Predatory Lending Laws And Unfair Credit Practices

Predatory Lending Laws And Unfair Credit Practices

This BLOG On Predatory Lending Laws And Unfair Credit Practices Was UPDATED On December 14th, 2017

Predatory Lending is the practice where the mortgage lender benefits and the borrowers are taken advantage of.

  • This type of lending is against the law
  • It benefits the lender and the borrower’s ability to repay their mortgage loan is ignored
  • Predatory Lenders often take advantage of mortgage borrower’s lack of knowledge in finances and mortgages and do not have the best interests of the borrower
  • Predatory Lenders often take advantage of minorities, elderly folks, and those with little education and unsophisticated borrowers
  • These lenders also take advantage of borrowers who are desperate in obtaining a mortgage or those who need cash in a hurry and do not have time to think about the terms and conditions of the loan
  • Predatory Lending is common for borrowers who recently lost their jobs, had death in the family, need emergency home improvement, need to purchase a vehicle, need major repairs, or had prior credit issues
  • Predatory Lenders target homeowners who have credit issues and have equity in their homes because they do not qualify for government and/or conventional loans but do with alternative financing

What Is Predatory Lending?

Predatory lending practices are the practice of unfair lending or abusive lending practices by banks, credit unions, mortgage bankers, mortgage brokers, or any residential mortgage lending institution. Predatory Lending benefits the lender and not the borrower.

  • It is the practice of illegal charges of fees, origination fees, and/or charges in the origination of a residential mortgage loan
  • It is also trying to have a mortgage loan borrowers to accept a residential mortgage loan without fully disclosing the rates and terms of the loans as well as the fees and third party charges the mortgage loans borrower can incur
  • It is deceiving the residential mortgage loan borrowers to accept the terms of the loan through deceptive and exploitative methods
  • Predatory Lenders do not care about the borrower’s ability to repay their loans
  • Predatory lenders fund loans that mortgage loan borrower cannot afford or does not qualify for their own benefit and not the benefit of the borrower

Definition Predatory Lending Practices

Predatory lending practices are illegal mortgage lending practices that does not benefit the mortgage loan borrower and only benefits the mortgage lender or mortgage loan originator

  • Predatory lenders take advantage of the mortgage loan borrowers lack of knowledge of the rates and terms and mortgage products
  • They misrepresent the loan program and deceive borrowers

Typical Predatory Lending Victims

Predatory mortgage lenders normally victimize the following:

  • Elderly
  • Minorities
  • Lower income mortgage loan borrowers
  • Uneducated mortgage loan borrowers
  • Foreigners

Predatory mortgage lenders often target mortgage loan borrowers who are desperate due to credit issues, high debt to income ratios issues, and those needing cash in a hurry

Examples Of Predatory Lending Practices

Prior to the 2008 Real Estate and Credit Collapse, predatory lending has been very common in the mortgage business and it was the major cause of the Great Recession.

  • Mortgage Loans on properties are collateralized by the homeowners home
  • Predatory Lenders targeted homeowners with equity and funded loans against their properties without regards of them having the ability to repay their loans
  • They got high interest monthly payments PLUS profited when the homeowner could not repay their loans and from the proceeds of the foreclosure when the borrower defaulted on their mortgages
  • Predatory Lending is not always illegal but there are so many risk factors on victims (borrowers) where they can lose their homes and ruin their credit for many years to come
  • Predatory Lending is not just on home mortgages. Predatory Lenders can be pay day loan lenders, car lenders, or consumer debt lenders

Some examples of predatory lending practices from mortgage lenders is not disclosing proper disclosures required by law and overcharging fees and costs beyond the maximum allowed by law.

Here are examples of Predatory Lending:

  • Mortgage loan packing
  • Mortgage flipping
  • Asset based mortgage lending
  • Reverse redlining 

Not Disclosing Costs And Fees

Predatory lending practices also includes when a predatory lender does not disclose the actual true costs:

Predatory lenders often deceive borrowers by not disclosing the true costs.

  • They fail to disclose the risks associated with proceeding with the mortgage loan or changes the initial terms and rates of the mortgage loan without notifying the mortgage loan borrower with the changes in writing
  • They do not re-disclose when they need to by law

Illegal Practices

Predatory Lending that benefits the lender and not the borrower is illegal.

  • A mortgage lender cannot inflate the appraisal costs or other third party charges and make a profit on third party fees
  • Whatever the third party charges are, that is what the mortgage loan borrower pays
  • A mortgage loan originator or mortgage lender cannot accept referral fees, nor kickback under RESPA and CFPB Rules And Laws
  • Kickbacks and referral fees borders into committing a felony and is classified as mortgage fraud

Choosing The Right Mortgage Loan Originator

A mortgage loan originator should be licensed.

  • Loan officers who work for FDIC Banks and Federal Credit Unions are exempt from licensing requirements
  • However, all loan officers originating residential mortgage loans need to abide to strict mortgage regulations and always need to consider the ability to repay when it comes to originating home loans
  • Residential Mortgages are regulated under RESPA and CFPB rules and regulations
  • Commercial Loans are not regulated because the government considers all commercial investors as sophisticated investors
  • A mortgage loan originator cannot ask for a retainer or any upfront fees during the mortgage application process with the exception of an appraisal fee
  • Home inspection fees are up to the home buyer to pay
  • If a mortgage loan originator asks for upfront fees or retainer, he or she is in violation of predatory lending practices and should be reported to the appropriate authorities
  • Residential mortgage borrowers can cancel their loans at anytime up to the date of closing without being obligated to anything

Due to new mortgage guidelines, the implementation of SAFE ACT, Dodd Frank, Quality Mortgage (Ability To Repay), new disclosures (LE and CD), predatory lending has been eliminated in the residential mortgage business. Both state and federal regulators do not mess around when it comes to predatory lending practices and unfair credit practices. Violators are subject to substantial fines and criminal charges.

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