CBS News Correpondent Wyatt Andrews tells what happened to 72-year-old Sanders Faust of Decatur, Georgia. Faust, who cannot read or write, faces foreclosure on his home because of the questionable lending practices of a loan company called the Associates.
A U.S. Senate panel is currently examining these lending practices and their impact on senior citizens who are sometimes left homeless.
Andrews reports that Faust feels he was robbed. And not by men with guns, but by salesmen with briefcases who loaned him money to help pay his taxes.
The salesmen were from the Associates, a nationwide finance chain. In a span of 15 months, Associates sold Faust three different mortgages with interest rates as high as 16.9 percent. Hidden in the fine print were expensive fees and credit life insurance that added thousands of dollars to the cost of the loan.
Faust said they did so knowing he was illiterate.
At one point, $9,000 of the $26,000 Faust owed--more than a third of his debt--went to Associates for the extra insurance and fees.
Associates is a subsidiary of the Ford Motor Company, and a leader in what is called subprime lending. Associates made a billion dollars profit last year, providing high interest credit, often to customers who can't get regular bank loans.
Their sales pitch urges consumers to pay off debts, borrowing against the equity in their homes.
The lenders are looking for senior citizens or other low-income Americans who don't make that much money but have built substantial equity in their homes.
Howard Rothbloom, an attorney helping Sanders Faust, says Faust was the victim of a practice called flipping--repeated refinancings with each new loan packed with fees that raised Faust's debt.
Fred Stern, an Associates senior vice president, denies there is a policy to flip loans, and insists Associates does nothing to take advantage of seniors or the poor.
He said, "We're filling a need for people to have access to credit, that they might not be able to get elsewhere."
But former Associates loan salesman Gary Ayala says he was encouraged to flip loans. Salesmen also got bonuses he says, for adding high profit charges like credit life insurance, without always explaining them to the client.
While the loans appear to be legal, the federal government is investigating Associates, to see if the loans are deceptive or illegally targeted towards men like Faust.
Associates maintains it made a proper loan to Faust but today Faust faces foreclosure on a home he had once paid off.
The Senate Special Committee on Aging launched a campaign to educate elderly Americans who have fallen prey to so-called "predatory lending."
"Above all, I want to send a message to older Americans who are presented home equity loans that sound too good to be true: Ask a lot of questions and don't sign anything until you're satisfied with the answers to your questions," said Sen. Charle Grassley, the committee chairman.
Lawmakers on the panel said they also want federal regulators to be on guard and help put an end to lending scams. Grassley said he will formally ask the Department of Justice and the Federal Bureau of Investigation to increase their oversight.
According to figures released by the Senate panel, the subprime lending market has growth exponentially in recent years. Between 1982 and 1996, home equity loans jumped from $1 billion to $600 billion.
A recent study conducted by the American Association of Retired Persons found that lending in the subprime market has grown to a lucrative $200 billion to $300 billion a year industry.
"Many of these loans are based on home equity rather than income or the ability to repay, so that over time, when the borrower cannot make the payments, the equity in their home is drained," Grassley said.
For Wyatt Andrew's full report, click above.
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