The pattern continued through six lenders, 10 years and thousands of dollars of dubious charges that eroded her home equity and pushed her mortgage balance from $50,000 to $198,000.
"For 10 years I've been going in a circle, robbing Peter to pay Paul, trying to keep this mortgage up," Lawler said. "No fly clothes. No new car. My mortgage is my life."
Lawler got caught up in a problem that has drawn increasing concern and action from state and federal regulators: predatory lending, loosely defined as loans with excessively high interest rates, fees or other provisions that can make them extremely difficult to repay.
The focus on predatory lending has coincided with the heady growth of the so-called subprime mortgage market. Subprime lenders offer higher-interest loans to people with troubled or non-existent credit ratings. While most subprime loans are not predatory, consumer advocates caution that all predatory loans are subprime.
More than 25 states and a host of towns and cities have passed predatory-lending restrictions since 1999. Looking ahead, predatory home lending is expected to be a continuing financial and political issue for several reasons:
•The rise of subprime. Subprime mortgage lending grew an average of 25% a year from 1994 to 2003 and now is a more-than-$330-billion-a-year industry that provides about 1 in 9 U.S. mortgages. The growth has helped broaden homeownership — nearly 70% of American homes are occupied by their owners — and given a boost to minority home buying.
Subprime lenders provide mortgages or home equity loans to people, including high-income borrowers, who don't qualify for conventional financing. Such lenders accept credit scores below the 620-660 threshold generally needed for prime financing and require less-stringent income documentation.
But critics say many of the subprime lenders' clients could qualify for conventional loans. Subprime lenders offer mortgage rates that sometimes range into double digits, though they can be as low as 6% to 7% for those with near-prime credit. Costs rise, often steeply, as credit scores fall.
•Changing demographics. Recent immigrants and minorities, who will make up the bulk of new households and about half of first-time home buyers in coming decades, are far more likely than whites to take out subprime loans — and appear more likely to be victimized by predatory lending. Federal data show even affluent minorities are more likely than whites to take out subprime loans, and some consumer groups say minorities are unfairly diverted to the subprime market.
The elderly population, too, is growing and may be vulnerable to predatory lending, because older homeowners have built up years of equity. AARP has a major initiative to combat predatory lending through education and litigation.
"Most of our clients don't go looking for loans," says Jean Constantine-Davis, an AARP attorney in Washington, D.C. "It very often starts out with a home-improvement loan. ... People think they're getting a loan for a chimney, (but) they've refinanced the house, rolled credit cards into it."
In Memphis, consumer advocates say predatory lenders, including firms owned by blacks, have targeted African-American neighborhoods, resulting in a rash of foreclosures. Data from Boston and Chicago also show concentrated subprime lending in minority neighborhoods.
•The growth of the secondary market. More than $200 billion in subprime mortgages were resold, bundled into bonds and offered to investors as mortgage-backed securities in 2003. Mainline entities such as Lehman Bros. or mortgage giant Fannie Mae are major players in the market.
•Uneven regulation. Mortgage brokers, middlemen who match buyers with lenders, now originate 50% of subprime mortgage loans — about the same as for regular mortgages — but are lightly licensed and monitored by states. The number of mortgage brokerage firms has climbed to 44,000 last year from 7,000 in 1987. State laws on predatory loans don't govern national banks, which are exempted under a ruling by the federal Office of the Comptroller of the Currency. The banks fall under less-restrictive federal rules.
A turning point?
The debate over subprime lending may be at a turning point. Banks and brokerages with a stake in the booming subprime market complain legislatures have gone too far, creating a confusing patchwork of laws that hurt legitimate business and prevent consumers from getting loans. Many want federal legislation overriding state statutes.
"You err on the side of letting people try to live the American dream if they want to buy a house," says Wright Andrews, a Washington, D.C., attorney who represents subprime lenders.
Congress is poised to take up the issue next year, though legislation is far from a sure thing. State governors and attorneys general, already opposed to the Office of the Comptroller ruling, fear a federal power grab. Consumer groups, which had pushed for a federal law, worry about losing state protections.
"A lot of people have been victimized. Not just poor people — middle-class, professional people, people of every stripe," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.
