Ethel Ivey is an Atlanta cliche. She's poor. She's black. She's proud. A multibillion-dollar lender, Beneficial Finance, calculated that this combination of poverty, race and hold-tight-to-what's-dear dignity made Ivey gullible for a slick sales pitch.
In order to make some repairs on her much-beloved home, Ivey wanted to borrow a little cash. "We kept getting all this mail from Beneficial," Ivey says. "It sounded real attractive, what they offered."
No one held a gun to Ivey's head. But the sharks in the lending business know there are millions and millions of low-income, minority and elderly Americans who have their life savings -- tens of billions of dollars nationwide -- invested in their homes.
"The Beneficial folks were so nice at first," Ivey says. "When they sent someone to talk to us, it was a black lady, and I thought she was my friend."
Rather than make a simple, small personal loan to Ivey, she says, Beneficial pushed her to borrow $34,500 and mortgage her home. It was supposed to be a 15-year loan with fixed payments. But, as Ivey was to find out, the payments started escalating. Even worse, writing a check for her monthly payment would never get rid of the debt. "They told me I'd never pay off the loan," Ivey says.
Beneficial's solution? Ivey says the company urged her to plunge even deeper into the hole by shouldering a 20-year loan at an even higher interest rate. That would have cost her more than $100,000. Her Social Security income would largely have been consumed by the debt -- a fact Beneficial certainly would have known.
Beneficial is now owned by another company, Illinois-based Household International. Spokeswoman Megan Hayden says she can't access records from pre-Household ownership, including Ivey's. Payment stubs kept by Ivey show her relationship with Beneficial continued after the company's acquisition by Household.
Of Household's general business practices, Hayden says, "You don't stay in business 123 years and take advantage of your customers." Nonetheless, Beneficial and Household -- which rakes in profits of about $2 billion a year, mostly by charging low-income borrowers sky-high rates and fees -- are routinely included in government, consumer watchdog and media reports on lenders who unfairly and, often, illegally gouge customers.
For Beneficial, Ivey's home was a gold mine. It wouldn't have taken long for Beneficial to squeeze the last bit of equity out of the house, not to mention siphoning off an ever-growing percentage of Ivey's small fixed income.
The happy news for Beneficial would have been that after Ivey was, financially speaking, a desiccated hulk, the company likely would have owned her home, and could have resold it at a profit.
A win-win deal for Beneficial, lose-lose for Ivey.
Miss Ivey, as she's called by friends, is just one of hundreds of thousands of homeowners around the nation being victimized by a devilish collection of unscrupulous financial practices lumped under the catch-all name of "predatory lending." And few cities are riper targets for these lenders than are Atlanta's blue-collar and African-American residents, many of whom are poor and unsophisticated in financial transactions, but who also boast high home ownership levels.
Many of those homes are paid for, others have an abundance of equity and little debt. That's money for the taking for the loan hucksters who roam working-class neighborhoods, trying to convince people to refinance their homes.
When the Georgia Legislature kicks off its annual session next week, the frantic focus will be on the economy and state budget cuts. But, after the belt-tightening, one of the biggest battles likely will be fought over whether to pull, or at least dull, the teeth of financial predators.
"These lenders are equal-opportunity rip-off artists," says state Sen. Vincent Fort, D-Atlanta, who has worked for two years to save the homes of people like Ivey. "Folks are getting their houses stolen. As long as you have a house to steal, these lenders are your friends -- friends you can't get rid of."
In Atlanta, the number of "subprime" loans soared 500 percent between 1992 and 1998, according to the U.S. Department of Housing and Urban Development.
The subprime category typically involves loans with high interest rates and fees. It's big business: The Federal Trade Commission calculates that in just the category of subprime home-improvement loans, the volume climbed 28 percent to $160 billion between 1997 and 1999.
The loans supposedly allow access to funds for higher risk low-income borrowers or those with impaired credit. The truth is that lenders target groups they feel are gullible, and many creditworthy people are channeled toward subprime loans.
Lenders contend subprime loans are legitimate and abuses are few. However, new Federal Reserve Board rules cover about 38 percent of subprime first mortgages -- in other words, two out of five of the loans involve some form of consumer abuse.
"My clients didn't go to the Harvard Business School," says lawyer Bill Brennan, a 33-year veteran of the Atlanta Legal Aid Society. Nationally, Brennan is one of a handful of poor folks' attorneys the lenders loathe. "Because they have lower incomes and are often uneducated, lenders feel they're there to be exploited. My clients know they've been wronged."
For race-conscious Atlanta, subprime lending is a real insult. Such loans in Atlanta were three times more likely in low-income neighborhoods than in affluent areas, and five times more likely in black areas compared with white, according to HUD. Even middle-class African-Americans in Atlanta were twice as likely to be forced into a subprime loan as poor whites.
