Nevada regulators may seek law limiting predatory lending

Phil Levine

Monday, June 19, 2000 | 11:16 a.m.

Nevada regulators hope a combination of greater public awareness and law enforcement will make the state a less hospitable environment for unscrupulous lenders targeting the poor and elderly.

State watchdogs say that "predatory lenders" -- defined as shady sub-prime lenders providing capital to those who might otherwise not qualify for loans -- are a national problem.

But Senior Deputy Attorney General Doug Walther says Nevada's service industry workforce and sizeable retirement community are perfectly suited for lenders looking to exploit customers.

"There are a lot of retired people here, as well as a lot of people whose salary is at, or just above, minimum wage," said Walther.

"These are people who can't bargain for better (interest) rates, and who often don't have other (lending) choices. The reason they go to these sub-prime lenders is really just a function of the marketplace."

The majority of sub-prime loans are made to existing homeowners to finance the purchase of big-ticket items, refinance existing mortgages or to consolidate debts.

Regulators say most sub-prime lenders do not practice predatory lending, however they express concern about the recent growth in unscrupulous lending practices nationwide.

High-rate second mortgages to disadvantanged borrowers account for between $70 billion and $100 billion of the sub-prime market nationally, Walther said.

He identified three practices common to predatory lenders: equity stripping, flipping, and packing.

Equity stripping occurs when a lender extends a loan based upon the equity in a home, rather than the borrower's ability to pay; flipping occurs when a lender convinces a borrower to sign several successive loans where each refinances the previous loan, thereby "flipping" the borrower into one loan after another.

Packing, as its name implies, occurs when a lender packs a loan with unnecessary credit insurance and fees that increase the amount to be repaid.

Financial Institutions Division Commissioner Scott Walshaw said his office has referred "a few (predatory lending) cases" to the attorney general's office in recent months.

He noted many predatory lenders are either chartered in other states or nationally, or are operating over the Internet.

"Other states have had bigger problems with sub-prime lenders (chartered there)," said Walshaw.

"However, we have been asked by the attorney general's office to closely monitor the issue (of predatory lending) and pass along any relevant information."

That information could prove helpful as the attorney general's office contemplates recommending new legislation aimed at preventing predatory lending, he said.

The AG's office plans to review the question of predatory lending over the next several weeks, and will then decide whether to recommend legislative action.

Walther said a lack of existing state legislation is the main obstacle in preventing the growth of predatory lending in Nevada.

"Although there are federal laws against predatory lending practices, there are currently no state laws against equity stripping or flipping," he said.

Walshaw said such a move would likely be seen as a preemptive strike against disreputable lenders.

"We have no objection to introducing a new law, although I believe it would be somewhat preventative in nature," he said.

Nevada officials are not alone in their concern over the proliferation of predatory lending.

A report issued last year by the Chicago-based non-profit Woodstock Institute found that in 1998, about 58 percent of conventional refinance loans in Chicago's predominantly black neighborhoods were sub-prime lenders; by comparison, less than 10 percent of lenders in white neighborhoods were sub-prime.

The Institute study also found that refinance lending by subprime firms in black neighborhoods grew by almost 30 fold between 1993 and 1998, compared to the 2.5 fold increase in white neighborhoods.

Hoping to disassociate themselves from abusive lenders, the nation's largest banks are lending their voice to the choir calling for a crackdown on predatory lending practices.

"This is certainly not a new issue," said Fritz Elmendorf, vice-president of communication for the Consumer Bankers Association.

"And there are those who believe that honest sub-prime lenders contribute to the democratization of credit by helping poorer people buy homes."

Elmendorf said the complexity of the mortgage industry makes it a desirable destination for those looking to take advantage of unsuspecting consumers.

"The mortgage process is complicated, and predators often prey on the confusion of their clients," he said. "Those people are typically elderly, those without much education or economically disadvantaged."

Elderly customers are viewed as especially desirable victims as many older people are also homeowners, said Elmendorf.

"Those types of lenders typically target the elderly as they usually have considerable home equity," he said.

"Another prime target is new homebuyers in need of financing. I think it's important to note, however, that about 70 percent of sub-prime lending is not done by the banks."

The CBA's members include 85 percent of the nation's 50 largest bank holding companies.

As state regulators wrestle with the question of whether to push for new legislation, their immediate efforts are in promoting public awareness of the potential dangers of predatory lending.

"We are going to be posting the information on our website and will also provide informational brochures to anyone interested in receiving them," said Walther.

"It is really a matter of buyer beware. Consumers need to find out as much information (about predatory lending) as they can in order to avoid becoming victims of these practices."