Predatory-lending restrictions
What is a predatory loan? There's no official definition. Both sides say the issue is akin to a Supreme Court justice's description of pornography: You know it when you see it.
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Home purchase loans
Home equity loans
20.8%States that have cracked down generally bar or limit these practices: loans that carry excessive interest and fees, exceed a borrower's ability to pay, include big balloon, or lump-sum, payments or penalties for early payoff or are subject to "flipping" — repeated refinancing with fees that strip out home equity.
"We were spending all our time trying to help people become homeowners, but two, three or five years down the road, they were going to get flipped into a loan with high fees and interest. We were building wealth so that it could be stolen," says Mark Pearce, president of the Center for Responsible Lending in North Carolina, a non-profit focusing on homeownership.
North Carolina's 1999 law started the move toward predatory-lending restrictions.
Mortgage giants Fannie Mae and Freddie Mac have set national standards for subprime loans that they purchase or package into securities with a guarantee for payment of principal and interest. Fannie, for instance, requires mortgages be based on ability to repay, not on home equity. It recently said it would not buy subprime loans that included mandatory arbitration clauses, which bar lawsuits. The industry, tarnished by a rash of legal settlements, has begun setting best practices, internal standards that govern lending activities.
How do consumers become victims? One of the biggest reasons is simple lack of education. Freddie Mac and the Department of Housing and Urban Development (HUD) have been reaching out to minority home buyers, saying many consumers don't understand how to get a loan or what they could qualify for. They may not have access to mainstream banks or they may lack a credit history or the proof of income needed for financing.
Fannie Mae CEO Franklin Raines, citing HUD research, says subprime lending is three times as likely in minority neighborhoods. Other research suggests as many as half of those taking out subprime loans could qualify for conventional financing — and would pay lower interest. Subprime lenders hotly dispute those figures.
Pamela Caudill of Dayton, Ohio, is a first-time home buyer who purchased her house from her brother three years ago with a $52,000 adjustable-rate mortgage from a local firm. Though there were no major blemishes on her credit record, she was given an initial rate of 13.25%. In 2001, adjustable-rate mortgages nationally were carrying average initial rates of 5.8%.
After missing a payment because of job troubles, Caudill was put into an expensive catch-up plan. The servicer who bought her loan did not post some payments. Because of the way the lender calculated Caudill's rate, her loan climbed near 15% from 2001 to 2004, as interest rates were falling nationally.
"I was told one thing, and yet the opposite would happen," says Caudill. The National Community Reinvestment Coalition (NCRC), which bought her loan and financed a cheaper one, said Caudill could have qualified for cheaper financing if she had shopped around. The NCRC runs a national consumer rescue fund for victims of predatory lending.
Memphis Area Legal Services lawyers cite the case of Edgar McDaniel, a 68-year-old with a psychiatric disability and minimal reading ability, who in 2003 owed $4,800 on his home, and whose income was a monthly $756 Social Security check.
After being contacted by a door-to-door salesman in summer 2003, McDaniel contracted for $16,500 of home improvements. To finance the project, lender American General Financial Services lent McDaniel nearly $34,691 at 12.81% interest, for payments totaling $78,789.32 over 15 years. Payments were $433, more than half his monthly income.
According to the lawsuit against the lender and contractor, the contractor was paid $22,000, or $5,500 more than the agreed-to price, even though less than $7,500 in work was done, while thousands of dollars in other dubious payments were made. American General is fighting the charges, saying that McDaniel misrepresented his income, that lawyers overlooked missed documented payments and that it pressed the contractor to complete work.
Elzenia Pitchford, 77, also of Memphis, contracted for $20,000 in repairs to her home but, according to a lawsuit, was fraudulently sold a bill consolidation loan, with high upfront fees and monthly payments that were more than 88% of her Social Security income.
She says she was promised new siding for her home, but the contractor did nothing to close up the many holes in the house's exterior.
Now, she says, rats come and go through the house. And the heating system was left in such a mess that the fire inspector will not allow her to turn on the heat. She and an 11-year-old grandson who lives with her use the stove and small heaters to stay warm.
Vulnerable victims
Borrowers can also get into trouble when they are forced to take out loans at stressful points in their lives — a bout of unemployment or an expensive illness that erodes their credit score, even as it increases their need for cash.
