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Volume 3, Issue 2, 2003   Federal Reserve Bank of Dallas

'Don't Borrow Trouble' Program Targets Predatory Lenders

The citizens of San Antonio have a new tool. Late last year, U.S. Rep. Charles Gonzalez and Mayor Ed Garza joined officials from Freddie Mac, the U.S. Department of Housing and Urban Development (HUD), United Way and other nonprofits to announce a program that targets unscrupulous lending practices in San Antonio.

"Don't Borrow Trouble" SM Off-site page is a nationally recognized campaign that utilizes advertising, brochures and public service announcements to help the public identify and avoid predatory practices. Freddie Mac supports participating communities with seed funding, a media kit, project coordination and on-site training by the National Consumer Law Center Off-site page. The city of Boston and the Massachusetts Community & Banking Council created the program in 1999. Freddie Mac—working with the U.S. Conference of Mayors—is making Don't Borrow Trouble available to more than 1,000 cities nationwide.

"In San Antonio, we promote home ownership because it is good for families and good for neighborhoods," Garza said in announcing the program. "But home ownership can be threatened by lending practices that strip equity and burden homeowners with new debt, often because owners are not aware of their rights. We have put together a strong local partnership to educate owners and buyers."

San Antonio residents can now call a local hotline—210-227-HELP—to get information on predatory practices through a referral network of counselors, community-based organizations and nonprofit agencies.

The campaign is Freddie Mac's latest effort to provide affordable housing opportunities in Greater San Antonio. Over the past five years, Freddie Mac has invested more than $2.6 billion in mortgages, making affordable home ownership possible for nearly 27,500 families in the area.

Partnerships with Communities and Financial Institutions

Don't Borrow Trouble collaborative communities include Atlanta, Chicago, Cleveland, Los Angeles, New Orleans, Seattle, Washington, D.C., and Greater Las Vegas. Delaware and Rhode Island are among the first states to adopt the initiative.

Financial institutions, from large national banks to community-based thrifts, are also participating in the campaign. Among their contributions are set-asides for affordable housing development, mortgage commitments for low- to moderate-income families, seed money for marketing and advertising, volunteers for financial education programs and technical assistance. National partners include Bank of America, Bank One, Citibank, Charter One Bank, J.P. Morgan Chase, FleetBoston Financial, HSBC, KeyCorp, ShoreBank and Standard Federal Bank.

From Dream to Nightmare

"Jean" is not her real name, but her story is all too real.

Laid off after nearly 30 years with a local phone company, Jean was struggling. She had a part-time job as a school bus driver but wasn't earning enough to pay her bills. One day, she received a call from a man who mentioned he could help her come up with some extra cash. He said the home improvement company he worked for could get her a loan that would pay for some remodeling and leave enough cash to pay off her debts.

Unfortunately for Jean, "John" actually worked for a mortgage broker. In fact, he was peddling mortgage refinancing, not a home improvement loan.

He invited Jean to his office, where they casually chatted while he filled out a mortgage application for her. Although he gave her a good faith estimate—a required document disclosing interest rates, fees and terms—the loan he wrote up was not the $6,000 home equity loan she needed to pay off her bills. It was a refinanced mortgage loan for $76,500 with a higher interest rate than she expected.

A couple weeks later, Jean signed the loan documents and walked out of John's office with a check for $1,900. She trusted John and his attorney friend, who had joined them in the room, so she didn't read all the paperwork. She felt comfortable with what she was doing.

Unfortunately, what Jean didn't know was that the terms of her loan differed from those in the good faith estimate. The broker had added $6,500 in fees and altered the loan from a fixed-rate to a more expensive adjustable-rate mortgage. Jean is a victim of predatory lending.

According to affordable housing and community development advocate Knowledgeplex Off-site page, predatory lending practices often flourish in low-income elderly and minority communities where residents sometimes rely on high-cost financial services. Approximately one-fourth of lower-income families have no traditional financial relationships or are dependent on check-cashing services or payday lenders.

Predatory Lending Characteristics

While there is no single definition for predatory lending, federal banking regulators, the financial services industry and consumer advocates generally agree that predatory lending refers to abusive practices involving deception, fraud or unfairness. In some instances, a loan product may not seem predatory initially but could develop predatory characteristics if used to trap or mislead borrowers. These characteristics include...

  • Aggressive solicitations to targeted neighborhoods or individuals.
  • Home improvement scams.
  • Yield-spread premiums—kickbacks to mortgage brokers.
  • Shifting unsecured debt into loans.
  • Reverse redlining—steering elderly, minority or low-income borrowers to high-cost loans.
  • Flipping—repeated refinancing.
  • Balloon payments.
  • Negative amortization—monthly payments don't pay off accrued interest, thus increasing the principal balance.
  • Single-premium credit insurance.
  • Excessive prepayment penalties.
  • High loan-to-value (LTV) loans—loans in excess of 100 percent LTV.
  • Rolling excessive fees into the loans.

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e-Perspectives, Volume 3, Issue 2, 2003

Federal Reserve Bank of Dallas Off-site page
Community Development Office Send an e-mail
P.O. Box 655906, Dallas, Texas 75265-5906
Gloria Vasquez Brown Send an e-mail
Vice President
    Jackie Hoyer Send an e-mail
Houston Branch
Senior Community Development Advisor
Diana Mendoza
Community Development Specialist
    Karen Riley
Community Development Specialist
Jason Sweat
Community Development Specialist
The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Development Office.

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