Predatory Lending Practices

Predatory lending is a term commonly used to describe certain unfair and deceptive practices engaged in by unscrupulous parties in the mortgage lending and consumer finance industries.  Although not uniformly legally defined, predatory lending means imposing unfair and abusive loan terms on borrowers, often through deception or fraud, aggressive sales tactics, and preying on borrowers' lack of understanding of these extremely complicated transactions. 

Predatory lending practices have been prevalent in the "subprime" lending market.  Subprime lenders are those who typically lend to borrowers who do not qualify for loans from mainstream lenders.  A subprime borrower is typically one who cannot qualify for prime financing terms but can qualify for subprime financing terms.  The failure to qualify for prime financing is due primarily to low credit scores.

While predatory lending can occur in the prime market, it is ordinarily deterred in that market by greater competition among lenders, greater homogeneity in loan terms and greater financial information amongst borrowers.  In addition, most prime lenders are banks and credit unions, which are subject to extensive federal and state oversight and supervision unlike many subprime lenders.  However, some subprime lenders are also banks and are federally regulated as well.

Unfortunately, predatory loans oftentimes end in foreclosure.  Our firm is committed to protecting consumers and borrowers from predatory lending practices by unscrupulous lenders.

Subprime lenders and brokers frequently target low income, minority and elderly consumers, who they believe have poor credit or little access to traditional lines of credit.  The consumers are oftentimes pressured into accepting high cost loans secured by a mortgage on their home.  These loans often provide little or no financial benefit to the consumer.  Consumers victimized by these predatory lending practices may be entitled to relief under State and Federal law.

We can help you to determine whether you have been the victim of a predatory loan scam and we can determine whether or not your lender has complied with all federal and state lending laws.

The following are some of the more common predatory practices:

Blank Pages
Never sign any blank pages or forms without numbers filled in. The complexity of mortgage loans and the number of unethical lenders can be daunting. If you're uncomfortable or unsure of some issues, always consult an attorney to review any papers you're asked to sign.

Read every word of every loan document Ñ it can be alarming as to what lurks in the fine print that could hurt you later. At the very least, pay the closest attention to four things:

• Truth-in-lending statement
• Good-faith estimate of closing costs
• HUD ettlement sheet of closing costs
• Mortgage note

Excessive Fees
Ethical mortgage brokers and lenders charge reasonable fees for their lending services. Unethical ones charge more than what is reasonable under customary standards and norms.  On a typical purchase loan or refinance loan, borrowers should avoid paying fees exceeding 1% (not including any discount points) of the loan to the mortgage broker and/or lender.

Predatory lenders often finance huge fees into loans.  These loans strip thousands of dollars in hard-earned equity and rack up additional interest in the future.  Borrowers in predatory loans are routinely charged fees of just under 8% of the loan amount in fees, compared to the average 1%-2% assessed by banks to originate loans, to avoid mandatory legal disclosures under Home Ownership and Equity Protection Act ("HOEPA").

Once the paperwork is signed and the rescission period expires, there is no way to get that equity back, and borrowers frequently lose thousands of dollars of equity in their home while receiving little, if any, benefit from the refinancing.  The damage to the homeowner is compounded at higher interest rates as borrowers often pay tremendous interest costs in the years it takes just to pay down the fees.  

Typically, these loan fees are set below 8% in order to avoid additional disclosures under federal law, HOEPA.

Making Loans Without Regard to the Borrower's Ability to Pay
Predatory lenders make loans based solely on a homeowner's equity, even when it is obvious that the homeowner will not be able to afford their payments.

For mortgage brokers, the motivation to engage in this kind of practice is a short-sighted desire to generate fees from the loan.  Loan officers at mortgage companies may have similar motivations based on earning commissions, regardless of the consequence to the lender for which they work.  For some lenders, especially when there is significant equity in a home, the motivation is the ultimate foreclosure on the house which can then be resold for a profit.

