WASHINGTON — The practice of predatory home lending costs borrowers an estimated $9.1 billion a year in excessive interest rates and fees, according to a new report by a group opposed to such loans.
The report, being released today, comes as the Senate Banking Committee plans two days of hearings on predatory lending, which critics say especially hurts minorities and the elderly.
The practice occurs when mortgage lenders pressure homeowners into high-interest loans to refinance mortgages, home equity loans or home repair loans they might not be able to repay. The high-cost loans, while legal, have drawn criticism from several lawmakers, including Banking Committee chairman Sen. Paul Sarbanes, D-Md.; Federal Reserve chairman Alan Greenspan; and consumer and community groups.
"The most important lending issue today is no longer denial of credit, but the terms of credit," said Martin Eakes, a housing advocate and president of Self-Help Credit Union in Durham, N.C.
He said the report by the Coalition for Responsible Lending, also based in Durham, shows "an order of magnitude of the amount of (home) equity stripped, each year, from those least able to afford it."
The end result, Eakes noted, can be foreclosure for people who cannot repay high-cost loans.
Federal regulators define predatory lending as involving one or more of these elements: unaffordable loans based on the borrower’s assets rather than his or her ability to repay; inducing a borrower to repeatedly refinance a mortgage so that the lender can charge high fees or points; engaging in fraud or deception to hide some of the costs of a loan.
The estimates in the report came from an analysis of reports by the Department of Housing and Urban Development, mortgage giants Fannie Mae and Freddie Mac, banking industry data and other sources. The coalition also reviewed loan documents of about 100 people in North Carolina who had borrowed from finance companies.
It estimated an annual cost to U.S. borrowers of $9.1 billion, including $2.1 billion for credit insurance, $1.8 billion for up-front fees, $2.3 billion for prepayment penalties and $2.9 billion for excess interest rates over what borrowers should be charged based on their credit histories.
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