FTC Officials Discuss Consumer Credit Issues and Highlight Consumer Education Efforts

Officials from the Federal Trade Commission today participated in two credit-related seminars as part of the Congressional Black Caucus Foundation's Legislative Weekend.

"Our principal message is that now, more than any other time in history, the African- American community can control its own economic destiny. But, to use this control wisely and effectively, we need to learn about the tools available to us," said FTC Commissioner Mozelle W. Thompson in opening remarks. "The most important tool is information, and that is why we are participating with Congressman Bobby Rush in this forum today."

Thompson noted in his remarks that a home is often a consumer's greatest, single asset and home equity fraud can rob consumers of their homes and the equity they have spent years building. Because of an increasing number of consumer complaints about home equity fraud, including practices such as equity stripping, credit insurance packing, and loan flipping, the Federal Trade Commission has developed a number of consumer brochures to educate consumers about how to protect themselves from fraud.

The agency also released at the conference a new publication, "Bound for Good Credit," which combines in one source many of the agency's most popular credit-related brochures. For example, the booklet includes information that explains various credit laws, including the Fair Credit Reporting Act, Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. The booklet also includes information about how consumers can dispute credit report errors and protect themselves from credit repair scams.

In addition to Thompson, Jodie Bernstein, the FTC's Director of the Bureau of Consumer Protection, outlined how consumers can protect themselves from credit-related fraud, including fraudulent home equity lending.

The Commission filed suit in January 1998 against one enterprise alleging it engaged in deceptive mortgage lending in the Washington, D.C. area, and the agency is looking at practices of other lenders across the country, particularly those who lend in the subprime market.

Subprime lending refers to the extension of credit to higher-risk borrowers, a practice also commonly referred to as "B/C" or "nonconforming" credit. The subprime mortgage market has flourished because such lending has been profitable, demand from borrowers has increased, and secondary market opportunities are growing. While the enormous growth of the subprime mortgage industry has enabled many consumers to obtain home loans who previously would have had much more limited access to the credit market, Bernstein said there are potential pitfalls for unwary consumers.

"Elderly consumers, in particular, are often targets of some subprime home equity lenders, because they often have substantial equity in their homes, yet have reduced incomes. In many cases, those living in lower-income and minority neighborhoods -- where traditional banking services continue to be in short supply -- tend to turn to subprime lenders when, in fact, they may be eligible for loans with better terms," Bernstein said.

She also highlighted tips for consumers based on three publications about home equity loans. For example, the Consumer Alert titled "Home Equity Loans: The Three-Day Cancellation Rule," explains that consumers applying for a personal loan and using their homes to guarantee repayment of the loans have three days to reconsider their decision and to cancel the deal without penalty. This "right to rescission" is guaranteed by the Truth in Lending Act. The brochure states that consumers can rescind a contract for any reason. However, there are some instances, such as applying for a loan to buy or build your principal residence, when the right to rescission does not apply.

The alert about reverse mortgages, "Reverse Mortgages -- Cashing In On Home Ownership," outlines some issues for consumers to consider before applying for a reverse mortgage. Reverse mortgages are often of interest to older consumers who have paid off their mortgages and are living on fixed or limited incomes. A typical reverse mortgage is a loan where the lender pays the homeowner a monthly advance while the consumer continues to live in the house. The amount of such a loan depends upon the consumer's age, the equity in the home, and the interest rate the lender is charging. Among the facts to consider before applying are that:

• Reverse mortgages are rising-debt loans. This means that interest is added to the loan's principal balance each month because interest is not paid on a current basis. Therefore, the amount owed increases over time as the interest compounds.
• Reverse mortgages use up some or all the equity in your home, leaving fewer assets for you and your heirs.

In a third publication, "Home Equity Scams: Borrowers Beware!," the FTC explains some common fraudulent practices, including equity stripping, loan flipping, and credit insurance packing, and offers tips on how consumers can protect themselves. The brochure notes that:

• Equity stripping occurs when a loan is made based on the equity in a property rather than on a borrower's ability to repay the loan. As a general rule, loans made to individuals who do not have the income to repay such loans usually are designed to fail. They frequently result in the lender acquiring the borrower's home and any equity the borrower had in the home.
• Packing is the practice of adding credit insurance or other "extras" to increase the lender's profit on a loan. Lenders often stand to make significant profits from credit insurance and, therefore, have strong incentives to induce consumers to buy it as part of a loan.
• Flipping occurs when a lender induces a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time.

All four publications are free and are available on the agency's website at www.ftc.gov or by calling the FTC at 202-FTC-HELP (202-382-4357).

NOTE: The FTC regulates non-bank lenders and enforces several credit laws that protect consumers, including the Truth in Lending Act, Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act.

Copies of the English and Spanish versions of "Home Equity Loans: The Three-Day Cancellation Rule" and "Home Equity Scams: Borrowers Beware!" and other consumer education materials are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.