Jill Eselman is no dummy. She handles a home full of four kids and kittens and puppies while making CD-ROM business cards -- and suing her mortgage company for $2.5 million without the aid of a lawyer. Back in 2001, though, she and husband C.J. were in a tough spot, and not yet wise to the ways of the subprime lending world.
They were seeking custody of Jill's two children from a prior marriage. Unless they added two bedrooms to their home in rural Evans City, Pa. -- and fast -- they'd likely lose. "We were in a state of panic," says Jill. In January, C.J. refinanced the home, but the proceeds weren't enough to pay for the addition, and the payments were hard to handle. Early that spring, they got an unsolicited call from Conseco Finance Consumer Discount Co. The St. Paul, Minn.-based company wanted to know if it could refinance their debt.
Conseco's proposal, dated April 5, 2001, called for a $100,000 loan, including $6,781 in closing costs, at 11.74 percent interest. On April 25, says Jill, Conseco's representative asked them to hurry to the company's Pittsburgh office to close the loan, because time was running out. When they arrived, they learned that Conseco had "refigured" the loan. They were presented with a $97,000 mortgage, including $9,966 in closing costs -- leaving too little to cover all their debts and the addition -- at 12.24 percent interest.
The application listed an income that was quadruple the $10,000 a year they were then earning, at a time when C.J. was working as a laborer and musician and they were living off of credit cards. Under pressure, they signed. "We didn't say anything the whole way home."
The Eselmans were in the grip of the subprime lending industry, which makes high-cost loans to people with low incomes or tarnished credit histories, whom conventional banks typically won't serve. Many subprime lenders have been accused of high-pressure "predatory" tactics that trap borrowers into loans they can't afford, and may never be able to pay off. The industry's growth and its tactics have spurred anti-predatory-lending legislation in some states and municipalities, and several tough bills have been introduced in Congress. But the legislation garnering the most attention in Washington is an Ohio Congressman's bid to curb consumers' rights to sue, squash state and local reforms, and put federal lending policy in the hands of a lender-dominated board.
Congressman Robert Ney's Responsible Lending Act "allows lenders to do anything they want without any meaningful limits at all," says Margot Saunders, managing attorney at the National Consumer Law Center in Washington, D.C. The bill isn't moving quickly, but Saunders and others fear it has set the stage for a battle over lending reform, on big money's favorite playing field.
Predators Go Hunting
Conseco says it did nothing wrong. The increase in closing costs, says Conseco attorney Dan Collins, was the result of a credit insurance policy the Eselmans requested, part of the cost of which was later refunded. (The Eselmans say the policy was forced upon them, the refund hard to obtain.) The income estimate, Collins says, came from the Eselmans. (The Eselmans say Conseco invented the figure.)
In any case, the Eselmans got the kids, but promptly fell behind on their $1,039-a-month payments to Conseco, and the company filed for foreclosure in June 2002. Suddenly the Eselmans' debt included thousands of dollars of late fees and legal costs. "The truck got repossessed. Our credit is crap. No one will ever refinance us again," says Jill, as she assembles lasagna and shoos kittens off the kitchen table. They draw the line at the house. "We are not losing our home. We are not!" says Jill. "I'll chain myself here before I let them take this."
They sought a lawyer, but none wanted to fight. "They all wanted us to file for bankruptcy," Jill says. So in July, they wrote up a lawsuit themselves, alleging that Conseco rushed them into a loan they couldn't afford, and demanding the cancellation of their debt and $2.5 million in punitive damages. "These people give out crappy, bull loans knowing that they're going to end in foreclosure," says Jill. "There has to be some kind of punishment somewhere."
You'd think making a bum loan would be its own punishment. But the strange world of subprime finance turns bad loans into big paydays.
Rather than making money by collecting monthly rent checks over decades, many subprime lenders get their paydays much faster. First, they charge high fees and tack on expensive insurance; Conseco, for instance, immediately pocketed $8,820 in the Eselman transaction. Second, they bundle thousands of loans into investment products called securities, and sell shares in those securities. In June 2001, for instance, Conseco sold shares in a bundle of loans with principles totaling about $500 million. (It's unclear whether the Eselmans' loan was in that bundle.) The fees and the securities sales create incentives for companies to write loans -- any loans. If the borrower doesn't pay, they take the home.
Federal law isn't much of a brake. It bars lenders from knowingly making loans to people who can't reasonably be expected to make the payments. But to get a loan cancelled, aggrieved borrowers have to show that lenders have made "a practice" of lending to people who can't afford to repay the loans, and that has proved extremely difficult.