And it's not that minorities are deadbeats. Banks are 60 percent more likely to turn down a loan application for a black compared to a white borrower -- even when there is no material difference in credit histories or income, according to a Federal Reserve Bank study.
Subprime mortgages are more than expensive; they're often loaded with what amounts to legalized hidden theft:
Catastrophes commonly come as devastating surprises to subprime borrowers. The industry often pouts that it can't force people to borrow money -- they can always say no. But thousands of cases have been documented of illiterate or poorly educated customers being hurried into signing voluminous documents that even a gaggle of lawyers would have trouble fathoming. Federal and state lawsuits document scores of deceptive practices by lenders. When all else fails, according to whistleblowers, some lenders have even forged borrowers' signatures.
For more than a decade now, some of America's largest corporations and financial institutions have been ripping off citizens with schemes that would make a Mafia don furious with envy.
When deregulation in the 1980s freed financial institutions of interest rate restrictions, Big Banking and Wall Street found they possessed legalized loan-sharking powers. No interest rate was too high, if you could find a way to con a customer into signing a loan agreement. No expensive gimmick -- typically credit insurance that's worthless to the consumer but provides big, effortless profits to lenders -- was too sleazy to pack into loans, concealed by blizzards of documents and mind- boggling language.
More important, no level of profit was beyond reach as long as corporate America was willing to plunge into the sewers of the underground economy -- previously dominated by bottom feeders such as pawn shops, back alley "bankers" and buy-here-pay-here used car dealers.
The lending industry's spin is that the big players are above reproach. Randy Lively, president of a lenders' trade group, American Financial Services Association, shrugs off criminal and unethical lending practices as "scams by a few scam artists."
True, there are scam artists and here-today-gone-tomorrow lenders. And, as Georgia Bankers Association President Joe Brannen notes, home repair rip-offs -- where, for a few thousand dollars in fix-up cash, owners are steamrolled into giving up good, low-interest first mortgages and totally refinancing their homes at usurious rates -- are the black heart of predatory lenders.
But it's not just tiny, hole-in-the-wall companies doing the dirty deeds. Among the biggest home repair predators, for example, was the Money Store, an aggressive, big advertising retail lender owned by First Union. The Money Store's abuses were so embarrassing, First Union eventually shuttered the company.
Commercial banks now have about $100 billion invested in subprime loans. And that's small potatoes compared to finance companies such as The Associates.
For years, The Associates was owned by Ford -- a name that encouraged unsophisticated consumers to trust the company that covertly gouged them, deceived them and even often forged their names, according to ex-employees. Associates was purchased by Citigroup in November 2000. The nation's largest bank became, according to Atlanta Legal Aid's Brennan and other consumer advocates, one of the nation's biggest predatory lenders. The price Citigroup anted was $31 billion -- a dramatic signal of how lucrative the subprime market can be.
"I remember the day about 10 years ago when it hit me," says Howard Rothbloom, a Cobb County lawyer who waged two class-action suits against a super-predator, the now-defunct Atlanta-based Fleet Finance. "This is not the America I thought it was. Big corporations, companies we are told to respect, are stealing people's homes. And the targets are the elderly, the poor, the most defenseless people in the community."
The corporate giants weren't content to go after only homes. NationsBank (now Bank of America) invested heavily -- $200 million-plus -- in spiffed-up pawn shops such as Cash America. American Express rushed to fund check-cashing stores. Car title loan companies, often funded by major auto retailers, blossomed in every neighborhood (and America's largest, Atlanta-based Title Loans of America, boasts one of the nation's most infamous organized crime figures, mob lawyer Alvin Malnik, as its major investor).
Federally chartered banks, which can't be regulated by states, have teamed up with rip-off payday loan operators to duck under bans on usury. Georgia has allowed these leeches, backed by their pinstriped bankers, to charge as much as 988 percent interest, a national record, on money secured by meager payroll checks.
And, when it comes to homes -- those hallmarks of apple-pie Americana -- it's been a free-for-all. Well, not exactly. Subprime mortgage abuses amount to virtually free money for corporate icons such as Citigroup, Bank of America and First Union. But for the customers, the price has been steep beyond their imaginations.
At the most basic level, the difference between a prime rate mortgage of 8 percent and a subprime loan of 12 percent is staggering. Even if no other predatory factors are involved, the hike in payments for a $50,000 loan over 15 years would be more than $20,000.
A key factor in the debate in the Georgia Legislature will be setting the threshold or trigger for what rates are predatory. Generally the industry argues for a high rate -- say, 13 percent or more. "And then the predatory lenders come in just under that amount, and they keep doing business as usual," says lawyer Rothbloom.
