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REVIEW The Predatory Lending Trap BY JENNIE KENNEDY Enticed by an offer of lower monthly payments and a chance to consolidate their bills, this couple refinanced their home mortgage with a subprime lender. Subprime lending, that is, lending to borrowers with marginal credit at higher than normal interest rates, is a skyrocketing business. It’s also rife with abuse: lending, where high interest rates, outrageous fees, and punitive terms are the norm. Prime loanstraditional home loans from bankstypically have an interest rate in the ball park of 7 percent, but this subprime loan comes with a whopping 11.9 percent interest rate. Why not an even 12.0 percent? Perhaps because under some state lawsinclud ing a new Texas lawlenders must advise borrowers about the availability of debt counseling for loans at a rate of 12 percent or higher. Another subprime lending reform recently adopted in Texas prohibits low-rate government and nonprofit loans from being refinanced at a higher rate for seven yearsbut it says nothing about private, for-profit loans like this one. AU ARE CJVINC US A SECURITY INTEREST IN THE REA If LOCATED AT THE ABOVE ADDRESS, 4″.6.:.,…..,1%;..4106.4.` Back to that mysteriously growing principal: In a scam the Consumer Federation of America has called “the worst insurance rip off” in the U.S., this couple was aggressively sold single premium credit life insurance. Credit life insurance, which pays the holder’s mortgage payments in the event of his or her death, is not uncommonit’s the deceptive way predatory lenders sell it that stinks. With single premium insurance, instead of making regular monthly or quarterly cash payments, the borrower is assessed one lump sum, which is financed immediately into the loan principal. Because of the interest payments the borrower will make over the life of the loan, these policies can cost as much as five times more than monthly credit insurance. Even worse, if these consumers later try to refinance through legitimate lenders, such as the Fannie Mae or Freddie Mac corporations, they may be out of luck, since both companies refuse to purchase loans with financed credit insurance. 8 THE TEXAS OBSERVER 2/1/02