Not surprisingly, the subprime industry's expansion has been accompanied by a relentless surge in foreclosures. In Butler County, Pa., where the Eselmans live, lenders of all kinds filed 314 foreclosures in 2002, up from just 136 in 1998. In nearby Allegheny County, which includes Pittsburgh, lenders filed 4,015 foreclosures in 2002, up from 2,034 in 1998. Foreclosure filings usually lead to the sheriff's sale of the home, bankruptcy, or a negotiated settlement that may or may not result in the lender taking the house.
Democrats, led by Sen. Paul Sarbanes of Maryland, have repeatedly introduced bills to regulate subprime lending. Sarbanes' proposed Predatory Lending Consumer Protection Act, for instance, would restrict high-cost lenders' fees, make it easier for people with bad loans to sue, and bar the gigantic "balloon payments" that some lenders include in loans, and which often force borrowers to refinance again and again. But the Democratic bills have gone nowhere in the Republican-dominated Congress.
Instead, consumer groups have turned to the states for legislation. California, Georgia, North Carolina, New York, New Jersey and New Mexico have passed laws that provide meaningful consumer protections, according to the Association of Community Organizations for Reform Now (ACORN).
That trend may continue -- unless Congressman Ney has anything to say about it.
Loan Shark Protection
Republican Bob Ney of St. Clairsville, Ohio, isn't saying much about his 71-page Responsible Lending Act. His press secretary did not respond to four phone messages and e-mail over the course of eight days, and other news organizations report receiving the same treatment. The act, introduced in February, has garnered an unimpressive five cosponsors, and isn't scheduled for any hearings or votes. Nonetheless, consumer groups are afraid it might be the first volley in a war to turn back the gains they've made in some states, and hope to make in Pennsylvania and elsewhere.
Ney's bill would add a few new consumer protections, like one making it tougher for lenders to refinance loans they just made -- a practice called "flipping" that typically leads to high profits for the lender and mounting debt for the borrower. But consumer advocates say Ney's bill would do more harm than good.
- The bill would gut the ability of borrowers to sue by forcing them to prove "actual damages" from a loan, which is a very high legal hurdle, says the National Consumer Law Center's Saunders.
- It would free companies who buy loans from lenders from any liability for problems in those loans. Since many subprime loans are bought and sold repeatedly, and lenders including Conseco Finance have declared bankruptcy, aggrieved borrowers might be left with no one to sue.
- It would invalidate, or "preempt," all current and future state and municipal mortgage lending laws.
- It would create a 15-member board to write lending policies and anti-predatory-lending materials, of which 11 members must come from the lending industry.
- The only penalty mentioned for any violation is a fine of up to $100,000 and a prison term of as much as five years -- for anyone who releases government information about mortgage brokers to the public.
"We think it's a good start," says David O'Connor, vice president of governmental affairs for the Mortgage Bankers Association. "It has preemption [of state and local laws], and that's the biggest problem we have as an industry." As more states pass lending laws, national lenders have to navigate an increasingly diverse tangle of regulations, he says, "and that's costly for them."
"We have renamed it the Loan Shark Protection Act," counters David Swanson, an ACORN spokesman.
No one predicts that it will pass as written. The biggest danger, says Saunders, is that it will be the starting point for a "compromise" bill that would offer a few more consumer protections, but cancel state laws, and prevent other states from enacting anti-predatory-lending statutes in the future. The problem, Saunders says, is that the federal government isn't likely to pass anything particularly comprehensive or pro-consumer.
It's easier for the subprime lending industry to fight one battle in Washington than 50 in the states, and the lenders appear to be gearing up for an attack. In January, subprime lenders created the Coalition for Fair and Affordable Lending, which has vocally backed Ney's bill and reportedly retained 15 top-level lobbyists and a public relations firm. And the mortgage banking industry gave $12.5 million in campaign contributions to federal candidates in the 2002 election cycle -- more than 10 times what it gave 10 years earlier, according to the nonprofit Center for Responsive Politics. (Consumer groups are insignificant givers and aren't tracked as a category by CRP.)
One beneficiary has been Ney. During the 2002 election cycle, the three industries that gave the most to his campaign were banking, real estate and securities -- all of which could benefit from deregulated subprime lending -- kicking in $139,000 out of the $654,000 he collected.
Told of Ney's legislation, Jill Eselman stops sprinkling cheese on the lasagna. "Who's in his pocket?" she asks. "He's privileged. He's got it good. I don't see why he'd ever worry about poor people like us."
For the moment, the Eselmans are treading water. The foreclosure filing and their countersuit are on hold while Conseco Finance tries to reorganize and come out of bankruptcy. Jill hopes that if the company emerges from bankruptcy, she'll have her day in court -- and have a fighting chance. "We as the consumer have to be able to do something," she says. "If I was a millionaire tomorrow, I still wouldn't pay them their loan. I will fight them until the end."
Rich Lord is a reporter for the Pittsburgh City Paper who has written extensively on predatory lending.