Consumers denied safeguards against predatory lending practices
AUSTIN -- Efforts to revive legislation that would afford citizens greater protections against unscrupulous lenders did not survive the rigors of the legislative process. During the early days of the 78th Session, State Senator Royce West (D-Dallas) drafted Senate Joint Resolution 52 that stalled in committee. This proposed constitutional amendment sought to bring increased consumer protections for home equity borrowers.
"Texas consumers are still learning, sometimes the hard way, about the home equity market," said Senator West. "It's been just a few years since Texas joined other states in allowing homeowners to borrow money using their homes as collateral. The result is that lenders, having operated in this market for years, have developed expertise that greatly benefits their bottom line, but at the same time can spell disaster for less savvy consumers. This is particularly true in the sub-prime lending market."
The sub-prime lending market identifies borrowers who for various reasons, may not qualify for loans from major financial institutions. These loans come packaged with additional fees and high interest rates that make repayment difficult. Borrowers, attempting to save their homes, may be encouraged to refinance, incurring more costs. Expensive monthly payments, sometimes combined with borrower hardship or earning fluctuations have lead to many homes being lost to foreclosure. In Texas, 30 percent of home equity loans are made by subprime lenders. Nationally, that figure is 20 percent.
Senator West's proposed legislation would have banned the financing of credit insurance premiums. Monthly payments would be established that do not charge interest on the premium. It would have also placed a limit on the late fees that can be applied to past due payments. Other provisions would have capped all fees that are not part of the principal or interest into a single fee at 5.5 percent of the total loan value. In addition, lenders who make loans with rates above a certain level would have been required to consider the borrowers ability to repay. Several disclosure clauses were included that would have given consumers the ability to determine the true full cost of their loans.
"I have heard too many stories - turned nightmare, about consumers who make home-equity loans without knowing the full ramifications of the agreements they've entered," said Senator West. "Many times these victims are our elder citizens. It troubles me greatly to know that I could not garner the legislative support needed to pass laws that could have help protect people from potential financial ruin. There are cases where money problems were made even worse by high-cost loans."
With the committee route closed, Senator West sought to amend other lending-oriented legislation. Amendments were drafted that contained elements of the thwarted bill. Those amendments would have strengthened Senate Bill 1581 passed by Senator West in 2001 that for a period, prohibits the refinancing of low-interest loans obtained through certain programs.
While the market offers good home equity products, Senator West encourages those considering home equity loans to carefully search for the best loan available. Consumer groups can provide valuable information to potential borrowers.
For more information, please contact Jennifer Wichmann or Kelvin Bass at 512-463-0123.