Predatory Lending

 

Predatory Lending is term coined for the actions that money-hungry mortgage companies and scam artists take on low-income homeowners and others who are at risk, financially. These actions, while not necessarily being illegal, still have negative outcomes for homeowners who trusted these people who were supposed to be “helping” them. Most people wind up losing their homes, and these professionals wind up profiting. It’s more appropriate to call these “helpers” predators.

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  Predatory lending can leave customers homeless and helpless, void of hope for ever restoring their now ruined credit. The definition of predatory lending reflects the party that comes out on top, in the mortgage transaction. The fact that the homeowner DOES NOT benefit is what turns a seemingly legal transaction into predatory lending and this fraud should be reported and there a numerous resources available to do so. Even if someone is unsure if the transaction is legal or predatory lending, it should still be reported to find out for sure. In most cases, there is a very fine line between the two.

Steering and Coercing
Predatory lenders use various practices when developing a subprime loan. Many of these abusive tactics are targeted towards the elderly, poor or minority homeowners, who, in reality, would actually qualify for a regular prime-loan. Fannie Mae estimates that about 50% of subprime, refinanced loans could have been prime-loans and saved homeowners thousands in interest and fees. The abuse of predatory lending against minority groups is evident in a government study. It was found that in an African-American community, 51% of the refinanced mortgages were subprime, and in a predominantly white community, only 9% were subprime. Most of the time, homeowners are exposed to aggressive sales strategies that coerce them into refinancing, when it’s not really in the homeowner’s best interest. Many states are now trying to implement predatory lending laws to alleviate this type of activity.

Excessive Fees
When refinancing a mortgage, oftentimes there are many unnecessary and excessive fees. Under normal circumstances, a mortgage will have fees below 1% of the total loan amount. A predatory loan can have fees of more than 5%. These exorbitant costs are hidden within the loan, leaving borrowers unaware and potentially costing them thousands of dollars more that goes directly into the predator’s pockets. This tactic falls within the definition of predatory lending.

Insurance and Other Unnecessary Products
Another scheme used by predators is to add insurance and other unnecessary products to the total loan amount. They convince borrowers to buy into these different insurances by insisting or intimidating. These insurances they force include regular mortgage insurance, fire and hazard insurance, life insurance, disability insurance, homeowner’s insurance and health insurance. The insurance isn’t offered only to the borrower but can include family members. Most times, the premiums for these policies are added on to the loan amount, where the cost is not easily depicted by the borrower. And, when all is said and done, these lender make huge commissions each year on each paid policy, and this varies when three to five years of premiums are paid in advance.

Abusive and Abnormal Prepayment Penalties
Out of all usual mortgages, only approximately 2% of those have a prepayment penalty that could be hard to meet. Up to 80% of subprime mortgages have prepayment penalties that could be considered abusive, and this is just another way these predators take advantage of homeowners. The prepayment penalty is a fee the borrower must pay if he or she decides to pay the loan off early. The subprime borrower usually has poor credit to begin with, and this prepayment penalty is disguised in the fine print. Over the years of this loan, the borrower’s credit could improve and they may decide to refinance for a lower rate and payment. The catch then becomes the fact that the prepayment penalty on the original mortgage is so high, the borrower loses any equity they may have had in the house and can even wind up owing money in the end. The homeowner then has no choice but to stay in the original mortgage and the lender then gives a kickback to the mortgage broker for including the high prepayment penalty. In the future when the penalty is eventually paid, the broker pockets even more money. Because the predator is using high prepayment penalties which lead borrowers into subprime loans, the honest lenders lose a lot of business that could be prime loans. This affects the fees they then have to charge their prime borrowers. Predatory lenders affect everyone.

Loan Flipping
Another predatory lending practice is when Scam Artists find homeowners that can be talked into refinancing their mortgage, even though the homeowner gains nothing from the transactions. This process is referred to as loan flipping. While initially homeowner’s might receive a few thousand dollars from it, the money goes right back out the door to pay for the excessive fees, higher interest rate and pre payment penalties. A serious danger to be aware of with loan flipping is the balloon payment that is inserted to the fine print. While the homeowner may have originally had twenty or thirty years to pay off a mortgage, with the loan flipping they may have two to five years of balloon payment. At the end of that time period, they will need to refinance again or else lose the house. No doubt the predators will gladly do another loan flip, and take home thousands of dollars once again, putting the homeowner in an even deeper hole, with less equity than before.

Mandatory Arbitration
Another form of predatory lending is when a lender puts disclaimers in the fine print, making it illegal for the homeowner to take legal action against the lender. What this essentially means is that the homeowner is signing away all rights to sue the lender, in any case of fraud, predatory actions or illegal actions. The only right left for the borrowers is to take their complaints to arbitration. This arbitration is normally in the hands of the lender, and is done without much involvement or representation of the borrower. Borrowers have the right to appoint counsel, but it’s difficult to find lawyers to work the case, because they are not guaranteed payment in arbitration like they are in court. Many arbitration cases are handled over the phone, and when an individual is put up against a large corporation, the proceedings remain confidential with no record, so the individual is at a great disadvantage. Most arbitration decisions are binding, leaving the borrower unable to appeal. More than 50% of the lenders include mandatory arbitration in their loan documents, and borrowers are left in the dark what this actually means. Lenders use mandatory arbitration because it eliminates the borrower’s ability to file a class-action law suit against the lender. And The Fair Credit Reporting Act and the Truth in Lending Act do not apply when it comes to arbitration, they only count when it goes to court. Some lenders even reserve their own right to go to court, but forbid the borrower from doing so. As well as all the aforementioned down falls of arbitration, it usually cost more money to go to arbitration than to small claims court. In the end, when borrowers sign loan documents including mandatory arbitration, they become bound to an unfair arrangement that is almost never in their best interest. The major arbitration administrators available to borrowers are the National Arbitration Forum, the American Arbitration Association and Jams Endispute.

Predatory Lending Laws
Slowly, state and federal governments are including laws about predatory lending. More than 35 states have already implemented laws limiting how much of a prepayment penalty someone should have to pay and more than half the states have taken action to limit predatory lending practices over the past five years. Although each state has it’s own specific definition of predatory lending, the need for people to be protected from it is universal. As homeowners become aware that they can take action against mortgage fraud and predatory lending and policy makers, consumer advocates, and civil rights leaders take more action against the predators, more people will be protected from its burden. Politicians are becoming more aware of the problems of predatory lending and are realizing the need for laws against the perpetrators of the scam. Organizations which are helping to promote these laws include the Center for Responsible Lending, the National Association of Mortgage Brokers, the Mortgage Bankers Association and the American Bar Association. They also acknowledge that educating the public is the key in elimination of mortgage servicing fraud, mortgage lender misconduct, and predatory lending, and these organizations are devoted to providing that knowledge.

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