March 29, 2013

Law would address predatory nature of tax lien lending industry

In a March 11 opinion piece in the Houston Chronicle, famed car dealer Red McCombs wonders why special interest firms want to take away the lien priority status of tax lien lenders that make loans to property owners who are in arrears on their taxes. He answers his own question with, "I have no idea, except maybe greed."

The groups he is referring to include Texas cities and counties, not-for-profit consumer advocacy organizations and banks that are concerned about the predatory nature of tax lien lending.

It's interesting that he would use the word "greed" since these groups are merely concerned about the high rates tax lien lenders charge homeowners, as well as their use of "expedited fore­closure," which has limited judicial involvement and doesn't allow for scrutiny over certain fees and costs claimed by the lender.

By the time the property owners pay tax lien lenders interest rates averaging 14-15 percent plus exorbitant fees, a $10,000 tax bill can turn into a $15,000 to $18,000 bill. For the tax lien lender, these loans are risk-free. For the bank that originated the loan in good faith to the borrower, these loans are a nightmare!

Legislators in Austin, charged with protecting consumer interests, could resolve this problem by just requiring tax lien lenders to give advance notice to the property owner and the bank BEFORE signing up for one of these egregious loans. This can be accomplished in legislation that is winding its way through the intricacies of the legislative process.

Although McCombs describes tax lien lenders as a valuable industry that "keeps families in their homes and the doors of Texas businesses open," these are the facts:

Tax lien lenders solicit homeowners with official-looking documents that we believe are intended to scare homeowners who are unable to make their tax payment on time.

They do not use standard underwriting criteria - such as the borrower's ability to repay - to make these loans. They don't have to because the loan is 100 percent equity-secured.

Tax lien lenders can bundle the loans and sell them on the secondary market to non-licensed entities.

They enjoy a priority lien position, which means if the property is sold during foreclosure, the tax lenders jump ahead of primary mortgage holders and state and local governments.

Due to what are referred to as "evergreen provisions," tax lien lenders can automatically renew the tax debt every year, which means the amount owed on property taxes, fees and interest continues to grow.

These types of loans do not stop foreclosures - they merely transfer the tax liens to a private company, which can foreclose for nonpayment.