Predatory practices drain about $9.1 billion from homeowners' equity throughout the nation each year, according to a report last year by the activist group Association of Community Organizations for Reform Now, better known as ACORN.
Georgia's share of that equity loss amounts to $27.4 million lost to prepayment penalties, $4.1 million to inflated interest rates, $67.2 million to single premium credit life insurance and $52.2 million to excess fees -- for a state total of almost $151 million.
Fueling subprime and predatory loans is the practice of "securitization." Lenders bundle loans together and sell the packages as investments -- more than $60 billion in subprime loans were securitized in 1999. The proceeds free up more money for loans. While securitization isn't inherently bad, it's a prop for the worst lenders. For example, Green Tree Financial (now called Conseco Finance) was the largest lender to mobile home buyers during the 1990s. The company built its volume by using an accounting gimmick for securitization that allowed Green Tree to claim $2 billion in profits that were pure vapor. While Green Tree's former chairman pocketed $200 million, 50,000 customers have lost their homes in the last two years after they were sold high-interest subprime loans they couldn't afford.
Miss Ivey's pride resides in her small, prim, turquoise-colored bungalow on Hosea L. Williams Drive in Kirkwood. Walls throughout the house are nearly covered with photos of her seven grand-children and 30 great-grandchildren.
Nowadays she spends most of her time caring for her husband, Ralph, 80, a construction worker disabled since 1995 by three strokes and cancer. The couple lives off his monthly Social Security benefits of $828.
The Iveys had paid off a $35,000 loan on their home, but about the time Ralph became ill, they borrowed $34,500 from Beneficial, now a division of Household International, best known as Household Finance.
"They told us we'd have fixed payments. They said I had a fixed rate. They told us the loan would be paid off in 15 years. None of that was true," Miss Ivey recalls.
What Beneficial had sold Ivey was a form of revolving loan, much like a credit card. "She'd make the minimum payment thinking she was 'paying her mortgage,' never realizing that it wasn't enough to reduce the loan," says Atlanta Legal Aid's Brennan.
Unlike most conventional mortgages, there was not a steadily increasing monthly amount applied to principal. During one 16-month period, from July 1996 to November 1997, Ivey made payments totaling more than $7,700 on her loan -- but the amount owned was reduced only $311. At the rate Beneficial was applying her payments to principal, it would have taken Ivey about 36 years -- and more than $181,000 -- to pay off the debt.
Payments on the loan started at $409 a month, but Ivey soon saw them creeping up and up. At the end of 15 years, and after having repaid more than $75,000 on a $34,500 loan, Ivey still would have owed about $20,000 of the original debt.
"I wanted out, but Beneficial said I couldn't get out, that I owed too much," Ivey says. "I learned that so-called 15-year loan would never be paid off."
Beneficial did have one solution, however. It wanted to "flip" the loan. The company suggested Ivey agree to terms that would have done nothing for her except create $101,000 in debt, not to mention additional fees and expenses. Her monthly payments would have left her will less than $100 a week for food, clothing, utilities, real estate taxes, insurance and medicine.
In other words, Beneficial soon would have owned Ivey's small house.
Ivey began attending meetings chaired by Sen. Fort. He referred Ivey to Citizens Trust, a community-based bank that has bailed out many Atlantans victimized by predatory lending. Citizens Trust lent Ivey $40,000 and cut her interest rate to a fixed 8.5 percent. Interest and honest-to-God principal payments are less than Beneficial's loan. Citizens' payments also include real estate taxes and property insurance, which Beneficial's didn't.
Ivey says: "I know that at the end of 15 years, I'll have paid the whole thing off. I'll still own my home."
The banking industry calls Ivey's story anecdotal, and claims such cases don't constitute evidence of predatory lending. Since you can't draw a line between what's predatory and what isn't, says Lively of American Financial Services Association, you can't define how big the problem is.
But the stats are there if you look -- and they paint a depressing picture.
Subprime mortgage lending -- predatory or not -- is a lucrative business, so much so that the number of high- interest, high-fee loans increased 900 percent in a five-year period ending in 1998, according to HUD.
Who is targeted for these loans? HUD reported that in black neighborhoods, subprime loans accounted for only 8 percent of refinancings in 1993 -- but 51 percent by 1998.
"It's reverse red-lining," says Sen. Fort, referring to the banking practice of not lending in largely African-American neighborhoods. As banks have consolidated, he explains, they've pulled branches out of minority neighborhoods. "And when the prime lenders leave, the predatory lenders move in. Often it's the banks that really own the subprime companies that take over when the banks leave."
A study by U.S. News & World Report shows that in 1970 the number of banks per 100,000 people was equal for white and minority neighborhoods. But by 1993, there were three times the number of banks serving whites as blacks. The resulting void in minority neighborhoods has been filled by the subprime outfits.
