Predatory lenders steal homes from trusting homeowners

Her voice still quivering from the effects of a stroke that has left her paralyzed on one side, Mrs. Edith Smith told the story of how she almost lost her home of over 40 years. "I just needed a little money to visit my sister in Texas," she said. "We're both getting up in years and she's been sick. I wanted to see her one more time."

Needing money, Mrs. Smith was happy when a lender approached her saying they could help. "I just needed about $500, and that's what I told them, but they kept saying I should take more. When the check came, it was for $10,000. I should never have talked to those people because that's when all of the trouble started."

The loan used Mrs. Smith's home as collateral and charged an exorbitant interest rate. But worse, it carried a balloon payment clause that required it to be paid back in full in one year. Mrs. Smith soon found herself barely able to pay the monthly loan payments. When the balloon payment was explained to her, she realized she was headed down the road to foreclosure.

Luckily, one of her granddaughters called San Francisco Adult Protective Services. APS intervened on Mrs. Smith's behalf and was able to stop the foreclosure and work out an equitable repayment schedule. "Mrs. Smith is one of the lucky ones," said Larry Pickard, supervisor of Adult Protective Services. "She got to us before it was too late."

City leaders, advocates and seniors and adults with disabilities will rally at City Hall this morning to tell the mayor and the City's financial community that they will not stand by and watch Mrs. Smith and others lose their homes to loans that manipulate, pressure and deceive older San Franciscans.

Mrs. Smith's case is one of thousands of "predatory loans" written in San Francisco every year. San Francisco's skyrocketing property values have been a particular attraction for mortgage fraud against seniors. A large percentage of elderly San Franciscans own their own homes. Equity in a home often represents the major financial investment for seniors.

Research reveals that there are at least 5,000 homeowners who are currently sitting on predatory loans in San Francisco County. Thousands more are at risk.

What is predatory lending?

The predatory lending business evolved out of the sub-prime lending industry. "Trying to define a predatory loan is difficult," says Brian Scrip of WestAmerica Bank. "One definition is that a predatory loan is a sub-prime loan where the borrower is being charged a higher interest rate or charged a higher fee than that which they qualify for." High pressure sales tactics and hidden costs also characterize predatory loans.

The large scale of sub-prime and predatory lending seen today is relatively new. For many years, real estate lenders offered one product at one price. This was typically a fixed rate loan for households with what was considered "good" credit. Households that did not fit into that underwriting standard of "good credit" had to go to finance companies for loans.

During the late '70s and early '80s, lenders began accepting the model that they could make loans to homeowners whose credit was less than perfect by charging a higher rate of interest. This model grew and eventually evolved into the sub-prime industry.

It is now well documented that this industry has had a phenomenal growth rate. The sub-prime market has reached a high of $200 billion annually, or roughly 10 percent of the overall national market in 2002.

Victims

Predatory lenders prey on those who may be vulnerable to fast talk and complicated legal language, either because of language barriers or literacy levels or because they come from an era when business transactions were executed with a handshake. Because predatory loans are so difficult to undo, preventing vulnerable citizens from entering into these loans is crucial.

Public awareness about the issue has been the focus of a multi-agency, multi-county effort since last year. With help from the San Francisco City Attorney's office, the District Attorney's office, the Department on Aging and Adult Services, non-profits such as Legal Assistance to the Elderly, East Palo Alto Legal Aid, Asian Law Caucus and others, the Institute on Aging is spearheading a campaign to bring the issue of predatory lending to the public's attention. The October tax bill, for example, will contain a STOP FORECLOSURE message to all 185,000 San Franciscans who own homes.

"The saddest thing in the world," sighs East Palo Alto Legal Aid attorney Shirley Hochausen, "is to try to explain to an older person that their home of 50-plus years is about to be taken from them. Unfortunately, there isn't enough legal assistance for these kinds of cases to go around," she says. "We could use all the help we can get from pro bono lawyers, law students, whoever wants to help."