Advertisements promising interest-free loans and free cash are posted throughout the city, but gullible borrowers are discovering that there is nothing free about them.
City officials said the number of “predatory loans” — which boast extremely high interest rates — that are offered to residents as mortgages or credit loans has risen sharply in the city during the last few years, especially among low-income and minority households. As national groups lobby the federal government to make the mortgage market more consumer-friendly, the city is introducing a program to offer financial education to members of the local community and to inform them of the pitfalls of predatory lending.
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James Paley, executive director of the nonprofit Neighborhood Housing Services of New Haven, said predatory lending is commonly found in the sub-prime lending market, which offers high-interest loans to individuals with no or low credit histories because of the high expected risk of default. Predatory lenders, Paley said, market their loans in such a way that borrowers do not fully understand the terms of the lending agreement before they sign.
“[Some contractors] tell the homeowners that they will arrange all the financing, and the homeowners never learn the exact terms of their loans until it is too late,” he said. “With proper education and financial awareness, borrowers will avoid loans that are not in their best interests.”
According to a Consumer Federation of America study, sub-prime loans accounted for nearly a quarter of all loans in New Haven in 2005. The study also reported that almost twice the proportion of African-Americans receive sub-prime loans as did whites.
Ward 20 Alderman Charles Blango said many residents in the city do not understand the details of loan contracts and are often drawn to the first loan offer they receive because they are impatient to purchase their house or car as quickly as possible.
“People target first-time homebuyers,” he said. “When you go for a house, you don’t have a lot of programs that are out there to teach you about predatory lending, to teach you about good rates. What we need to do is more education.”
But Ward 10 Alderman Edward Mattison said that although financial instruction will help the city residents make wiser decisions when borrowing money, he thinks the problem is more fundamental. With house prices high throughout the country and state, many people are encouraged to buy homes they cannot really afford by deceptive advertising, he said.
“They offer rates that are so low in the beginning that people are in the fantasy that they can afford the loans, and it turns out that they can’t,” he said. “The latest scam is the equity growth loan, where as your house increases in value, they increase the size of your mortgage and increase the size of your payments.”
Mattison said he thinks the city, state and federal governments should create their own programs to make it possible for low-income families to buy their own houses.
Sharon Reuss, a spokesperson for the Center for Responsible Lending, a North Carolina-based nonprofit organization, said informing local communities about good borrowing practices is a good short-term solution to the problem. But she said the fault lies fundamentally with lenders who push loans aggressively onto uninformed borrowers, who believe the lender is watching over the best interest of both parties.
“[The loans are] structured to fail, [and] we would say that this is being deliberately done to the lender,” she said. “When there is someone working with the borrowers and their responsibility is not what is in the best interest of the borrower, that’s a problem.”
Reuss said a number of civil rights advocacy groups lobbied in Washington D.C. on Wednesday for a nationwide moratorium on foreclosures, which have risen sharply this year to date.