For example, a mortgage lender may solicit a homeowner for a second mortgage to consolidate his debt.  The new loan could have a 13.5% interest and a monthly payment of $700, leaving him with a total housing payment of $1,400 a month.  At the time that the consumer received the loan, he was working at a moderate wage job and had gross earnings of $2,000 a month.  This would mean that the new mortgage payment would be 70% of his gross monthly income.  Loans are typically made at 33% of gross monthly income and they take into consideration other debt obligations before approving the loan (e.g., student loans, credit cards, car payments).  Accordingly, the lender arguably did not properly consider the borrowerÕs ability to pay back the loan, and thus should have not made the loan in the first place.  A lender has expertise in the lending field and duties to protect consumers against improper financial instruments.  Lender's who do not meet this duty to provide a borrower with the proper financial terms may be held liable for the injury that occurs to the borrower.

Prepayment Penalties
More than two-thirds of subprime loans have prepayment penalties.  In comparison, about 2% of conventional prime loans have pre-payment penalties.

The penalties come due when a borrower pays off their loan early - refinancing or the sale of the house.  The penalties remain in force for periods typically ranging from the first two to five years of the loan, and are often as much as six months interest on the loan.  For a $100,000 loan at 12% interest, this would be over $5,000.

When a borrower with a prepayment penalty refinances, the amount of the penalty is sometimes rolled over or financed into the new loan.  In effect, the borrower will lose more of the home equity.

Another instance of prepayment penalties is when they are combined with an adjustable rate loan ("ARM").  Borrowers are approved for a loan with a starting interest rate which lasts for 2-7 years.  Then, the interest rate increases dramatically at the end of the 2-7 year period.  These borrowers are left with little choice but to refinance due to the increased monthly payment and have to pay additional fees for the new loan in addition to the prepayment penalty.

Borrowers are frequently unaware that their loans contain a prepayment penalty.  Lenders' agents simply fail to point it out, or they are deliberately misleading, telling borrowers that they can refinance to a lower rate later, while neglecting to inform them of the prepayment penalty which will be charged if they do refinance or sell within the 2-7 year period.  Many borrowers are misled in this way even when the mortgage broker or lender has presented to them the legally required disclosure.

Prepayment penalties on subprime loans thus make it difficult or impossible to refinance and prevents other borrowers who establish and maintain improved credit from obtaining a loan with more favorable interest rates.  For example, the prepayment penalty and the new fees for the refinance loan oftentimes may exceed the equity of the home.

Loans Greater Than Market Value of Home
Lenders may make a loan for considerably more than a borrower's home is worth.  This may be done in tandem with a false appraisal.  In effect, the borrowers are upside down on their loan from day one of ownership and trapped with the lender for an extended period.

Home Improvement Scams
This scam occurs when the lender allows loan proceeds to be paid directly to a contractor for work to be done on the financed home.  Home improvement contractors may target their marketing efforts to lower income neighborhoods where homes are in most need of repairs and where the owners commonly are unable to pay cash for the service.

The contractor may communicate to the homeowner that they will arrange for the financing to pay for the work on the home and refer the homeowner to a specific broker or lender.  The contractor may begin the work before the loan is closed and force them to pay for the work even if they are not approved for the loan.  The lender may make the payments directly to the contractor if they approve the home equity loan, which will leave the homeowner with no control over the quality of the work.  As a result, the work may not be done properly and leave the homeowner with the obligation of a high-interest, high fee loan.

Single Premium Credit Insurance / Insurance packing
Credit insurance is insurance linked to a specific debt or loan which will pay off that particular debt if the borrower loses the ability to pay either because of sickness (credit health insurance), death (credit life insurance), or losing their job (credit unemployment insurance).  The insurance premium is often paid in one lump sum and financed into the home loan.  The insurance premium is sometimes as high as $10, 000.00, especially if the borrower is "sold" multiple forms of insurance.

There is overwhelming agreement that financing single premium credit insurance into mortgage loans is abusive and illegitimate.  Fannie Mae and Freddie Mac both now refuse to purchase loans that include financed credit insurance.  A HUD/Treasury report on predatory lending recommended that the financing of single premium credit insurance policies be banned on all home loans.  The Federal Reserve Board has issued a proposed regulation that would count single premium credit insurance premiums as 'points and fees' for the purposes of the federal Home Ownership Equity Protection Act (HOEPA). The Consumer Federation of America calls financed single premium credit insurance "the worst insurance rip-off in the country."

Lenders who sell these insurance products may surprise borrowers with additional fees at closing.  They rely on the naivety or trust of the borrower in understanding the differences between credit insurance and private mortgage insurance.  Unethical lenders may convey to customers that the insurance comes with the loan and imply that it is free.  Sometimes, lenders may try to scare borrowers into closing the loan by suggesting that refusing to sign will delay and even jeopardize the loan and cause the closing to cancel.

