The Hard Sell: Combating Home Equity Lending Fraud in California
In October 1995, Consumers Union released its landmark report Dirty Deeds: Abuses and Fraudulent Practices in Californias Home Equity Market. The report chronicled how homes are stolen and lives are devastated because of home equity loan abuse and fraud. The Hard Sell: Combating Home Equity Lending Fraud in California describes how significant changes in several key areas, such as legislation, regulatory involvement, and education efforts, have increased consumer protections in California. Nonetheless, much remains to be done to protect more fully California homeowners who continue to be the targets of home equity lending abuse and fraud.
In many respects, home equity lending fraud and abuse today is still very much as it was in 1995. The victims are mostly elderly, minority and low-income residents who have owned their homes for many years. Many of those targeted are "cash poor" because they live on fixed incomes, but may be "equity rich," having built tremendous equity through decades of hard-earned mortgage payments. This makes them prime targets for home equity lending abuse and fraud.
Unscrupulous lenders and brokers continue to use four common practices to sell high-cost home equity loans to California homeowners who have no reasonable ability to repay them.
These include: 1) making loans made in conjunction with home improvement contracts; 2) selling loans under the guise of "rescuing" a homeowner from foreclosure; 3) disaster-related home loan abuses; and 4) consolidating various types of debt into a home equity loan. Regardless of the context, consumers continue to report being harassed by persistent telemarketing efforts and mailing campaigns by lenders trying to sell them home equity loans.
There are several parts to the problem: technically legal, but high-cost, loans are made to people who cannot afford to repay them (exacerbated by poor or absent loan term disclosures), and outright fraud in the inducement or creation of loans. In 1995, Consumers Union calculated (conservatively, based upon evidence available from Los Angeles County (1)) that estimated losses due to home equity fraud and overpriced, unfairly-induced loans ran at least into the tens of millions of dollars and very possibly hundreds of millions. Today, we estimate that losses due to home equity lending fraud and abuse are at the same level or higher than they were in 1995, based upon currently available figures.
Dirty Deeds reviewed the regulatory environment in 1995 and concluded that it was weak and did little to discourage abusive home equity loans. In part, regulation has not been as effective as it should be because different government agencies are responsible for regulating non-bank home equity lenders. This multi-jurisdictional approach has made it more difficult for regulators to monitor, investigate, and discipline non-bank home equity lenders. The regulatory environment is somewhat improved. The biggest development has been the involvement of federal regulators in investigating predatory lending practices. Homeowners in California and elsewhere have benefited from this increased regulatory scrutiny.
Based upon current findings, we renew many of our previous recommendations and add several new ones to enhance the effectiveness of the advancements within the last three years. Dirty Deeds recommended reducing the financial and emotional toll home equity loan abuses take on Californians by: 1) strengthening existing laws and regulations; 2) fully enforcing existing laws; 3) preserving existing remedies such as the Truth in Lending Act; 4) educating homeowners about the risk of home equity loans; and 5) providing access to affordable home equity loans on fair terms for low-income and elderly homeowners. Once again, these actions will require concerted efforts by regulatory agencies, the legislature, and the lending industry.
Dirty Deeds continues to be the only report issued in California that chronicles how home equity fraud and abuse has taken a serious toll on Californians. Since its release, the report has been used by legislators, public policymakers, law enforcement, and the media to alert the public about predatory lending practices and to craft new laws and programs to protect the public interest.
Part I of The Hard Sell is an update on the state of abuses and fraudulent practices in Californias home equity market. There have been significant changes in the legal and regulatory environments, however Californias most vulnerable homeowners continue to be targeted for unscrupulous home equity lending practices. As mentioned earlier, many of the practices that lead to abusive home equity loans are not illegal, yet they put homeowners at an unusually high risk of losing their homes to foreclosure.
In Part II, we explore recent trends in the home equity lending industry that motivate many of the practices that lead to abusive home equity lending. Home equity lending continues to be an extremely profitable endeavor, particularly in the subprime lending market, which typically charges high interest rates and fees to often unsuspecting homeowners. The aggressive push to sell high-cost loans to unsuspecting homeowners has begun to attract the interest of regulators, legislators, and law enforcement. Industry practices that are costing the elderly and minorities their homes are being scrutinized.
The Hard Sell examines two dangerous subprime lending products: 1) the "no-equity loan," also known as a "125% LTV loan," and 2) the Home Equity Secured Credit Card. We also take a closer look at a subprime lender identified as an industry leader to gain a better understanding of a company within an industry that is generating significant consumer and regulatory dissatisfaction and concern.
We present our recommendations in Part III.
(1) At the time Dirty Deeds was published, within California, only Los Angeles County had compiled statistics reflecting dollar amounts lost to home equity fraud for any one time period. See Dirty Deeds: Abuses and Fraudulent Practices in Californias Home Equity Market, p. 1.