Predatory Lending
During the latter part of 2005 and through most of 2007, lenders made a large number of loans without adequately underwriting the loans. Because of this, many loans were made to borrowers who could not possibly repay the loans. The borrowers are victims of predatory lending and now may be facing a foreclosure of their home.
Definition
Predatory lending is the term used to describe a large number of unscrupulous activities found in the residential home lending industry. The term applies to a set of abusive practices often committed by lenders:
- the use of sharp practices to obtain above-market interest rates and fees;
- the encouragement of borrowers to enter into loans likely to lead to foreclosures;
- the “reverse redlining” or unscrupulous lending to targeted geographic, economic, age, or racial areas;
- the lending to unprotected borrowers who had been previously shut out of the mortgage or financial industry, or;
- the unnecessary lending to unsophisticated borrowers who had owned their homes for some time and had accumulated significant equity in their homes.
Goals of Predatory Lenders
The goals of predatory lenders were to sell loans with higher than market rate interests and other costs, or to strip out the equity in a borrower’s house (through frequent refinancing) and, too often, selling the loans on the secondary market or by securitizing them. The expectation of immediate bundling and resale in the secondary market led to a major relaxation of loan underwriting standards which lead the lenders to focus less on the long term strength of the borrower and more on simply generating the largest possible face value of mortgage paper.
How Predatory Lenders Achieved Their Goals
Predatory lenders achieved these goals by offering 1% teaser rates, negative amortization loans, Adjustable Rate Mortgage Loans, stated income loans, or small to no equity loans (i.e. 100% loan to value loans).
In such cases, the borrower is left with a loan that he or she can possibly handle initially, but when something happens — such as a rate increase, depreciation in the housing prices, loss of a job, tightening of the credit markets — the borrower is faced with foreclosure proceedings.
What You Can Do About It
You can and should get counseling as to whether or not you have been a victim to Predatory Lending. Our law firm is dedicated and knowledged in addressing and pinpointing the various Predatory Lending activities, which can include, but are not limited to:
- Stated Income or No Doc Loans. Putting the borrower into a loan with little or no regard to the borrower’s ability to repay the loan. This is especially common with adjustable rate mortgages, in which the rate adjusts after 3 to 5 years (so called 3/1 and 5/1 ARMs) and Option ARMs, in which borrowers are given the choice of pay interest-only payments or negative amortization payments of less than the full interest rate. These loans are many times packaged as “stated income loans” or “no doc” loans.
- 10% or No Money Down Loans. Putting the borrower into a loan where the borrower will have little or zero equity in the property.
- Negative Amortization Loans. Loans where monthly interest payments are less than actual interest incurred, thereby forcing an increase in the balance rather than a decrease.
- Excessive High Fees. High points, high broker fees or lender fees, and padded closing costs.
- High Annual interest rates or “default” rates. These are loans that escalate the rate on an event of default (monetary or nonmonetary).
- Excessive Impounding of Interest payments. This practice can have several effects, including a) reducing the amount of money a refinancing borrower actually realizes from the loan, b) supporting such sales-pitch techniques as “no payment for 6 months”, or 3) reducing a lender’s out-of-pocket exposure when the unaffordable loan inevitably defaults.
- Undisclosed or inadequately disclosed ARM adjustments
- Steering. Putting the borrower into loans with increased interest rates or costs despite the borrower’s ability to qualify for more favorable loan terms. This usually happens in cases where a supposedly “independent” broker is paid a commission for steering the loan to a particular lender.
- Short Term Loans. Interest-only loans with short terms and balloon payments due at maturity, which virtually guarantee default and the “flipping” opportunity.
- Loan Flipping. Repeated refinancing, widely known as “flipping”. Oppressive loan terms force borrowers to pay high points, fees, or prepayment penalties. When an ARM interest rate resets or a balloon payment becomes due and borrowers are unable to pay their loans, they must repeatedly refinance. Dealing with borrowers caught in cycles of flipping, lenders strip equity on each closing by charging excessive loan fees and closing costs.
- Forced Placed Insurance. Forcing the borrower to pay for insurance obtained by the lender or loan servicer at exorbitant costs under the claim that the homeowner does not have insurance, thus paving the way for the lender or servicer to get an undisclosed commission for selling it to the borrower. Such insurance generally costs 2 to 3 times the normal rate for homeowners insurance and does not cover the borrower at all.
- Bait and Switch Tactics. Such as substantially changing loan terms at closing.
- Making unfavorable loans to disabled, mentally incapacitated, elderly, or uneducated homeowners
- Falsifying Loan Applications. A loan broker or lender may state on a loan application that a prospective borrower’s income is greater than it really is in order to facilitate approval of the loan.
- Adding False Cosigners or Guarantors. Adding false cosigners or guarantors in order to obtain additional security for the loan
- Forging signatures on loan docs
- Padded appraisal costs and Closing Fees
- Fraudulent inflated home values in collusive appraisal scams
- Bogus Fees. Fake fees, such as fees for Broker “underwriting fees” (where by definition, brokers do not do underwriting) or itemizing duplicative services and charging separately for them.
- Misinformation. Misinforming the homebuyer that credit insurance is required, or failing to disclose to the buyer that the lender or broker is earning a commission on the insurance.