Balloon Payments
Reports show that about 10% percent of subprime loans have balloon payments.  Balloon payments are arranged so that after making a certain number of regular payments, often 5-7 seven years, the borrower must pay off the remaining loan balance in its entirety, in one "balloon payment."

There are specific circumstances where balloon payments make sense for some borrowers in loans at "A" rates and high income levels.  For most borrowers in the subprime market, balloon payments are senseless.  Balloon mortgages, especially when combined with high interest rates, make it more difficult for borrowers to build equity in their home.  After paying for some number of years on the interest on the loan, homeowners with balloon mortgages are forced to refinance in order to make the balloon payment.  The borrowers incur the additional points and fees on a new loan to pay the balloon payment and they must start all over again paying mostly interest on a new loan, with another extended period until their home is paid for.

In addition, many borrowers are unaware that their loan has a balloon payment, that their monthly payments is comprised of nearly all interest and not reducing their principal, and that the balloon will ultimately force them to refinance.

Loan Flipping
Loan flipping is a lending practice in which a lender encourages repeated refinancing by existing customers and charges thousands of dollars in additional fees or other charges each time.  The borrower may need extra cash and agree to refinance.  Some lenders will intentionally start borrowers with a loan at a higher interest rate, so that the lender can then refinance the loan to a slightly lower rate and charge additional fees to the borrower. This kind of multiple refinancing is never beneficial to the borrower and results in the further loss of home equity.

Property Flipping
Property flipping is an elaborate lending scam in which unsuspecting first-time homebuyers are sold houses in serious states of disrepair for prices far above what the houses are actually worth.

The typical "property flip" begins with an investor or real estate company purchasing a distressed or foreclosed property for very little.  The owner will do minimal cosmetic or even no work to the property and provide estimates for contractor work.  The owner will find a buyer, frequently targeting low-income, minority families.  The owner will take advantage of the buyer by misrepresenting the condition of the house, promising to make visibly-needed repairs, setting the sales price at far above the property's actual value, and referring the buyer to a subprime lender or broker.

In order to meet the 80% loan-to-value ("LTV") requirement of many lenders, the owner utilizes a number of schemes in order for it to appear that the buyer has the required down payment of 20% or more.  The owner sets the sales price far above what the property is actually worth.  The key to this scam is having a lender or broker that will utilize appraisers who will support the property's inflated sales price.  In exchange for the appraisers' participation, the lender or broker is compensated by often excessive fees and additional charges on the loan.

Steering & Coercing
Predatory Lenders use quite a number of different abusive practices.  The potential targets for these abusive and unethical practices are the elderly, low-income, or minority homeowners.  In many cases, these borrowers would actually qualify for a regular prime loan. 

Fannie Mae estimates that possibly up to 50% of the subprime refinanced loans could have been prime loans Ð saving the borrowers thousands of dollars in fees and interest rates.  The abuse of subprime loans in minority neighborhoods is evidenced by a government study in an African-American neighborhood showing over 51% of the refinanced mortgages being subprime.  In comparison, only 9% of loans refinanced in predominantly white neighborhoods were subprime.  Borrowers are often subjected to very aggressive sales tactics to steer them or coerce them into refinancing when it is not in their best interest to refinance at subprime conditions.

Consumer Protection Laws
There are several Federal and State laws which have been enacted to protect borrows
from the aforementioned practices.  These laws include:

Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) was enacted to provide consumers with meaningful information about credit transactions.

TILA requires creditors to disclose to consumers for closed-end credit loans, interalia, (1) the finance charge, (2) the Annual Percentage Rate (APR), (3) the amount financed, and (4) the total of all payments.  The finance charge is the cost of credit disclosed to the consumer as a total dollar amount, including the interest for the loan and other costs of the loan such as origination fees, discount points, and private mortgage insurance (PMI).  The APR for closed-end credit is the finance charge expressed as an annualized percentage rate.

Before TILA was enacted, creditors could advertise the same interest rate but calculate it by different means.  The APR is designed to provide a benchmark figure for consumers to consider the real costs of credit for a loan and to facilitate comparison shopping for credit.  Assuming the existence of additional costs of a loan beyond the interest charged, the APR will be greater than the interest rate on the loan. 

