During the Spring of 2000, I listened - in near disbelief - to the accounts of citizens who have fallen victim to the now, widespread practice of what has become known as predatory lending. The issue gained my attention through a local grassroots organization and the complaints of constituents who packed my District Office in the effort to make known their plight. Needless to say, they got my attention, to the point where a Town Hall Meeting was held that dealt exclusively with the topic of predatory mortgage lending.

Simply put, predatory lending occurs when a lender- in the name of profit - makes loans to consumers that carry additional and inflated charges, and exorbitant interest rates. These loans, due to the high rates, and fees sometimes become nearly impossible to satisfy.

While predatory lending practices have been in existence for some years, organized efforts to combat them have just recently emerged.

Those familiar with consumer financing know that there are two categories for lending, the prime and sub-prime markets. The sub-prime lending market provides loans to consumers who because of their credit histories, may not qualify for a prime interest rate. Higher interest rates are charged because of a greater risk of loan default. Prime loans are typically issued by major financial institutions.

Predatory lending generally occurs in the sub-prime lending market. This pool of potential borrowers can be characterized as having less than perfect credit or poor credit histories, some are elderly, many are minorities.

While there are credible sub-prime lenders, the public - nationwide - in recent years has been exploited by some not-so-credible sub-prime lenders. A study conducted by the U.S. Department of Housing and Urban Development (HUD) and the Treasury Department revealed that even those in upper-income Black neighborhoods are twice as likely as those in low-income white neighborhoods to refinance using a sub-prime loan.

The HUD report also stated that sub-prime lending has grown from a 5 percent, $11 billion market, to a $83 billion market representing 13 percent of all home loans.

While I applaud the increased access to capital that sub-prime lenders have made available to neighborhoods that have historically been under-served by major lending institutions, the stories from my constituents created a sense of alarm in regard to predatory lending.

Now I'll be the first to admit that upon entering the 77th Legislative Session, my knowledge of the lending industry as a whole, and predatory lending practices in particular, was limited. What I did know was that I needed to file a bill in a timely manner.

In doing so, industry officials and consumer advocacy groups were alerted, and soon we had assembled a group representing all sides of this potentially divisive issue. The goal was to strike a balance that would not discourage lenders from pursuing a very lucrative Texas market, while at the same time protecting the consumer from personally disastrous predatory practices.

With this work group providing expertise, I soon became fairly familiar with the process of credit scoring, a critical element of the predatory lending compound. In this mix also are borrower targeting, and the use of single premium credit insurance.

For example, four individuals with basically the same credit profile, in theory, should have a similar interest rate offered to them. However in practice, each of those potential borrowers may be offered loans at varying interest rates. What needs to be determined is why this occurs and whether these practices are predatory or based on legitimate business reasons.

Under the single premium credit insurance scheme, borrowers take out insurance on the loan they've acquired. This insurance premium is due at the time of the loan. However, if a borrower cannot afford to pay the "single premium" on the insurance, it is financed over the term of the loan. The result: borrowers pay double the cost of the insurance.

Another aspect of predatory lending involves the evoking of a mandatory arbitration clause as a condition of the loan. Under these terms, borrowers are forced into giving up their right to take the lender to court should a dispute arise pertaining to the loan agreement. Needless to say, I believe that it is the constitutional right of every citizen to have access to the courts.

Senate Bill 1581 prohibits for seven years, the refinancing of certain low-rate interest loans (such as offered under programs like Habitat for Humanity). It also requires that borrowers who receive an interest rate of 12 percent or greater on home-related loans must receive information on HUD-approved mortgage counseling and a warning that their loan may be a high-cost home loan.

The bill also restricts single premium credit insurance. Borrowers must now be offered a monthly premium product and a disclosure must be provided to borrowers that explains the additional finance charge.

Under the bill as passed, lenders must also consider the borrower's ability to repay high-cost home loans. Other provisions extend federal statutes to provide protection at the state level.

While Senate Bill 1581 provides a measure of relief to consumers, this matter is far from being settled. Already during this interim, I have met with representatives of the lending industry and consumer advocacy groups and to their credit, they have been both receptive and responsible in listening to the concerns posed by predatory lending practices. More meetings are planned, hopefully leading to more legislation to be offered during the next Legislative Session.

Royce West
Texas Senate

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