Priscilla White, 54, of Peabody, Mass., refinanced her 7% mortgage in 2002 to pay off $20,000 in debt tangled up in divorce proceedings. Her divorce attorney referred her to a mortgage broker, who offered to set her up with financing at a 6% interest rate. At closing, she discovered the rate was 11.25% but signed out of fear she'd be in legal trouble if the debts weren't paid.
Six months later, White tried to refinance, only to discover the initial appraisal inflated the value of her house. Her income had been overstated in loan documents, with monthly payments exceeding her net income. Unable to get an equivalent mortgage, White, a secretary in a large law firm, started investigating. She settled out of court with the company and refinanced through NCRC with a 30-year mortgage at 7%.
"He was my divorce attorney. I thought he was going to be good for me," White says. "The documents were immense and a lot of the (fraudulent) stuff they put in the back. ... By the time you got to the good stuff, you were exhausted."
Robert Armbruster, president of the National Association of Mortgage Brokers, says while most mortgage brokers are ethical, some engage in unscrupulous lending. "There are probably some bad apples out there. There are bad apples everywhere," he says.
Armbruster would like to see a national registry of mortgage brokers and wants Congress to give states seed money to prosecute bad brokers.
The Center for Responsible Lending estimated in a 2001 study that predatory loans cost consumers at least $9.1 billion a year. Lenders call those figures grossly inflated.
There are no comprehensive data on predatory lending, but there are clear signs it has been a problem:
• Household International, now HSBC, in 2002 agreed to change its practices and pay up to $484 million in consumer restitution for alleged predatory-lending practices in the subprime market. Household now funds the NCRC rescue fund.
• Citigroup in 2002 agreed to pay $240 million to resolve abusive-lending charges against its subprime subsidiaries, which the Federal Trade Commission says lured borrowers into high-cost loans through false statements.
• First Alliance Mortgage in 2002 agreed to a $60 million settlement with the FTC and six states.
"When the market expanded rapidly, there were excesses, and excesses created problems," says Mitch Feinstein of the National Home Equity Mortgage Association, a trade group for non-prime lenders. "We believe the market has responded very favorably by companies imposing much higher standards and fraud-reduction efforts."
Still, the legal cases continue churning.
"When I first started ... I wasn't in big trouble. I was running along smooth. But then I got jammed up, and I never could get out of it," says Allen Winston, 64, a Natchez, Miss., mechanic who was part of a lawsuit against lender Beneficial Mississippi.
Winston and his wife, Mary, in 1987 took out a home equity loan to consolidate $18,000 in debts. The couple paid $3,300 in fees, and according to their law firm, was required to buy $2,261 of special insurance to pay off the mortgage if they died. Premiums for single-premium insurance, which some state laws bar, are collected upfront and added to a loan balance.
After closing the deal, the Winstons were deluged with offers for more loans. Lenders sent letters pegged to Christmas or other expensive times of the year. After cashing a "check" that came with a solicitation, the Winstons found themselves in yet another loan.
Allen Winston, who left school after the eighth grade, and Mary, who attended through sixth grade, saw their original $22,500 loan gradually rise above $66,000, including $23,000 for insurance.
Montgomery, Ala., law firm Beasley Allen Crow Methvin Portis & Miles represent the Winstons in arbitration with the lenders. Officials of HSBC, which now owns Beneficial, say they do not have permission from the firm to talk about the case. They note it dates before 2002, defend their lending record and add, "In light of our contract with the Winstons, arbitration is an appropriate way of resolving their concerns."
Tom Methvin, managing shareholder for Beasley Allen, which has cases around the Southeast, says 90% of its predatory-lending clients are black.
'Paying ... the rest of my life'
Meanwhile, Lawler, the Brooklyn woman who signed multiple refinance loans, has gotten on with her life. The NCRC bought her mortgage in August, refinancing her into a 5%, 30-year fixed-rate loan. But she remains saddled with a high balance.
"Renovations? Forget it. Whatever falls down, forget it. I'll just leave it until I have the money," Lawler says. "I'll be paying for it the rest of my life."
Contributing: Sandra Block
