Dorothy Secol, CLA
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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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