Lending a hand Lawmakers introduce bills to curb predatory mortgage practices

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Darlene and Brent Jellison had almost finished paying off the mortgage on their Beech Grove Road home in Corinth seven years ago when they decided to refinance and put some money toward their fire equipment repair business.

Initially they secured a loan with a 9 percent interest rate that was subject to change after two years. Just when the rate was due to change, the Jellisons received a phone call from a national lending company with local offices in Maine, offering what was promised to be a lower rate.

However, the couple ended up signing for two separate loans totaling $96,000, both with much higher interest rates – 11.9 percent and 19 percent. In addition, they paid closing costs of $6,000.

They could not afford to hire a lawyer at the time and Darlene and Brent now acknowledge they did not ask enough questions before signing on the dotted line.

Despite making payments for more than four years totaling $45,000, the Jellisons lost their home in foreclosure.

They now feel ashamed, they said recently.

“It was just a rolling snowball,” Darlene Jellison recalled, her eyes filling with tears. “You go to bed at night and wonder, ‘Is it ever going to end?'”

The Jellisons are not the only Maine family that felt or is feeling trapped by a mortgage with exorbitant fees and interest rates, sometimes called a “predatory loan.” The state has recognized that many people are approved for mortgages they cannot afford. This legislative session, Rep. John Brautigam, D-Falmouth, and House Speaker Glenn Cummings, D-Portland, will put forth two bills to curb questionable lending practices.

“This is a growing nationwide issue and I want to be sure Maine has serious protection,” Brautigam said in a recent interview.

Cummings’ bill was prompted by a report put forth in 2006 by Coastal Enterprises Inc., a nonprofit economic development organization in Wiscasset, and by the Center for Responsible Lending in Durham, N.C.

The study conducted research on subprime loans – those that often go to borrowers with credit problems or limited credit. Coastal Enterprises was concerned that Maine residents are receiving less protection against predatory lending than borrowers in many other states. Not all subprime loans are predatory, but predatory loans are almost always subprime, the report stated.

The study found that between 2000 and 2004, Maine’s subprime loan market rose 436 percent by dollar volume, which in 2004 represented between 10 percent and 14 percent of the state’s total mortgage market. Risky “alternative” subprime mortgages such as those with adjustable rates, balloon payments and interest-only transactions account for 60 percent of the Maine subprime market.

These alternative subprime loans carry staggering foreclosure rates. Adjustable rate mortgages have a 49 percent foreclosure rate. Balloon payment mortgages have a 46 percent foreclosure rate.

“A person’s home is usually their most valuable possession. When one Mainer is hurt, we are all hurt,” Cummings said in a recent interview.

Predatory lenders are not only targeting first-time or recent homebuyers. The majority, about 65 percent of subprime loans, are taken out for refinancing purposes so the borrower can pay off other debts, such as credit cards, according to the study by Coastal Enterprises and the Center for Responsible Lending. The study also states that at least 15 percent of the subprime mortgages in Maine between 2003 and 2005 went to families that could have qualified for a less expensive mortgage.

But under current state law, some such transactions remain legal. Cummings, Brautigam and a growing group of borrowers and local mortgage lenders believe Maine law is not strict enough.

“We feel predatory lending, as practiced in Maine, is largely legal,” said Uriah King, spokesperson for the Center for Responsible Lending.

The bills Cummings and Brautigam are drafting aim to expand and strengthen a 2003 state law which only bans mortgage points and fees that exceed 8 percent of the loan. Current law also bars some instances of flipping, a practice by which the lender racks up excessive fees by convincing a homeowner to refinance repeatedly or unnecessarily.

At a hearing on predatory lending held by the state Office of Consumer Credit Regulation in September, Cummings said the vast majority of predatory lenders are out-of-state finance companies, not banks. Oftentimes these lenders work through in-state brokers. State government has authority over these lending companies and is obligated to weed out abusive business practices that harm consumers, Cummings said.

Both bills aim to limit points and fees to 5 percent of the loan amount, a policy many states have adopted. The bills also would prohibit lenders and loan brokers from falsifying borrower information such as income and ability to pay. Predatory loan brokers have been known to exaggerate such criteria to make the borrower eligible for a loan the borrower cannot afford.

Cummings’ bill takes additional measures to require lenders to document borrowers’ income and ability to pay. The bill would also eliminate “flipping,” the practice of encouraging refinancing only to generate more fees for lenders, and binding arbitration clauses, which deny the customer the right to take a lender to court. The bill would also outlaw prepayment penalties, designed to prevent customers from paying off their loan ahead of schedule, on most loans, and would cap fees at 2 percent of the loan for all others. Finally, Cummings’ bill calls for mandatory credit counseling for consumers before they take on a high-risk and high-fee home loan.

Braudigam has drafted his bill on behalf of Bill Lund, director of the Maine Office of Consumer Credit Regulation. Lund issued his own report on predatory lending in Maine in December.

On two separate occasions, Lund teamed up with Maine Attorney General Steven Rowe and all 50 states’ attorneys general and consumer credit offices to investigate allegations of unfair and deceptive mortgage lending practices. The first probe in 2002 targeted Household International and the second in 2004 was aimed at Ameriquest Mortgage Co.

The state officials said Household International, parent company of Beneficial Finance – which operates several offices in Maine – and Household Finance lending companies, charged excessive fees and interest and misled borrowers about payment plans and other loan terms. Ameriquest was accused of inadequately disclosing prepayment penalties and other loan terms, inflating appraisals and encouraging borrowers to lie about income or employment to obtain loans. In 2006, Ameriquest Mortgage Co. was Maine’s second-largest mortgage lender and the nation’s largest subprime lender.

Neither Household International nor Ameriquest admitted guilt but both settled for record sums. In December 2002, Household International agreed to distribute more than $484 million to its borrowers nationwide. At the time, it was the largest state and federal consumer protection settlement in history. In January 2006, Ameriquest agreed to pay $295 million to its borrowers and $30 million toward the costs of the investigation and consumer education and enforcement, the second-largest state and federal consumer protection settlement in history.

Both companies also agreed to implement reforms in their lending operations, including limiting prepayment penalties and improving disclosure of interest rates and other loan terms.

Illinois-based HSBC Bank purchased Household International in March 2003 and now oversees the operations of its subsidiaries, including Beneficial. Kate Durham, Beneficial manager of public affairs, said the company has adopted clear and well-disclosed lending terms.

“Beneficial takes our commitment to responsible lending practices very seriously. We’re confident we’re treating our customers with integrity,” Durham said.

Brent and Darlene Jellison had received $96,000 in loans from Beneficial in 2001.

At the foreclosure sale, a relative bought back the house for $115,000. The Jellisons now rent their home from their relative.

Though the state found Beneficial’s lending practices to be suspect, the Jellisons received only $800 from the settlement with Household International.

Today, the Jellisons expect to file for bankruptcy, then begin working with a local nonprofit lender to secure a new mortgage on their house. Their phone still rings daily with offers from out-of-state lenders who want to give them a good deal on a mortgage.

Darlene Jellison said she always gives the same response. “I just say, ‘My husband and I don’t have a mortgage on this property.'”