Equity-stripping loans, extravagant fees and so-called "predatory lending" practices are costing Utah's low-income and ethnic communities dearly.
Just ask Teresa Lugo, 21, of West Valley City.
In January, Lugo, who speaks only Spanish, paid $2,000 cash as a down payment to purchase a 1995 Pontiac Grand Prix.
The balance of Lugo's auto loan — $4,729.08 — carried a whopping 38 percent annual interest rate, financed through the dealership, First Class Cars, located at 801 S. State.
Lugo readily agreed to make the $350 monthly payment. She needed a reliable vehicle for work in order to support her younger brother and sister.
But within 24 hours after driving off the lot, the car didn't work, Lugo told the Deseret News through a translator. Two weeks later she handed over the keys to First Class Cars, telling them the vehicle was sitting in a McDonald's parking lot.
"She had it for a couple of weeks, blew the motor. We were working very well with her. She didn't want the car," said Dave Davis, a spokesman for First Class Cars.
Lugo counters that she repeatedly called about her vehicle and tried to get her initial $2,000 deposit back but was told to keep making her monthly payments.
However, under Utah law, Lugo is not entitled to any of her money back, according to John Diaz, a Salt Lake attorney.
"When you buy a used car in the state of Utah, usually it's presumed 'as is,' " Diaz said. "They hide behind that and obviously they tell them, 'Oh yeah, this is a good car,' but basically it's up to the consumers to protect themselves and have it checked out."
First Class Cars turned Lugo's debt over to a collection agency, Knight Adjustment Bureau, which said in an April 30 letter to her that she owed an additional $2,029.92 — a combination of repair costs and the outstanding amount owed on her contract.
Total price for Lugo's two-week use of her car: $4,029.92.
No protection
Regrettably, Diaz said, those most at-risk have no protection when it comes to high-interest-rate loans, forcing many into bankruptcy.
"There is no usury law in the state of Utah. In general, all the car dealerships when they deal with minorities, especially people that don't speak English, take advantage of them royally," he said. "Education is the only thing we can do unless the Legislature decides to protect the consumer versus the auto industry."
That statement surprises Craig Bickmore, executive director of the Utah Automobile Dealers Association, which represents 150 new-car dealers across the state.
"The dealers that I know do their best to treat all their customers well, and it doesn't matter what language they speak or where they are from," Bickmore said. "They want to keep customers for the long term."
And Wayne Jones, executive director of the Independent Auto Dealers Association, said regardless of a person's ethnicity, the issue comes down to a buyer's credit history.
"There are some people with just such bad credit that they're willing to pay the real high interest rates," Jones said. "If we put a cap on it, that may eliminate a resource for those who fall into that category."
George Scott, general manager for First Class Cars, said all of his sales agents speak fluent Spanish, and he defends the high interest rates the company charges on auto loans. About a quarter of those who purchase his vehicles file for bankruptcy within 90 days, he said, shielding themselves from future payments.
"The courts write it off, and we get nothing. We're at a high loss area here. The risk is exorbitant," Scott said. "Most of my clients are either just getting out of prison, they're the bottom of the line. . . . We provide a service for people that otherwise would be taking the bus. If we didn't charge that interest rate, there would be nothing to gain by carrying a contract."
Scott added that as an incentive, if buyers make all their payments on time, any interest paid is deducted off the balance.
In Lugo's case, Scott said First Class Cars went out of its way, towing the vehicle back to the dealership and having the engine repaired at a cost of nearly $1,700.
"The only reason she is having a bill is she blew the motor," he said. "The only loss we have is what we are going after her on. That is our out-of-pocket loss."
Russell Behrmann, president of the Better Business Bureau of Utah, said he has no outstanding complaints on First Class Cars.
"We do not get a lot of complaints on used car companies specifically because they have to allege misrepresentation up front," Behrmann said. "I give First Class Cars credit for having a Spanish sales person. Unfortunately for this lady, steps maybe two and three didn't happen."
Those additional steps, Behrmann said, include making contracts available in Spanish, something not required by law.
Lugo's contract was in English except for the "as is-no warranty," section, which appeared in English and Spanish and made it clear that the buyer was responsible for any future costs of repairs.
Home loan problems
But high interest rates are not just confined to car loans in Utah, said Maria Garciaz, executive director of Salt Lake Neighborhood Housing Services.
