Lenders who issue loans to consumers with poor credit are proliferating.
Mark James, past president of the Mortgage Bankers Association of Hawaii, conservatively estimates that at least 20 such companies - called B and C lenders for the riskier credit ratings of their customers - have entered the Oahu market during the past year.
"We're just being inundated" with more competition, agreed Jeanne Sandifer, credit manager for BNC Mortgage Inc., which opened an Oahu office in March.
The companies, also referred to as nonconventional lenders, issue loans to people typically shunned by traditional institutions.
"They try to scarf up the scraps," James said of the lenders.
But because their borrowers represent greater credit risks, the B and C lenders are able to charge premiums for their products. It's not unusual for interest rates to be as much as 4 or 5 percentage points above what is available from conventional lenders.
The market for such loans in Hawaii certainly has grown the past few years. Foreclosures and bankruptcies have soared to record levels as the state's economy has sputtered. Loan delinquencies are on the rise as well, though the numbers here still are well below national averages.
And homeowners no longer have surging real estate values as a financial crutch, like they did during the boom years. With Oahu's overall housing prices relatively flat - and down substantially in specific neighborhoods and segments of the market - there is little if any equity for many homeowners to leverage.
If they lose a job or are forced to work fewer hours, they fall deeper into debt. Bills go unpaid and credit card balances skyrocket, creating an economic malaise that tends to feed on itself. The hardest hit fall behind on mortgage payments, risking the loss of their homes. Some slip into bankruptcy.
With few alternatives, many of these debt-ladened consumers are turning to nonconventional lenders, who are eager for the business. Indeed, providing high-interest loans to risky clientele has become a lucrative enterprise for some companies, partly accounting for the influx of competitors.
Only a few years ago there were few such lenders on Oahu.
Quality Funding Inc. was one of the first to surface - and to hit pay dirt, say those in the industry.
"We did an incredible amount of business," said Sandifer, who worked at Quality before leaving to help form BNC Mortgage.
Quality officials did not return a phone call yesterday afternoon seeking comment.
The idea behind these high-interest loans is that they're supposed to be short-term solutions, buying customers time to restore their credit to A ratings. Many of the loans are for two to five years, presumably enough time for the client to re-establish good credit and qualify for a lower-interest loan from a conventional lender. The conventional loan would in turn be used to retire the higher-costing debt.
"We're here to help customers get rid of that" bad credit, said LaVerne Paulos, area sales manager for Long Beach Mortgage Co., a B and C lender that opened its Oahu office last month.
People who can't verify their income levels - often workers and business owners who deal primarily in cash but don't report everything they earn - also turn to the B and C market, though they too pay premiums for the loans.
These lenders serve a good social purpose, James said. "They're willing to take a risk on people."
Some consumer advocates, however, argue that the costs are too high. They maintain that some lenders take advantage of less-sophisticated borrowers, charging unnecessarily high fees or rates. Lenders say their costs reflect the level of risk of the customer.
B and C lenders in Hawaii generally are unregulated by the state, as long as they don't take deposits and don't charge more than 12 percent interest on all but first-mortgage loans, said Lynne Himeda, the state's deputy commissioner for financial institutions. (First mortgages are not regulated by the state; institutions that charge more than 12 percent for other loans must be licensed).
Himeda said she wasn't aware of consumer problems hampering the B and C industry here.
Many of the lenders don't deal directly with consumers. As wholesalers, they issue loans through mortgage brokers. Some don't even have a physical presence in Hawaii, using fax machines and phones to do business from the mainland.
As with any complicated financial product, people who turn to the B and C market should contact several lenders or brokers to shop for the best deal, consumer advocates and industry officials say.
Customers also should read all documents carefully before signing anything, so they know exactly what they're paying for, the experts say.
If you're planning to take out a high-interest loan in the so-called B and C market, keep these tips in mind:
Don't pay more than $700 to $800 in fees (excluding points).