Predatory Loan Practices

What Constitutes Predatory Loan Practices?

Predatory loan practices are when a lender commits abusive lending practices by not allowing consumers to access mortgage credit fairly. Consumers are given a loan for which they are paying more than they should and which could put their home at risk of foreclosure because they cannot afford their mortgage payments. If consumers were targeted for these type of loans based on any of the protected classes under the Elliott-Larsen Civil Rights Act or PWDCRA, they may be a victim of unlawful discrimination as well.   

Identifying Predatory Mortgage Lending

  • Here are some signs to look for to identify predatory loan practices:
  • Consumer directly approached by lender to take a home equity loan against the equity in their home.
  • Lender encouraged Consumer to make home improvements.  Predatory loans often involve a dishonest home improvement contractor who is working with the lender and/or there is outright fraud in the loan documents.
  • Repeated refinancing of debt by charging multiple fees and costs to the Consumer which results in the Consumer draining all the equity out of their home.
  • Asking the Consumer to refinance to consolidate credit card debt in their home loan.
  • Adding credit insurance, life insurance, disability insurance or another form of insurance to the loan.
  • A prepayment penalty is added to the loan without offering the consumer a benefit or discount in return or offering them other loan products without prepayment penalties.
  • Balloon payments. A balloon payment is a large lump sum of money due at the end of the term of the loan. Lenders who add excessive balloon payments know that homeowners who cannot meet the balloon payment will lose their home to foreclosure unless they qualify to refinance the loan.
  • Negative amortization.  The lender structures the loan so that the monthly payments do not cover the amount of interest due each month on the loan, and the principal balance increases each month. At the end of the loan term, the Consumer owes more than the original amount they borrowed (reverse mortgages).
  • Making loans to senior homeowners based upon the equity in their homes, knowing that they cannot afford to repay the loans.
  • Packing or other fraudulent non-disclosure of loan terms or adding additional fees and charges without the Consumer’s consent.

The above practices deny the Consumer from being offered suitable mortgage credit, the right to the lowest cost mortgage that the Consumer qualifies for and the right to know the true cost of a mortgage and are predatory loan practices. 

Fannie Mae

 

Fannie Mae has established certain guidelines for lenders to follow to protect Consumers against practices such as steering, equity stripping, excessive fees, and prepayment penalties.

Points and fees charged to a borrower should not exceed 5 percent.

Fannie Mae will not purchase "high-cost" mortgages.

Fannie Mae will not purchase or securitize any mortgages where a prepaid single premium of credit life insurance was sold to the borrower at the time of the origination of their mortgage.

Lenders must report on the status of any Fannie Mae loan that they are servicing each month to the credit agencies.

Fannie Mae will only consider allowing prepayment penalties under the terms of a negotiated contract, and where the lender adheres to the following criteria: a mortgage that has a prepayment penalty should offer some benefit to the borrower in the form of a rate or fee reduction for accepting the prepayment premium; the borrower is also offered the choice of another mortgage product that does not require a prepayment penalty; the prepayment penalty must be disclosed to the borrower; and the prepayment penalty should not be charged when the mortgage debt is accelerated as the result of the borrower’s default in not making the borrower’s monthly mortgage payments.

Fannie Mae generally requires servicers to maintain escrow deposit accounts for the monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc., especially in the case of borrowers with poor credit records to protect them from default risks and foreclosure.

Steering

Steering is when the lender actually steers the borrower away from better loans or less expensive loan products for which they are qualified or when the lender allows the borrower to get a sub-prime loan when it is clear that they cannot afford the loan, especially when these products are higher costs to the Consumer.

Excessive Fees

Lenders should have their own guidelines and policies regarding fees that they can charge and must apply those policies to every loan.

Prepaid Single Premium Credit Life Insurance Policies

Including a prepaid single premium credit life insurance in the origination of the mortgage is considered predatory lending practices by Fannie Mae guidelines. 

