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Article Excerpt
This investigation examines how consumers perceive and experience predatory lenders. Findings reveal that industry practices are carried out to the detriment of persons typically defined as "vulnerable," such as elderly, impoverished, and African American consumers. Using a series of personal interviews with a geographically diverse set of respondents, data reveal thematic categories that include the friendly veneer, the rules of engagement, and an aggressive response, which capture the nuances of this exchange relationship from the perspective of these unwitting consumers. The closing section provides implications for scholars and regulators seeking workable solutions to limit additional financial exploitation.
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In her essay on marketing practices, Consumers Union President Rhoda Karpatkin (1999) called for the transformation of exchange relationships between several industries and impoverished consumers in order to advance a "fair and just marketplace." One practice singled out in her treatise was predatory lending by banks and subprime financial institutions. The purpose of this research is to highlight predatory lending practices in the mortgage market. Predatory lending is defined as consumer loans with any or all of the following characteristics: aggressive and deceptive marketing, lack of concern for the borrower's ability to pay, high interest rates and excessive fees, unnecessary provisions that do not benefit the borrower (e.g., balloon payments or single-premium credit life insurance), large prepayment penalties, or faulty underwriting (Carr and Kolluri 2001; U.S. Department of Housing and Urban Development 2006). Such abuses occur with institutions such as consumer finance companies, banks, and mortgage brokers. These lenders cater to low-income, high-risk consumers who may have difficulty obtaining traditional mortgage credit.
The practice of predatory lending is conceptually different from that of subprime lending, defined as lending to borrowers with poor credit histories, payment delinquencies, and in some cases charge-offs and bankruptcies (Carr and Kolipuri 2001). Responsible subprime lending is cited as having positive consumer benefits including expanding credit access. Proponents of the industry have cited an increase in home ownership and borrowing equity as positive contributions (Elliehausen and Staten 2004). However, consumer activists have noted frequent abuses and recommended more vigilance and legislative solutions by policy makers. Along with high rates and added fees, predatory companies have been charged with frequent flipping of loans (i.e., refinancing an existing loan with little additional money advanced to the consumer while charging additional points and fees) that results in "equity stripping" and an increased risk of foreclosure (Consumers Union 1998; Elliehausen and Staten 2004).
These practices are carried out to the detriment of populations typically defined as "vulnerable," such as elderly, poor, and African American consumers (Karpatkin 1999). For example, data released by the Federal Reserve under the Home Mortgage Disclosure Act showed racial and income differences in subprime lending practices. According to the data, African Americans were two to three times more likely than whites to receive higher-priced home loans in 2004 (Avery, Canner, and Cook 2005; Zindler 2005). A joint study by the Department of Housing and Urban Development and the U.S. Department of the Treasury (2000) reported that 51% of the loans made in predominantly African American neighborhoods were made by subprime lenders versus 9% in predominantly white neighborhoods. Calem, Gillen, and Wachter (2004) reported similar results in an analysis of the Philadelphia and Chicago metropolitan markets. Even after accounting for a series of explanatory variables that included credit risk, the authors found a strong geographic concentration of subprime lending in neighborhoods that were primarily African American.
Researchers have also identified and highlighted predatory lending practices such as exploitive greenlining or the marketing and issuing of loans without regard to the borrowers' ability to repay (Newman and Wyly 2004). Such perceived inequities in the marketplace served as the impetus for regulation of the industry by both federal and state legislators. Federal protections against predatory lending include the Home Ownership and Equity Protection Act, the Truth in Lending Act, and the Federal Trade Commission Act. Home Ownership and Equity Protection Act provides safeguards such as supplementary consumer disclosures for high-rate mortgages. Truth in Lending Act requires that a lender discloses the cost of credit prior to the consumer completing a loan transaction. Lastly, the Federal Trade Commission Act broadly prohibits unfair or deceptive acts which affect commerce (Swindle 2000). These laws fundamentally share the goal of creating an environment where a consumer makes an informed choice. The criticism of existing legislation and the case for increased enforcement result from the deceptive and abusive practices discussed herein that still occur during loan transactions with a customer base not well versed in their rights or loan options. State officials unsatisfied with federal regulations also have passed legislation to curtail these illicit practices (Jaworski and Byrne 1999).
The primary purpose of this research is to examine the consumer experiences of predatory lenders, specifically highlighting the exchange process. The next section provides additional framing for this study, which focuses on individuals who had one or more loans with subprime lenders accused of using illicit marketing tactics. The data discussion follows with an emphasis on the qualitative approach utilized that is widely employed in consumer-based studies involving impoverished subpopulations (see Hill 2001, 2002a). Results are presented using interrelated themes and subthemes that capture the lived experiences of these consumers. The closing section provides implications for scholars and regulators seeking workable solutions to financial exploitation.
FRAMING THE ISSUE
Several financial institutions that target the subprime market were pursued by federal and state authorities for predatory lending violations. For instance, Household International recently agreed to pay $484 million in fines to consumers who were victims of alleged illegal lending practices. The New York State Attorney General accused Household management of failing to disclose material information to consumers and misrepresenting loan terms (Mokhiber 2002). As part of the settlement, Household management agreed to reduce the number of points charged for new loans, reform and improve disclosures to consumers, reduce flipping of outstanding loans, and provide loan closers with no financial interest to ensure compliance (Mokhiber 2002). In another instance, the Federal Trade Commission (FTC) filed a complaint in federal court charging the corporations collectively known as "The Associates" with systematic and widespread abusive lending practices. Central to this complaint were allegations that the lenders victimized consumers who borrowed to meet emergency needs without access to other capital; induced consumers to refinance existing debts into home loans with high interest rates, costs, fees, and unnecessary credit insurance; concealed essential information from consumers; misrepresented loan terms; and packed optional fees to raise the cost of loans. Other allegations were that employees rushed consumers through the closing process to avoid explaining loan terms, employed unfair and aggressive tactics to collect payments, and dunned consumers with repeated and continuous phone calls to homes and places of work. The parent company Citigroup paid $215 million to settle and agreed to modify their marketing tactics consistent with ethical industry practices (Pacelle 2004).
Such abuses have existed for some time and have been chronicled in the consumer behavior literature. The classic U.S. study by...
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