The two sides in the long-running debate over abusive lending practices all but agreed on a definition of predatory lending at the Consumer Federation of America's annual Financial Services Conference which has just finished in Washington, DC..

They still can't seem to come to terms on what to do about the problem, but they may be getting a little closer together on that front, too.

The mortgage business believes stronger enforcement of existing laws is enough to weed out the bad actors. But consumer advocate Eric Stein of the Center for Community Self Help in Durham, N.C., maintains that at the very least, the rules must be amended to include specific practices.

Such skullduggery as equity skimming and flipping are "actually legal" under current federal law, said Stein, a leader in the consumer movement's successful effort to persuade the North Carolina legislature to enact what is possibly the nation's toughest predatory lending statute.

"Perhaps some new definitions" are in order, responded Steve Alonso of Cresleigh Bancorp, a mortgage banker who stressed he was speaking for himself and not as an industry spokesman. "But I don't think the laws need to be changed."

As far as Alonso is concerned -- and here he echoes the thoughts of most of his colleagues -- legitimate lenders don't need to be forced into complying with more cumbersome federal rules and regulations.

The mortgage banker said he's "not going to deny" that abusive practices occur. But, he told the conference, lenders who commit such sins "will never be able to sell" their loans or will be forced to buy them back from investors.

Either way, he explained, violators will have to put up their own capital to fund their bad loans. And that alone is enough to keep the vast majority of lenders honest.

Besides, Alonso added, state banking regulators "have really tightened up" their oversight, "especially in the last year."

Stein, on the other hand, said greater protections are in order, if only because "those who are screwed over the most" by predatory lenders are less educated than other borrowers.

The fees some unscrupulous lenders are charging "are very complicated to understand," he added, citing an AARP study that found that 52% of all senior borrowers find loan fees so difficult to comprehend that they don't even bother to try to analyze them.

In many cases, the consumer advocate said, predators target African American neighborhoods where there's "a lot of equity but not a lot of options. People shouldn't be penalized just because they only bank in the neighborhoods is a subprime lender."

Even though Stein used the term "subprime" in discussing "predatory" lending, both he and Alonso agreed the two words are not necessarily synonymous.

"Predatory and subprime are not the same thing," the lender said. "Doing the wrong thing to a customer is predatory; making a subprime loan isn't. Non-prime lending is a service, a product that fills the very specific needs of people for whom no other credit is available."

Prior to the advent of the subprime industry, these people borrowed at exorbitant rates from neighborhood finance companies, he noted. Now, they're able to get the money they need at rates that are properly priced for risk.

Stein acknowledged that the two terms are not interchangeable. At the same time though, he pointed out that "most predatory lending takes place in the subprime universe."

The consumer advocate defines predatory lending "by what it does to families." Equity stripping, loan flipping and excessive fees are all designed to steal the borrower's wealth, he explained. And the problem "comes homes to roost" in foreclosure.

He said he has no problems per se with credit insurance as long as the premiums are paid on a monthly basis rather than added to the loan balance and financed over the life of the loan. And he has no objections to risk-based pricing, even if the rate is 10% over prime, as long as it's warranted and a lot of fees unrelated to risk aren't tucked on the front and back ends of the loan.

But he and other consumer advocates do oppose onerous prepayment penalties that all but prevent borrowers from paying off their loans in mid-term. These often "hidden, deferred fees" are found in about half of all subprime loans, he pointed out, yet they are noticeably absent in all but about 2% of all prime mortgages.

He also said that in some cases, consumers are forced to pay a penalty of 5% of their loan balances if they want to payoff their balances within the first 60 months. On a $150,000 loan, he added, that amounts to a $7,500 prepayment penalty, an exorbitant charge that amounts to nothing more than stealing a borrower's hard earned equity.

Published: December 14, 2000

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.