Citibank
isn't the first company to have trouble with a subprime
subsidiary.
First Union shut down
the money-losing Money Store, which used former baseball
star Jim Palmer to pitch its loans, after paying $2.1
billion to acquire the subprime lender in 1998. Analysts
blame Conseco Inc.'s $6.5-billion purchase of Green Tree
Financial for most of the insurer's subsequent financial
deterioration. Conseco's management team resigned and
former General Electric Co. executive Gary Wendt is
attempting to turn the firm around.
Other subprime lenders
failed to find buyers. FirstPlus Financial Group of
Dallas and First Alliance Corp. of Irvine, among others,
filed for bankruptcy, and both firms are out of business.
The FTC sued First Alliance six months after the firm had
ceased operations, charging that the company had misled
borrowers. That suit is still pending.
Consumer advocates say borrowers
can help protect themselves by shopping around for rates
and terms before agreeing to a loan and by checking with
groups such as the Better Business Bureau. First Alliance
generated hundreds of complaints at the Los Angeles
bureau before the subprime lender closed its doors.
Regulators, Bankers
Differ on Curbing 'Predatory' Lending
The federal government's
lawsuit against a consumer lender owned by Citigroup Inc.
is the latest attempt by regulators to battle "predatory"
lending practices that target borrowers with poor credit,
but will it solve the "flipping" problem --- say most
reporters.
Lending to people
with poor credit
--an area of banking
known as subprime lending--has become big business in
recent years. Subprime loans grew to 13% of all new
mortgages in 1999, up from 5% in 1994. And the amount of
such loans repackaged on Wall Street and sold to
investors hit $56 billion last year, up from $18.5
billion in 1995.
But determining at what point
subprime lending becomes predatory lending--and what
should be done about it--is still a matter of great
debate.
This year, seven states and both
houses of Congress have introduced bills to rein in
predatory lending. North Carolina passed an anti-predator
law in 1999, and last month Virginia legislators approved
two similar bills. The legislation typically targets
high-cost loans but differs on definitions of what
constitutes high cost.
Bankers complain that many of
the proposed laws unfairly restrict legitimate subprime
lenders, who usually charge higher fees and interest
rates to people with poor credit to compensate for the
greater risk of default.
According to federal agencies
that regulate banking, predatory lending typically
involves one or more of the following practices: making
high-cost loans that borrowers can't afford to pay back
so the lender can seize the borrower's house; inducing a
borrower to refinance a loan repeatedly to charge higher
fees (a practice known as loan flipping); and deceiving
borrowers about the true costs and terms of their loans.
In a series of community forums
held across the country last year, the Department of
Housing and Urban Development highlighted cases in which
loan payments consumed nearly half of borrowers' income
or borrowers paid fees equaling 8% or more of the loan
amount.
Most mainstream lenders
typically charge 2% or less in fees for home loans and
refuse to approve home loans if debt payments equal much
more than a third of borrowers' incomes.
The lending industry contends
that the move by big banks into subprime lending in
recent years has helped clean up what an industry
spokesman said was once a "Wild, Wild West" market of
small, independent operators. The result has been more
competition, fewer abuses, lower-cost loans and increased
availability of credit, said Leland Chan, general counsel
for the California Bankers Assn.
"To the extent that [big
banks] can standardize the subprime market and make
it more like the prime market, that lowers costs. Then
the bad operators will have no place to go," Chan said.
In addition to Citigroup, other
major banks with subprime units include Bank of America
Corp., Wells Fargo & Co., Key Corp., First Union
Corp. and Washington Mutual Inc. J.P. Morgan Chase &
Co. recently agreed to buy Advanta Corp.'s subprime
mortgage unit.
Consumer groups, meanwhile, have
staged rallies and letter-writing campaigns to protest
lending practices they say prey on the most vulnerable
borrowers. Consumer advocates unsuccessfully asked
regulators to block Citigroup's purchase of Associates
First Capital Corp. last year, saying the consumer lender
targeted the poor and minorities with predatory loans.
Associates was one of the
nation's largest subprime lenders when Citigroup bought
the company and merged it with CitiFinancial Credit Co.
The Federal Trade Commission, in
what is billed as the agency's biggest predatory-lending
action, charged earlier this week that Associates hid
important information from borrowers, trained its brokers
to lie about loan terms and packed loans with high-priced
credit insurance. Government officials said they are
seeking hundreds of millions of dollars for victimized
consumers.
Citigroup said it had taken
steps to address any problems resulting from Associates'
past practices and criticized the government action as
"counterproductive to our shared objective of ensuring
the availability of attractive loan products to all
borrowers."
Consumer
Tips
The Federal Trade Commission and
the AARP offer the following tips for consumers on how to
avoid predatory lenders:
* Choose your lender carefully.
Contact your local Better Business Bureau to see whether
other borrowers have complained.
* Shop around. Compare loan
terms and costs among several lenders or visit Web sites
such as Bankrate.com at www.bankrate.com that track
prevailing rates.
* Don't be pressured. Don't sign
documents that you don't understand or that include blank
spaces to be filled in later. If you change your mind
about a loan secured by your home, federal
truth-in-lending laws give you three days to cancel.
* Get objective advice. If you
can't afford a lawyer, your local Fair Housing Office or
Legal Aid Society may offer loan counseling. The elderly
should contact their local Area Agency on Aging. The
National Consumer Law Center at www.consumerlaw.org has
information about what you should know before taking out
a home equity loan.
///
Respectfully
,
Bernie
Schwartz,
Finance
News Analyst - TVI Magazine
com/moneysecrets
