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PREDATORY
LENDING
In accordance
with the HUD-Treasury Task Force, predatory
lending involves engaging in deception or fraud,
manipulating the borrower through aggressive
sales tactics, or taking unfair advantage of a
borrower’s lack of understanding about loan
terms. These practices are often combined with
loan terms that alone or in combination, are
abusive or make the borrower more vulnerable to
abusive practices. Some of the most common
abusive practices are:
Excessive
fees – Points and fees are not directly
reflected in interest rates. Because these costs
can be financed, they are easy to disguise. On
predatory loans fees totaling more than 5% of
the loan amount are common.
Abusive
prepayment penalties – up to 80% of all
subprime mortgages carry a prepayment penalty.
An abusive prepayment penalty typically is
effective more than three years and/or costs
more than six months’ interest.
Kickbacks to
brokers (Yield Spread Premiums) – When
brokers deliver a loan with an inflated interest
rate, the lender often pays a “yield spread
premium” (kickbacks) for making the loan more
costly to the borrower.
Loan
flipping – A lender “flips” a borrower by
refinancing a loan to generate fee income
without providing any net tangible benefit to
the borrower. Flipping can quickly drain
borrowers’ equity and increase monthly payments.
Unnecessary
products – Sometimes borrowers may pay more
than necessary because lenders sell and finance
unnecessary insurance or other products along
with the loan.
Mandatory
Arbitration – Some loan contracts require
“mandatory arbitration” meaning that the
borrowers are not allowed to seek legal remedies
in a court if they find that their home is
threatened by loans with illegal or abusive
terms.
Steering &
Targeting - Predatory lenders may steer
borrowers into subprime mortgages, even when the
borrowers could qualify for a mainstream loan.
Vulnerable borrowers may be subjected to
aggressive sales tactics and sometimes outright
fraud.
Predatory
lending occurs primarily in the subprime
mortgage lending market. By providing loans to
borrowers who do not meet the credit standards
for borrowers in the prime market, subprime
lending provides an important service, enabling
such borrowers to buy new homes, improve their
homes, or access the equity in their homes for
other purposes. Many borrowers who had
substantial credit card and unsecured debt took
subprime mortgages to pay that debt, and now
find themselves in foreclosure. The growth in
foreclosures which result from subprime loans
taken to pay unsecured debt is evidence that
subprime borrowers may not adequately appreciate
the fundamental risk of converting unsecured
consumer credit into home-secured credit. The
downside risk is no longer just filing a
bankruptcy case, but loss of a home.
Subprime
mortgages generally are made to individuals and
households with impaired or limited credit
histories, or high debt relative to their
income. There is a growing body of anecdotal
evidence that an unscrupulous subset of subprime
lenders, as well as mortgage brokers, realtors,
and home improvement contractors who engage in
abusive lending practices that strip borrowers’
home equity and place them at increased risk of
foreclosure. The explosive growth of subprime
mortgage lending has thus created a
corresponding increased potential for abuse of
consumers.
More and more
attorneys, both private practitioners and legal
service attorneys are filing suit against
predatory lenders. Many of these suits result in
settlements where the loans are renegotiated to
allow borrowers to avoid foreclosure. The
California Attorney General has filed a civil
lawsuit alleging that Countrywide Financial Corp
engaged in deceptive advertising and unfair
competition by pushing borrowers into risky
loans. There is a bill (H.R. 3221, The
American Housing Rescue and Foreclosure
Prevention Act of 2008, which would use the
Federal Housing Administration (FHA) to
guarantee up to $300 billion in new mortgages to
refinance borrowers at risk of foreclosure into
viable loans that they can afford. Willing
lenders would write down their existing mortgage
loans to 85% of the current appraised value of a
homeowner’s property, and the borrower would
receive a new FHA-insured loan. To qualify for
such a loan, borrowers would have to document
their income and their ability to repay the new
proposed loan under the FHA’s prudent
underwriting standards. This bill, if passed,
and signed by the President, would not help all
of the victims of predatory lending, but would
help many. There are legal remedies, and for
those who have fallen victim to predatory
lending, help is there.
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