"Where you have subprime lenders, you have predatory lenders," lawyer Brennan says.
While it would be impossible to calculate the total number of victims, the biggest subprime players -- The Associates, Household and subprime divisions of major national banks -- have all been accused of abuses or agreed to settlements involving tens of thousands of consumers. The Fleet case in Georgia claimed 20,000 borrowers were deceived and fleeced. California sued Household in November, claiming large numbers of that state's citizens had been scourged by illegally high fees.
The general spin of the industry is that subprime lending makes money available to lower income borrowers and to people with damaged credit. But, few consumers really know how their credit is rated. Lenders use something called a FICO score. While your loan officer can see your FICO score (900 is the best, and the worst is around 375), you can't. Only California requires lenders to reveal the scores to consumers.
"Many people who should get low- interest prime loans are told they don't qualify," Brennan says. "They're told that to get money, they have to take a subprime loan with its high interest, fees, balloons and all the rest."
According to Consumer Reports, as many as 15 percent of subprime borrowers have prime rate credit scores -- but the customers don't know that. Other estimates peg the percentage of people unfairly pushed into subprime loans at 30. And as many as 75 percent of subprime borrowers actually have good credit histories with only minor delinquencies in the previous year.
The final fallback argument of lenders is that the high rates and fees -- as well as balloons, prepayment penalties and all the other methods to pick consumers' pockets -- are justified because subprime borrowers are more likely to be deadbeats. "It's reasonable for us to charge higher rates because we have a higher risk," says Household's Hayden.
Aside from the fact that many of the loans are designed to fail so that lenders can get the title to the real estate (one reason DeKalb County has the highest foreclosure rates in the state), a truthful analysis shows the loans are very safe.
"Think about it," Brennan says. "Most of these loans are for 80 percent of the value of the homes. If the borrower defaults, the lender gets the house and sells it for a profit. And if it looks as though the debt is higher than the value of the home, it's because of all of the fees the lender has packed into the deal."
At Israel Missionary Baptist Church in Kirkwood Nov. 29, politicians, activists and about 200 just plain folks gathered for a meeting that was part revival and part Economics 101 lesson.
An elderly black man welcomed a stranger by offering a smudged and rumpled sheet of paper with a scrawled bit of biblical verse on it. "You read this," the man commanded. "Then you listen to Senator Fort," the night's keynote speaker.
Ethel Ivey told the audience that she "had been praying and asking God to direct me" on how to save her home from unscrupulous lenders. Abundant punctuations of "Amen!" boomed from the audience.
The 59-year-old black matron was preceded by a 41-year-old white woman from Haralson County, Gaylon Shealy.
There were similarities between the women. Both were hand-to-mouth poor, both had almost lost their homes to lenders. Viewed from a different perspective, however, they appeared to live in Georgia's two worlds, spheres that seldom overlap. Ivey's life has been shaped by civil rights and the politics of a minority-dominated big city. Shealy is the essence of poor Southern white. She's largely unlettered, rural in speech and demeanor.
Shealy looked uneasy as she began addressing the predominantly black crowd. But applause greeted her tale just as it would Ivey's. Fighting tears, Shealy told how a mortgage company had almost ruined her life.
Shealy and her husband had purchased a 100-year-old Draketown home for $25,000. They owed only $22,000 at 8 percent, with payments less than $300.
But they needed to make some repairs. Rather than merely lending them the needed few thousand dollars, a mortgage company pressured Shealy into refinancing the home for $44,000. Shealy's attorney, Millard Farmer of Atlanta, contends the roughly 13 percent fees and closing costs on the loan were "100,000 percent illegal," that the lender lied in loan documents, and that essential facts about the loan were concealed.
Shealy, who suffers from multiple sclerosis, has a monthly income of about $640. She fell behind in payments -- which, at 11.79 percent interest, had climbed to $449 a month. The lender refused to give her a payoff amount on the loan -- a common predatory tactic. So, she couldn't pay off the debt.
Eventually, Shealy was evicted. "They took my grandmother's things, everything we had," she told the audience. The eviction, too, was done illegally, Farmer says.
"They didn't count on me being a fighter," Shealy said haltingly into a microphone. "But I got a litigation going on now. I intend to get my house back."
The two women have shown that even little people can beat giant predators at their game of creating never-ending and always-escalating debt.
The Scripture handed out at the church's door was an eloquent explanation of what had brought together these two women -- representatives of cultures that likely would have been enemies in another time. The verse, Habakkuk 2:7, was a warning to bankers and their lawyers:
"Will not your debtors suddenly arise, and those awake who will make you tremble?"
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