TILA, which applies to all transactions that involve a mortgage on a consumer's personal residence, requires uniform disclosure of credit terms, including an annual percentage rate (APR).  The act grants consumers a right to rescind certain mortgages within three days of the later of (1) closing, (2) the provision of accurate material disclosures, or (3) the giving of notice of the right to rescind.  Regulatory agencies can obtain certain administrative and (in the case of the Federal Trade Commission) judicial remedies for TILA violations.  An individual plaintiff may recover actual damages; statutory damages in the amount of twice the finance charge, although this remedy cannot be greater than $2,000 or less than $200; and costs and reasonable attorneys' fees.  

Real Estate Settlement Procedures Act (RESPA)
RESPA requires the disclosure of settlement costs to consumers for federally-related mortgage loans at the time or soon after a borrower applies for a loan and again at the time of real estate settlement.

Section 8 of RESPA prohibits payments by settlement service providers for the referral of settlement service business and unearned fees and splits of fees for such services. In enacting RESPA, Congress intended to curb abuses that lead to increased settlement costs.  RESPA also limits amounts held in borrowers' escrow accounts and requires notices to borrowers of affiliated businesses and transfers of mortgage servicing.

RESPA currently requires creditors (or mortgage brokers) within three days of loan application to provide all applicants for "federally related mortgage loans" with an estimate (the "Good Faith Estimate" or GFE) of the amount or the range of charges for specific settlement services in mortgage transactions.

These charges include creditor-imposed fees, such as loan origination fees; charges by third parties, such as appraisal or title insurance fees; and amounts the consumer is required to put into an escrow account for items such as property taxes or insurance.

The GFE allows consumers to understand how the total amount of closing costs will be allocated.  It also provides an opportunity for consumers to shop for some of the services (for example, the services of a settlement agent or title insurer).  At or before settlement, consumers receive a second RESPA disclosure -- the uniform settlement statement (the HUD-1) -- that enumerates the final costs associated with both the loan and, if applicable, the purchase transaction.  HUD has interpreted RESPA to require that the charges disclosed on the GFE must bear a reasonable relationship to the actual charges.  The figures disclosed on the GFE, however, need not be firm or guaranteed.

Moreover, RESPA does not impose liability on a creditor for an inaccurate or incomplete estimate, or for failing to provide one.  Section 8(a) of RESPA prohibits kickbacks and referral fees.  Section 8(b) prohibits unearned fees.  These provisions have provided a legal basis for addressing certain abusive and predatory practices under the RESPA statute. (Section 8(c) permits bona fide compensation for goods and facilities actually provided and services performed).  The statute provides criminal penalties for violation of Section 8, private rights of action for damages and limited injunctive relief. However, the statutes of limitations are short.  The disclosure provisions of the statute concerning settlement costs do not include sanctions for violations.

If you are facing foreclosure on your home and you believe this was caused by oppressive mortgage terms, insurance fees, interest rates which were changed or undisclosed prior to closing, your mortgage lender or broker may have failed to follow the Truth in Lending Act or other state and federal statutes.

If you have received a "Notice of Default" or your home is in foreclosure, let us determine whether your foreclosure and credit problems qualify for statutory relief.  Please contact us for a consultation at 713-864-1941 or contact us here.

Whistle Blowers:  Please help others by sharing any insider information.
If you work or have worked in any capacity within a title company, a real estate company, for a lender, as a mortgage broker, an appraiser, or in any part of the mortgage loan and settlement industry, and have good information to share your information here. Your name can be kept confidential.

Helpful Information Regarding Predatory Lending:

HUD Ð Predatory Lending
http://www.hud.gov/offices/hsg/sfh/pred/predlend.cfm

HUD - Don't Be a Victim of Fraud
http://www.hud.gov/offices/hsg/sfh/buying/loanfraud.cfm

Real Estate Settlement Practices Act ("RESPA")
http://www.hud.gov/offices/hsg/sfh/res/respa_st.cfm

Truth in Lending Act ("TILA")
http://www.fdic.gov/regulations/laws/rules/6500-200.html

Home Ownership and Equity Protection Act ("HOEPA")
http://www.law.cornell.edu/uscode/15/1639.shtml
http://lenderliabilitylaw.com/HOEPA.html