Wherever there is a pool of low-income homeowners or other groups
of individuals who are financially vulnerable, the potential for
greedy mortgage companies or con-artists to step in looms large.
While the actions of these companies may not always be illegal,
the result can be the same: the homeowners may lose their home
and the professionals who supposedly 'helped them'
end up profiting. These helpers are predators – seeking
their prey from the elderly, the sick, the poor. Predatory
lending practices can leave victims homeless and defeated,
stripped of self-respect and hope, their credit ruined.
The definition of predatory lending involves who really benefits
in the mortgage transaction. The fact that the homeowner does
NOT benefit is what turns a legal mortgage into a predatory
lending practice which can and should be reported. There are many
resources where one can report
mortgage fraud and predatory lending. If uncertain whether
a mortgage action is legal, or actually fraud or a form of predatory
lending, then one should still report it and find out for sure.
In many cases only a fine line divides actual fraud from an ethical
and legal transaction.
Steering & Coercing
Predatory Lenders use quite a number of different abusive practices
when putting together a subprime loan. The possible targets for
these practices are the elderly, low-income, or minority homeowners
who, in many cases, 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 – 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, compared
to only 9% in predominantly white neighborhoods. Borrowers are
often subjected to very aggressive sales tactics to steer them
or coerce them into refinancing when it isn't in their best
interest. Many states are attempting to set up predatory
lending laws to avert this type of activity.
A refinanced mortgage can be packed with excessive fees and/or
unnecessary fees. A regular mortgage usually will have loan fees
below 1% of the total loan amount. A predatory mortgage can have
loan fees in excess of 5%. These excessive costs are tucked into
the loan amount so the lender can easily disguise them, and these
fees can put thousands of the homeowner's dollars into the
predator's pockets. This practice falls within the definition
of predatory lending.
Insurance and Other Unnecessary Products
Predators often add insurance and other unnecessary products to
the loan amount. The insurance they either insist on or intimidate
the borrower into buying can include regular mortgage insurance,
fire and hazard insurance, life insurance, disability insurance,
homeowner's insurance, and health insurance. The insurance
can be extended to include all family members, not just the borrowers
themselves. The premium for these items is also added onto the
loan amount where the cost is not easily spotted by the borrower.
And, of course, the predator earns large commissions every year
on the premiums paid. A variation of this happens when three or
five years of premium are paid in advance.
Abusive and Abnormal Prepayment Penalties
Only about 2% of normal conventional mortgages have a prepayment
penalty that might be difficult to meet. Up to 80% of subprime
mortgage have an abusive prepayment penalty. Why? This is one
more way the predators can gouge an unsuspecting homeowner. The
prepayment penalty is a fee the lender requires the borrower to
pay if the borrower should pay off the mortgage loan early. The
subprime borrower usually has less-than-perfect credit when originally
taking out the mortgage, and the prepayment penalty is hidden
in the fine print. Over the next few years the borrowers may manage
to improve their credit and want to obtain a new mortgage that
has lower interest and lower payments. However, the prepayment
penalty on the original mortgage (which often equals 5% of the
original loan) is so high that it eats up any equity the homeowners
have built up and can even leave them owing more money. Homeowners
often are trapped into keeping the original, high-interest mortgage.
This is also another case where the lender gives a kickback
to the mortgage broker for helping to include the high prepayment
penalty in the mortgage. In the future, when the homeowner has
to pay the prepayment penalty, the mortgage broker pockets more
Because the predators using high prepayment penalties channel
the borrowers into subprime loans, the honest conventional lenders
lose a great deal of prime loan business. This indirectly affects
the fees they need to charge their regular prime borrowers. Everyone
loses when predatory lenders have their way.
Another form of predatory lending practices occurs when Con-Artists
find a homeowner whom they can talk or coerce into refinancing
their mortgage, even though the homeowner gains nothing from the
transaction. The process is called loan flipping. While
the transaction might put a few thousand dollars into the homeowner's
bank account, this amount is easily eaten up by the excessive
fees, higher interest rate, and prepayment penalties of the new
mortgage. A serious danger with loan flipping occurs when a balloon
payment is inserted into the fine print. While the homeowners
originally may have had twenty or thirty years to pay on the mortgage,
under the loan flipping they might be signing for a two, three,
or five year balloon payment. At the end of that time they need
to find a way to refinance the house again or lose it completely.
Of course, the 'expert Con-Artists' will be only to
glad to do another loan flip and refinance it for them
– once again pocketing thousands of dollars in the process
and leaving the homeowner with even less equity in the property
Another practice that falls within the definition of predatory
lending happens when a lender hides words in the fine print that
make it illegal for the homeowner to take legal action against
the lender. The borrowers sign away their rights to sue the
lender for any fraud, predatory actions or illegal actions.
The only right the borrowers have is to take their grievances
to arbitration. The arbitration process is totally in the hands
of the lenders, usually conducted in secret without the borrowers
having adequate representation. Although the borrowers can usually
have legal counsel, they find it difficult to find anyone who
will represent them because the lawyers are not guaranteed payment
of their fees in arbitration like they are in court. Many arbitration
cases are handled over the phone and when a small individual is
pitted against a large corporation and the proceedings are confidential
with no stenographic or written record of the facts, the borrower
is at a true disadvantage. Most arbitration decisions are binding
and the borrowers cannot appeal them.
More than 50% of the lenders are now including mandatory arbitration in their
loan documents, and the borrowers remain unaware of the implications. Lenders
favor arbitration because it eliminates a borrower's rights to do a class-action
suit against the lender. The Fair Credit Reporting Act and the Truth in Lending
Act have no bearing in an arbitration situation, only if one can go to court.
And, some lenders keep their right to go to court but prohibit the borrower
from doing so. The fees for arbitration can also be more expensive than filing
a small claims court suit. Overall, the borrowers who sign a mandatory arbitration
contract are bound to a very lopsided arrangement that rarely is in their best
The major arbitration administrators that a borrower can utilize
are the National
Arbitration Forum, the American
Arbitration Association (ADR), and Jams
Predatory Lending Laws
Predatory lending laws are slowly being integrated into the legal
systems of the federal government and the individual states. More
than 35 states have already placed a legal limit on the maximum
prepayment penalty that a homeowner should have to pay, and over
half of the states have taken steps to limit predatory lending
practices during the last five years. While the definition of
predatory lending varies in each state, the awareness that individual
citizens need to be protected by predatory lending laws is growing.
As more and more homeowners become aware that they have the right
to report mortgage fraud and predatory lending, and policy makers,
consumer advocates and civil rights leaders take stronger action
against the Con-Artists specializing in predatory lending practices,
then the elderly, minorities and those with less income are less
likely to be prey for predators. Politicians on every level are
becoming more aware of the need for predatory lending laws as
the Con-Artists multiply, ultimately costing citizens billions
of dollars. Organizations like the Center
for Responsible Lending, the National
Association of Mortgage Brokers, the Mortgage
Bankers Association (MBA), and the American
Bar Association actively work to promote predatory lending
laws. They also know that educating the public is one of the strongest
deterrents to mortgage fraud and predatory lending practices.
These organizations are committed to providing this education.
Note About This Information
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only. It is our belief that all information presented here is accurate
as of date of publication, however this information may change at
any time. The information presented here should be considered a
starting point and we encourage everyone to fully research any information
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If you do find an error or have updated information, please contact
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