March 1997

Rich House, Poor House:
The Two Faces of Home Equity Lending

This article was written by the Consumers Union Southwest Regional Office.
This report is also available in PDF Format

Executive Summary

Home equity lending, as implemented in other states, helps many consumers because banks offer lower interest rates on loans secured by a lien on the home, and the interest on these loans is tax deductible. But in today's fragmented loan market the benefits of home equity lending are not equally available to all, and some borrowers can lose their homes over abusive or high interest loans they cannot afford. While Consumers Union supports consumer access to home equity, many borrower protections will need to be incorporated into the Texas lending market to prevent abuse.

Under the current Texas Constitution, lenders may foreclose on a borrower's home only if the borrower fails to repay a first mortgage, a tax lien or home improvement second mortgage. Lenders may offer cash loans or loans for consumer goods, vacations, or children's education, of course, but they may not require the borrower to put up a home as collateral. Home equity lending bills now before the legislature would expand the number and type of loans that borrowers take using a lien on the home as security. For many low and moderate income working Texans, this additional outlet for credit may prove a disaster.

While commercial banks offer lower interest loans and home equity lines of credit to their preferred customers, they frequently ignore low and moderate income consumers and avoid those with poor credit histories. Instead, finance companies target low income and elderly borrowers with equity loans at higher-than-bank rates. Many of these consumers cannot afford the loan packages offered to them and eventually lose their homes. In addition, these lower income borrowers typically file simple tax forms and do not deduct, gaining no benefit from the deductibility of their increased debt burden.

Lower income and elderly borrowers are also more vulnerable to lending abuses. Home equity lending abuses gained national attention in 1993 and 1994, culminating in Congressional hearings. According to testimony, published reports, and Texas civil suits filed on behalf of borrowers, finance companies aggressively marketed loans with high interest rates and deceptive provisions to vulnerable consumers. Instead of making affordable loans available to homeowners, these loans caused over 100,000 families nationwide to lose all of the equity in their homes. In Texas problems in equity lending already exist in the market for home improvement loans, where lenders may now take a borrower's home if a debt cannot be repaid.

Because elderly and lower income borrowers are already vulnerable to abuses in the home equity lending market, any expansion of home equity lending in Texas should include certain additional consumer protections.

• Limit loan fees and other up front costs associated with home equity loans and limit interest rates on loans secured by second (or lower priority) liens.
• Require full disclosure to consumers of consumer rights and risks when taking home equity loans, including the consumer's right to cancel the loan within three days and receive a full refund of all money paid.
• Define deceptive lending practices as Deceptive Trade Practices under DTPA, including loans where the lender knew or should have known that the borrower was unable to repay under its terms.
• Reform the foreclosure process to include adequate time to cure the default, a redemption period after foreclosure during which the borrower may repay the debt, and the right to assert counter claims against a lien holder through a judicial foreclosure process.
• Create an Office of Access to Financial Services with authority to collect and analyze data on home equity lending and represent consumers.
• Prohibit "reverse" redlining through additional reporting and the creation of "life line" checking accounts which increase access to mainstream financial services.
• Create a centralized Home Equity Consumer Complaints Hotline and provide access to loan counseling services.