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Predatory Lending: Are Federal Agencies Protecting Older Americans from Financial Heartbreak?

Statement Before the Special Committee on Aging of the United States Senate

Good morning Chairman Craig, Ranking Member Breaux, and Members of the Special Committee on Aging. My name is Lavada DeSalles. I am a member of AARP's Board of Directors. I appreciate this opportunity to testify on a matter of great concern to us – the practice of predatory mortgage lending.

The American mortgage finance system is justifiably the envy of the world. It has offered unparalleled financing opportunities under virtually all economic conditions to a very wide range of borrowers who, in no small part, have contributed to the highest homeownership rate in the nation's history – 68.6 percent.

Over 80 percent of persons 65 and older are homeowners. For older Americans, home equity has consistently been a primary source of wealth – today, accounting for approximately $2 trillion among persons 62 and older or roughly one-half of the wealth of older persons.

The process of obtaining a home mortgage has changed dramatically. Many of us remember when getting a loan meant walking into a bank or savings and loan, filling out paperwork, going home, and waiting – sometimes days – for a call from the bank as to whether the loan was approved. Not so today. Technological advances have increased the speed and efficiency of lending decisions. TV, newspapers – even the Internet – are full of ads that offer ‘instant credit,’ and ‘guaranteed loans.’ A recent study by AARP found that approximately 7 of 10 older homeowners reported having received information offering them the opportunity to borrow money against the equity in their homes. In addition, ill-intended home improvement contractors go door-to-door, ‘finding’ home repair ‘emergencies’ with home-secured loan documents in-hand and ready to sign.

The types of loans that are available to today's borrowers have expanded well beyond the ‘prime’ products traditionally offered at banks. Subprime lending has grown – and grown rapidly. In 1994, the $35 billion in subprime mortgages represented less than 5 percent of all mortgage originations. By 2002, subprime lending had increased to $213 billion or 8.6 percent of originations (subprime originations in recent years have represented as much as 13 percent of the mortgage market).

AARP's concern regarding the growth of the subprime market is based on numerous studies that indicate that older homeowners are more likely than younger borrowers to receive a subprime loan. This is a concern because the subprime market appears to be the primary source of predatory lending practices – in particular, subprime refinancings (as opposed to first purchases), since that's where there's home equity to skim. Willie Sutton said, ‘that's where the money is.’

In addition, AARP is concerned that aggressive ‘push marketing’, often conducted by subprime lenders, leads to loans that are ‘sold, not sought.’ In a recent study, nearly two-thirds (61%) of older borrowers with refinanced subprime loans, reported that the broker/lender – not themselves – initiated the contact. Over one-half (54%) of these older borrowers with refinanced subprime loans reported to have responded to 'guarantee' ads or sales calls.

AARP has seen the devastation wrought by predatory loans upon older homeowners and has been active in working to eliminate predatory lending through litigation, advocacy, and education.

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