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Consumer Groups Seek Protection for Low-Income Homeowners

May 20, 1993

WASHINGTON (AP) _ Consumer groups are urging Congress to toughen a bill designed to regulate expensive home-improvement loans that often cost low-income borrowers their houses.

The loans are marked by excessive up-front points or arrangement fees, high prepayment penalties and huge balloon payments that disguise the actual costs for unsophisticated borrowers. The practice is called reverse redlining, to contrast it with the better-known redlining, in which lenders deny credit to undesirable neighborhoods.

Sens. Don Riegle, D-Mich., and Alfonse D’Amato, R-N.Y., chairman and senior Republican, respectively, of the Senate Banking Committee, have offered a bill that would require considerably more disclosure on the terms of such home loans and give consumers three days to change their minds.

″This bill is a good first step toward developing the kind of legislative remedy that is needed to end the predatory practices that cost consumers their homes and life savings,″ Michelle Meier of Consumers Union told the committee Wednesday.

Testifying also on behalf of the Consumer Federation of America, Public Citizen and U.S. Public Research Interest Group, she said the bill should be strengthened by outlawing loans to people who clearly cannot repay. In addition, she recommended the bill be extended to cover all home-equity loans, including open-ended lines of credit, even when the proceeds are not used for home improvement.

On a wider scale, Ms. Meier said, Congress should either set a national ceiling on usury or restore state authority to establish strict limits.

″Without broad prohibitions against predatory equity-loan practices, prohibiting today’s unconscionable deeds will only spur the creation of new ones tomorrow,″ she said.

Lawrence B. Lindsey, a governor of the Federal Reserve Board, said the Riegle-D’Amato bill is a commendable effort to halt reverse redlining. But he cautioned that unless the legislation is drawn more narrowly, it could cut off credit to many low-income people and small businesses.

Terry Drent, housing coordinator for Ann Arbor, Mich., said over 90 percent of victims of reverse redlining in that area are blacks and most are elderly and from working-class backgrounds. Ann Arbor has seen so many foreclosures that a special fund has been created to help victims.

″The practice ... is threatening the sanctity of the American dream, home ownership, for those who can least afford it,″ Drent said.

The Riegle-D’Amato bill would require additional disclosures to borrowers when then they take out such ″high-cost mortgage loans.″ It would give the borrower three days to cancel the loan before settling.

A targeted high-cost loan would have one or more of several features, including:

-An annual rate that was more than 10 percentage points above a federal securities of comparable maturity.

-The consumer’s monthly debt, including the loan, exceeds 60 percent of income.

-Points and other fees paid before closing exceed 8 percent of the loan.

Lindsey, the Federal Reserve governor, raised the ire of D’Amato when he questioned the wisdom of limiting the annual percentage rate of the loan. Lindsey noted that many homeowners use credit cards, with considerably higher rates of interest, to finance home improvements.

″One does not pledge collateral,″ a home, on a credit-card loan, D’Amato said. ″That’s preposterous.″

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