Two of the nation's largest consumer finance loan companies have stopped making loans to renters, and other companies are limiting such loans. Instead, they are giving preference to homeowners who can secure their loans with second mortgages on their houses.
Officials at Beneficial Finance Co. and Associates Corporation of North America said they had stopped lending to renters because of large increases in bankruptcies which they blamed on a liberalized federal bankruptcy law that took effect in 1979.
"The bankruptcy law stopped us from making loans to non-homeowners," said David Ward, a senior vice president at Beneficial, the nation's second largest finance company. "The real decision to say we cannot make loans except to homeowners was made in July."
Reece Overcash, chairman of Associates Corp., said his company's policy was instituted a year ago after the bankruptcy law "created a flood of bankruptcies from people who could afford to pay."
Other companies, while stopping short of an outright halt of loans to renters, reported that they were encouraging consumer loans secured by second mortgages.
For example, a spokesperson for Household Finance, the nation's largest finance company, said that in 1980 one-third of their loans were based on second mortgages and by 1981 the company had pushed that figure to one-half.
This trend favoring homeowners comes at a time when high interest rates and housing prices make a home unaffordable for the vast majority of Americans.
Just a few years ago many homeowners regarded borrowing based on a second mortgage as an act of desperation to be used only as a last resort. But inflation greatly swelled the values of most homes and second mortgages became fashionable when homeowners found that they could easily use their houses as collateral for all sorts of loans.
Banks and finance companies generally will lend homeowners up to 75 percent of the difference between the appraised value of their home and the amount of any existing mortgage.
Richard Wills, director of the Consumer Protection Center at the George Washington University law school, said he agreed that finance companies should become more selective about their customers, but added that "owning a home should not determine credit worthiness. We have a lot of homeowners coming in here [for credit counseling] who should not have received a loan."
Both banks and finance companies have attacked the new bankruptcy law because it makes it easier for consumers to qualify for bankruptcy and allows them, particularly non-homeowners, to protect most of their assets, such as their furniture and car, from creditors.
Both the old and the new federal statute put a consumer's salary out of the reach of creditors after bankruptcy is declared. But a second mortgage offers finance companies more protection because they can foreclose if payments are delinquent. In the case of a bankruptcy, a homeowner can protect only a small value of his house. Thus, lenders consider a bankruptcy less likely.
Wills, disagreeing with the finance companies, blamed the rise in bankruptcies on the generally bad economy and unemployment--not the federal law which took effect Oct. 1, 1979.
There are other reasons for the lenders to prefer loans secured by second mortgages. They enjoy a significantly lower delinquency rate. Additionally, they are more profitable since they are larger (usually exceeding $10,000), run for a longer period of time (generally seven years) and cheaper to administer than smaller unsecured loans.
But some finance companies admit that renters may have difficulty finding money for large credit card debts, medical expenses, college bills and to use in investments.
"It prevents us from servicing an important part of the market," said Ward of Beneficial. "The non-homeowners have been the backbone of our market."
The problem of obtaining a personal loan is exacerbated in the Washington area because Maryland and District laws limit the interest rate the financial institutions can charge on such loans. There is no limitation in Virginia.
District law forbids banks and savings and loans from charging more than 15 percent interest on consumer loans and Maryland law limits the interest charged to 16 percent. The D.C. City Council, in December, passed a bill raising the legal limit to 21 percent and that legislation is pending before the Congress. The Maryland legislature is expected to change that state's usury laws during its current session.
Several District and Maryland bank officials said they had reduced their personal loans considerably. "It is illogical to make loans at 15 percent when the cost of money [to the banks] is 17 to 20 percent," said C. Jackson Ritchie, president of First American Bank and the D.C. Bankers Association. Ritchie was echoed by his Maryland counterpart.
Several finance companies with offices in Maryland said they no longer made loans even based on second mortgages because of the 16 percent limit. Overcash, head of Associates, said his company was closing its Maryland office because of the interest rate ceiling.
By comparison, in Virginia last week, Household Finance was charging 27 percent on unsecured loans and these were limited to $2,500. A second mortgage was required for larger loans and the interest rates varied from 21 to 22 percent, according to a survey of several offices.
United Virginia Bank charged 20 to 21 percent on unsecured loans while First Virginia charged 18 percent.
In 1978 finance companies made 24.8 million consumer loans and 6.6 million were secured by second mortgages. Two years later the number of loans had only risen to 31.6 million but the number secured by second mortgages had nearly tripled to 16.4 million, according to figures compiled by the National Consumer Finance Association, a trade association for consumer loan companies.
Finance companies make about 27 percent of all consumer loans in the United States, banks 44 percent and savings and loans, credit unions and car companies the remainder.