City Considers Curbs on Costly Home Loans

With hard work, sacrifice and years of monthly payments, she purchased a house.

With a few strokes of the pen, she almost lost it.

“I almost had a nervous breakdown,” said Hazel Rawal, a 69-year-old grandmother whose lender placed a lien on her house and threatened her with foreclosure. “I kept praying, Lord ... show me what to do.”

With the help of housing advocates, Rawal kept her house. The advocates say Rawal was a victim of “predatory lending” -- high-interest, high-fee loans designed, critics say, to send unwitting homeowners into foreclosure. Experts say lenders appear to target specific populations -- older people, poor people and minority homeowners.

Across the country, cities and states are enacting laws to curb the practice, and the Los Angeles City Council is scheduled to consider such a measure today.

“This is terrible stuff,” said Los Angeles City Councilman Mark Ridley-Thomas. “It is life-altering, manipulative.... We just simply believe that the city of Los Angeles is duty-bound to protect its citizens, particularly seniors who are at risk of losing their single most important asset.”

Opponents in the financial services industry have put time and money into an effort to kill the ordinance. A state law passed last year makes a local law unnecessary, they say, and will drive lenders out of communities that need access to capital.

The state law has “brought results,” said Victor Franco Jr., director of government relations for the Central City Assn. of Los Angeles, a business group.

Predatory lending describes loans that are often characterized by exorbitant interest rates, expensive fees and prepayment penalties. They are offered by subprime lenders, those that service borrowers who lack the “A” rating needed to borrow from prime lenders. While not all subprime loans are predatory, many predatory loans are subprime. Typical borrowers are homeowners who need extra cash.

The tragedy, Ridley-Thomas said, is that most of these homeowners need to borrow only $5,000 to $10,000, but through abusive loan agreements, end up owing much more. “Once ensnared, the best legal minds have difficulty disentangling the victim,” he said.

Housing advocates suspect that lenders target would-be borrowers using databases to learn names, addresses and information on delinquent taxes -- a clue as to who might be receptive to a pitch for a loan.

“We know from looking at the data that there are a large number of census tracts and neighborhoods in Los Angeles that are particularly plagued by predatory lending practices,” said Gary Rhoades, litigation director of the nonprofit Housing Rights Center. It appears in Los Angeles “that race and age are two of the criteria being used.”

Most of the calls that have come into a hotline set up by Freddie Mac, a private mortgage investment company chartered by Congress, and the city’s Housing Department were “from African American senior citizens who are saying things to us like, ‘ ... and the next thing I knew my name was no longer on the deed,’ ” Rhoades said.

The practice has been the subject of numerous studies conducted by a range of organizations. A nationwide study by the Department of Housing and Urban Development found that in 1998, subprime loans accounted for 31% of refinance loans originated for African Americans, compared with 12% for Latinos and 11% for Caucasians.

An AARP study found that of borrowers 45 and older, 56% of mortgages were subprime; for borrowers under 35, only 12% of mortgages were subprime.

The ordinance is supported by a long list of groups, including unions, churches, the Southern Christian Leadership Conference and the NAACP Legal Defense and Educational Fund.

It also has the backing of Los Angeles Mayor James K. Hahn.

The law is opposed by the American Financial Services Assn. and many major banks, including Bank of America, Wells Fargo and Washington Mutual. Many major banks, while not in the subprime market themselves, own subsidiaries that are.

Among other things, the proposed ordinance would:

* Require borrowers to obtain home loan counseling from an independent advisor.

* Prohibit lending unless there was a reasonable belief in the borrower’s ability to repay it.

* Prohibit making high-cost refinance loans that do not benefit the borrower.

At a meeting of the City Council’s Housing Committee on Wednesday, several lenders accused the city of moving too quickly on the measure.

Mark T. Harris, an attorney representing American Financial, said consumer education, not more legislation, will keep people from becoming victims.

Several other industry representatives, including Jon Eberhardt of the California Assn. of Mortgage Bankers, warned that lenders would desert the subprime market in Los Angeles.

“The risk is bigger than the reward,” Eberhardt said.