgage. Without it, the borrower is limited to
making claims against the originator of the mortgage --- and the originator may
be difficult to pin down, or even impossible to find.

As you can
imagine, assignee liability would also give financial institutions in the
so-called ìsecondaryî loan business a powerful incentive to police their own
ranks. Peter Dellinger of the Public Interest Law Office of Rochester sums up:
ìAssignee liability becomes a critical tool for making institutions behave.î

Unlike
NYRL, the New York Bankers Association isnít so interested in a strong
assignee-liability provision. ìWe totally concur,î says Bankers Association
general counsel Roberta Kotkin, ìthat anyone in the loop has to have
appropriate culpabilityÖ but weíre concerned the language [in proposed
legislation] will chill the secondary market.î As a counterweight to regulatory
moves, the Bankers Association is pushing a set of ìHome Lending Best
Practicesî among its members. The voluntary guidelines speak of ìfull enforcement
of existingÖ laws and regulationsî but do not address legal reforms.

The state
legislature is not in session right now. An aide to Senator Rick Dollinger says
S.5005 could be taken up when the Senate goes back to work this week. But there
are more high-profile items to be dealt with, says the aide --- like the state
minimum-wage hike.

So donít
expect the predatory lenders to meet the legislative equivalent of Ventura and
Schwarzenegger very soon.