"Predatory lending is really lending at any level where the fees are beyond what the standard market is," Garciaz said. "It's not against the law. That's why we call it predatory lending, because they tend to prey on communities of color, on people who are not sophisticated in terms of financing."
In Utah, such practices rob homeowners of roughly $91 million annually in lost equity, back-end penalties and excess interest paid, according to the Center for Responsible Lending, a North Carolina-based advocacy group.
Nationally, predatory mortgage practices represent a $9.1 billion problem, with balloon payments, early payoff penalties and unaffordable monthly payments putting the squeeze on borrowers.
"The vulnerability for the Latino community in Utah is 10 times higher because, hey, these people won't understand it, especially with the language issue," said Tony Yapias, director for the state's Office of Hispanic Affairs. "I've heard stories where your payment is going to be $500. But in five years they include some kind of balloon thing where the payment goes from $500 to $1,500 or $2,000. And so there are a lot of things that are difficult for our community to understand."
A study by the U.S. Department of Housing and Urban Development found that subprime loans were five times more likely in black neighborhoods than in white neighborhoods. And homeowners in high-income black neighborhoods were twice as likely as homeowners in low-income white neighborhoods to have subprime loans.
"Our experience has been that this problem is just as great with Latinos," said Eric Stein, a spokesman for the Center for Responsible Lending. "I'm a lawyer, and when I closed my first home loan the documents might as well had been in Spanish. It's not that understandable to the average consumer."
Rob Bennett, deputy director in the Fannie Mae Utah Partnership office and co-chair of an anti-predatory lending task force, agrees that the problem is serious.
"We have seen as a trend in the community these types of activities happening more and more, especially in the minority community and also in the senior community," Bennett said. "One of the goals of some of these lenders is to find ways to strip equity out of the home. A lot of times people are promised things they don't necessarily understand or are in their best interest."
Education is key
Bennett said one of the best ways to combat predatory practices is to educate consumers.
"A lot of times people are just told this is standard. People don't shop around, and they don't question."
Not everyone believes predatory practices have reached crisis proportions. Among them is Dexter Bell, director of the state's Division of Real Estate, which regulates real estate agents, brokers and residential non-bank mortgage lenders. Bell said his agency is focused more on mortgage fraud, where consumers defraud lenders by manipulating information about a loan.
"I think so far the evidence has been that there has been more loan fraud than there has been predatory lending in Utah," Bell said.
But according to Gina Bellazetin, who works for the Salt Lake Mexican Consulate's protection department, predatory practices are a common complaint among Utah's Hispanic population, which totals roughly 10 percent of the state's residents.
Often, the problem lies in understanding complex contracts or consumer rights.
One family, Bellazetin noted, didn't know they could do a "walk-through" of a home before buying it. After the closing, the family discovered mold on the walls and a broken furnace.
Shelley Weiss, tenant outreach coordinator for Mountainlands Community Housing Trust, a nonprofit affordable housing organization based in Park City, said undocumented individuals pay astronomical mortgage interest rates, sometimes as high as 15 percent for 30-year fixed mortgages.
"You are talking about a large community," Weiss said. "Certainly there is a language barrier, there is a lack of credit history, there is a large undocumented population, and all of that makes these individuals very vulnerable to predatory lenders because they have no options."
Homeowners' association fees are another big problem, Weiss said, pointing to one Park City condominium complex where the fees are $180 a month.
"They've never had a homeowners association before," she said. "They don't understand that if they don't pay their homeowners fees that they can foreclose on the house."
Deon Spilker, co-chair of a private industry task force on mortgage fraud, loan defaults and foreclosures, said there needs to be a better way to disclose to the borrower what they are actually signing.
"You pretty much put your trust into the person doing the loan with you," Spilker said. "A lot of times they will believe somebody because they speak their language. If a person were to shop three or four different companies, they would be able to see the difference. I think that is where a lot of predatory lending would stop."
Behrmann believes as a society more can be done.
"We've seen that people take advantage of newcomers and people that don't speak the language well when it comes to employment practices," he said. "There should be no surprise unscrupulous businesses may do the same thing."
Discuss predatory lending in Utah Monday morning at 9:30 on the Doug Wright show, on KSL Newsradio 1160.
E-mail: danderton@desnews.com