Prepayment Penalties

Prepayment penalties must be included in the terms of a negotiated contract and must provide some benefit to the borrowers such as a rate or fee reduction for accepting the prepayment penalty premium or they are considered predatory loan practices. The borrower should be offered of choice of other mortgage products that do not require a prepayment penalty.  Also Consumers should be aware of loans that call for the prepayment penalty to be accelerated as a result of the borrower’s default on their loan.

Servicing Practices

The servicer should provide for escrow deposit accounts to be made available to borrowers with blemished credit records for monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc. to avoid additional risk of default for the borrower.

Consumer Protection Against Predatory Practices

Because very few borrowers understand how mortgage prices are determined and affected by variables such as the borrower’s credit, the type of property, interest rate, fees, points, rebates (hidden fees),  unscrupulous lenders or contractors conspire to take unfair advantage of borrowers and especially sub-prime borrowers.

HOEPA

The Home Owners Equity Protection Act (HOEPA) of 1994 was enacted to help prevent predatory lending practices. It imposes disclosure requirements and creates Consumer remedies in connection with high-cost mortgages that are 8 percent or more above prime. However, HOEPA only covers about 2 to 10 percent of sub-prime notes. Violations of HOEPA's disclosure provisions and inclusion of prohibited contract terms allows borrowers to collect for actual damages, statutory damages and attorney fees and costs. HOEPA violations are also subject to the Truth in Lending Act’s (TILA) extended right that Consumers may rescind the loan.  Assignees of loans covered under HOEPA are also liable for all claims and defenses with respect to the assigned mortgage that the Consumer could assert against the originator of the loan, except for certain limitations on damages.

The Truth in Lending Act (TILA)

Under the Truth in Lending Act a homeowner has a right to rescind a non-purchase money loan which is secured by the homeowner’s primary residence. Home equity loans and home improvement loans, whether first or second mortgages, are also included so long as the proceeds of the loan were not used to purchase the home. The homeowner must be provided with a notice of the right to cancel. The homeowner has a right to rescind the loan for up to three business days after the transaction and an extended right to rescind the loan for up to three years if the homeowner was not given a notice of the right to cancel the loan when it was made, or the borrower failed to receive the notice and all the required disclosure disclosures. TILA also requires lenders to disclose the terms of loans in a manner that is understandable to the borrower.

Real Estate Settlement and Procedures Act (RESPA)

The Real Estate Settlement and Procedures Act (RESPA) prohibit the payments of unearned fees and kickbacks. A lender kickback to a mortgage broker for making a referral is forbidden. The remedy available to the borrower for violation of this provision is treble damages and attorney fees.  At the time of the closing of the loan, the Borrower must be given a HUD-1 closing statement explaining the fees and the lender must disclose their fees in writing to the borrower prior to the borrower signing final loan documents.

State Laws

Many of the abusive practices and loan terms found in predatory mortgage loans can be challenged by Consumers under their state unfair and deceptive acts and practices as long as the practices are covered under the state laws. This would include claims for practices such as repeated and unnecessary refinancing ("flipping") of loans, making unaffordable loans to Consumers to acquire the equity in the property, or misrepresenting the loan terms.  Excessive fees and costs, and other terms that are clearly disadvantageous to the borrower may be also challenged as well.

At least 30 states have some sort of predatory lending law, with the strongest laws being in Arkansas, California, Georgia, Illinois, Massachusetts, New Jersey, New Mexico, New York, North Carolina, South Carolina, and West Virginia. 

Additional Laws 

In addition, warranty law, usury, unconscionability, breach of fiduciary duty, fraud, and contract law all have remedies which apply in abusive loans and predatory practices. Other laws, including the Equal Credit Opportunity Act and the Fair Housing Act, may also been raised as a remedy for Consumers against these practices.

Also with the government’s current pressure on lenders and other consumer groups helping to curb predatory loan practices by making the Consumer more aware and prosecuting lenders that violate the rules and laws, victims do have a voice that is stronger now than ever.

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