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Climbing costs, hidden fees
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April 6, 2001: 6:30 a.m. ET
When signing up for home equity loans, consumers often don't understand costs
By Sue MacDonald
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NEW YORK (Planetfeedback.com) - The come-ons sound incredibly enticing for someone swamped by debt or unable to get a conventional loan.
Into your life comes a lender who offers to take all your outstanding bills, lump them into one big sum and provide a loan with one monthly payment that will pay them all off.
In the most common scenario, lenders pursue home equity loans, meaning the monetary value you've built up in a home over years of paying mortgages is used to secure the loan. What consumers often don't know is that they risk losing the home altogether if they can't make the loan payments.
The overall practice is called "subprime lending," or providing loans to people who are considered to be high-risk borrowers. It's legal, but the FTC stepped in this week and charged Associates First Capital Corp.-- the nation's largest subprime lender in 2000 -- with "deceptive marketing practices."
Hidden fees, higher costs
The FTC claims that Associates lured consumers into loans that had higher fees, hidden charges and unnecessary insurance premiums. When home equity loans were issued, consumers often signed up for loans they eventually couldn't afford -- and risked losing their homes.
Also named in the complaint are affiliates Citigroup Inc. (C: Research, Estimates) and CitiFinancial Credit Company. In November 2000, Citigroup Inc. of New York City acquired Associates for $31 billion. Associates operated throughout the U.S. and serviced 480,000 home equity loans in 1997 (latest available figures).
"There's nothing illegal about subprime lending," says FTC spokesman Howard Shapiro. "It's a good thing, in a lot of ways, even if people pay a little more. But it's when the practices become predatory that the commission takes issue."
Often, people are targeted for such schemes because questionable lenders know (or make sure) their customers don't read the fine print, won't compare promised with actual costs, won't ask enough questions and are likely to fall for fast-talking sales reps and dishonest pitches.
A growing market
According to testimony given in late February by the FTC to a California State Assembly banking/finance committee, the phenomenon is growing:
- Subprime lending, as a percentage of all home mortgages, has risen from less than 5 percent in 1995 to almost 13 percent in 1999. Now that credit-card and other consumer interest is no longer deductible, many people are turning to home equity loans to deduct mortgage-related interest.
- In the year 2000, subprime lenders made more than $140 billion in home equity loans, a $15 billion increase from 1997.
- According to the FTC, predatory lending practices often target lower-income and minority borrowers -- typically people whose neighborhoods no longer have banks or who do not have easy access to loans and banking services. Also targeted are elderly homeowners because they are more likely to have substantial equity in their homes and are vulnerable to high-pressure sales tactics.
What to look for
Among the common practices consumers should guard against:
- Balloon payments: Reconfiguring the loan so that you have lower monthly payments -- but only because you're paying off only the interest each month. At the end of the loan's term, a huge "balloon" payment of the entire amount you borrowed is suddenly due. If you can't make that payment, you face foreclosure and the loss of your home.
- Credit "packing": Lenders often include credit insurance premiums or other services in the final package -- usually at closing when consumers are signing papers quickly and are less likely to ask questions. You end up paying for things you didn't even agree to buy -- and often don't need.
- Equity stripping: Even though your income isn't enough to support a loan, you're offered one by a lender who advises you to inflate your income on the application to improve your chances of getting approved. Then, when you can't make the payments, the lender forecloses on the home, stripping what equity you have it in and forcing you to lose the home.
- Loan flipping: The lender convinces you to refinance the loan several times, charging higher points and fees each time. At some point, the payments become higher than what you can afford, and losing your home becomes a real risk.
- Home improvement loan: Lenders use contractors to guarantee financing for home improvement projects, but the contractors stop short of the completed project and threaten not to finish unless higher terms or fees are agreed to.
- Mortgage service abuses: These can include fraudulent charges, unexplained late fees, poor record-keeping, efforts to include insurance and taxes in loan payments even though you pay those separately, and the like.
- Signing over the deed: A lender asks you to "temporarily" sign over the deed to your home while refinancing details are worked out, but the refinancing never comes through and you suddenly no longer own your home.
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