Over the last several years, our nation has made progress in expanding access to capital for previously under-served borrowers. But despite this progress, too many families are suffering today because the evidence of abusive practices in a segment of the mortgage lending market. Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that were beginning to enjoy the fruits of our nation’s economic success. Predatory mortgage lending involves a wide array of abusive practices. Here are brief descriptions of some of the most common predatory lending practices:
• Loan Flipping: A lender “flips” a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments – sometimes on homes that had previously been owned free of debt.
• Unnecessary Products: Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
• Excessive Fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.
• Prepayment Penalties: Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all subprime mortgages carry a prepayment penalty – a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.
• Mandatory Arbitration: Some loan contracts require “mandatory arbitration,” meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.
• Steering & Targeting: Predatory lenders may steer borrowers into subprime mortgages, even when the borrowers could qualify for a mainstream loan. Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.
• Kickbacks to Brokers: When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays a “yield spread premium” – a kickback for making the loan more costly to the borrower.
Predatory lenders have caused a tremendous amount of misery and suffering to hundreds of thousands of people in this country. These practices had a direct effect on the meltdown of the nation’s economy. Very poor and sometimes no regulation of the industry were contributing factors. It bothers me to hear some of the Republicans in Congress — who were in control when much of the regulation that was in effect was relaxed — trying to put the blame on others for what the predatory lenders have done. Had the government done its job, much of what our economy is going through may well have been avoided.
Source: Center for Responsible Lending & Predatory Lending
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