In this mortgage guide in Gustan Cho Associates we will cover what predatory lending laws are. 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.
Is Predatory Mortgage Lending Illegal?
If you are not aware of what Predatory Lending is and need to make sure that it does not strike you, then this article will be of great importance to you. As much as we would like to pretend it is happening in the mortgage loan industry, the hidden truth behind the matter is there are some mortgage lenders out there who do not have your best interest in mind. If you aren’t careful, you could be another victim of this act.
What Is Predatory Lending In Mortgage?
Predatory Lenders often take advantage of borrowers’ 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.
What Qualifies As Predatory Lending?
Predatory Lending is common for borrowers who recently lost their jobs, had a 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. This is because they do not qualify for government and/or conventional loans but do with alternative financing.
How Does Predatory Lending Happen?
Predatory lending happens when a borrower is issued a loan that is to the lender’s benefit but has sizable adverse effects on the ability of the borrower to pay for and repay the loan through less than moral lending techniques. Through your mortgage process, if there were any unethical, deceptive, or unfair terms or activities, you could very well have been an unknown victim of Predatory Lending.
Victims of Predatory Mortgage Lending
Unfortunately, there is typically a type of borrower that a predatory lender would seek out, and it is minorities, the elderly, the poor, and the uneducated. If the lenders can discover or notice an exploit that can be used against these borrowers, they may do everything in their power to exploit this and make it to their advantage for financial gain.
Case Scenario of a Predatory Lender
For example, if a borrower recently lost their job or had to seek employment at a worse-paying job but still needs to purchase a property, the lender can take advantage of the situation. Since there is a sense of desperation from the borrower, the lender can take this opportunity to charge a significantly higher mortgage rate than they would have to a less desperate audience.
What Are Predatory Lending Practices?
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.
Predatory Lending Mortgage Reform
It is also trying to have borrowers accept a residential mortgage loan without fully disclosing the rates and terms of the loans, as well as the fees and third-party charges borrowers, can incur. It is deceiving 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 borrower cannot afford or does not qualify for their own benefit and not the benefit of the borrower.
Definition of Predatory Lending Practices
Predatory lending practices are illegal mortgage lending practices that do 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.
Are Balloon Mortgages Predatory Lending?
Balloon Mortgages: Balloon mortgages are a loan type that is currently being used. However, you need to get all the details associated with the balloon payment to make sure that there are no surprises down the road. A lot of times, lenders will make the initial cost before the balloon is due very attractive.
Is a Balloon Payment Considered Excessive?
The balloon payment at the end is an excessive amount. With this excessive amount, it is usually planned that the borrower won’t be able to afford the charge, which may force them to refinance the amount with another high-interest rate loan, or worst case would be foreclosure. The goal of this scheme is to have the borrower pay high-interest payments without paying much principal at all, thus allowing the lender to make a lot of money on the loan without the borrower having a chance to pay it off.
Are Negative Amortization Loans Legal?
Negative Amortization Loan: This type of loan is very deceptive when it comes to taking advantage of unsuspecting borrowers. With a negative amortization loan, the borrower will make a monthly payment. Still, that payment will be so small that it won’t even be enough to cover the monthly interest associated with the loan, let alone pay down any of the principal.
You could get stuck paying on this loan for years only to show that not you owe significantly more than when you took out the loan. This puts an even more significant debt on the borrower when they are under the assumption they are getting closer to home ownership.
Typical Predatory Lending Victims
Predatory mortgage lenders normally victimize the following:
- Lower-income borrowers
- Uneducated borrowers
Predatory lenders often target borrowers who are desperate due to credit issues, high debt-to-income ratio issues, and those needing cash in a hurry.
Excess and Hidden Fees By Predatory Lenders
Excess Fees / Hidden Fees: This is a commonly occurring practice for deceptive lenders to partake in for their own financial gain. Legally, all fees that are needed to facilitate the funding of the loan need to be clearly outlined and followed. If you aren’t careful and double-check these fees accordingly, you can find yourself paying excess fees or hidden fees that lenders will try to get you to pay. The best advice here is to ask many questions concerning costs and shop around to make sure the quoted fees seem reasonable.
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 homeowner’s home.
Predatory Lenders targeted homeowners with equity and funded loans against their properties without regard to 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 Not Always Illegal
Predatory Lending is not always illegal. But there are so many risk factors for victims (borrowers) that 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 payday loan lenders, car lenders, or consumer debt lenders. Some examples of predatory lending practices from mortgage lenders are not disclosing proper disclosures required by law and overcharging fees and costs beyond the maximum allowed by law.
What Makes Predatory Lending?
Here are examples of Predatory Lending Practices:
- Mortgage loan packing
- Mortgage flipping
- Asset-based mortgage lending
- Reverse redlining
Not Disclosing Costs And Fees
Predatory lending practices also include 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 borrower of the changes in writing.. They do not re-disclose when they need to by law.
Illegal Predatory Lending 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 lender cannot accept referral fees, nor kickbacks under RESPA and CFPB Rules And Laws. Kickbacks and referral fees border into committing a felony and are 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 by strict mortgage regulations and always need to consider the ability to repay when it comes to originating home loans.
What Is an Example of Predatory Lending in Mortgages
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. It should be reported to the appropriate authorities.
How Can I Get Out of a Predatory Mortgage?
Residential borrowers can cancel their loans at any time up to the date of closing without being obligated to do anything. Due to new mortgage guidelines, the implementation of SAFE ACT, Dodd-Frank, Quality Mortgage (Ability To Repay), new disclosures (LE and CD), and 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.
Predatory Lending Practices and Loans
It is in your best interest to be knowledgeable of the different loans and processes that lending companies show for them to benefit financially. The list below shows the many different types of loans and practices and how they can impact borrowers. Please make sure if you are approached with any of these scenarios, you remove yourself from business with the predatory lender immediately. Get in touch with us right away so you can work with a reliable lender. A reliable mortgage lender will give you an honest opinion of your loan options and loan programs suitable for you.
Predatory Lending: How To Protect Yourself and Warning Signs
If you aren’t aware of Predatory Lending, you need to be, or you could get stuck paying on a loan that you should have never signed for. However, if you can determine or identify the predatory practices, you will be better off and can help yourself and safeguard against Predatory Lending.
Is The Mortgage Loan Officer Licensed In The State He Is Originating Loans?
Ensure your loan officer is licensed in the state you want to purchase a home in. Be very cautious of someone “cold-calling” your house, trying to sell you a loan, or an option to refinance. Be especially careful if you are approached by a salesman who is knocking on your door. Be aware of excessive promises made by the lender that ensures that you are going to get a loan regardless of credit standing. If you have done your research on this site and you know that you cannot qualify for a loan, be nervous about someone who promises you a loan.
Read Mortgage Documents Carefully
Read through your documents thoroughly and ensure you aren’t signing anything with empty spaces where there should be numbers or words otherwise. If something looks fishy to you, make sure you have a friend or someone you trust check it out to ensure everything seems right. You don’t want to allow the lender to add verbiage to the documents at a later date after you have already signed.
Predatory Lending: You Are Protected!
Plenty of federal laws and regulations protect borrowers against predatory lenders and Predatory Lending practices. Under ECOA or the Equal Credit Opportunity Act, it is illegal for lenders to impose higher rates and fees due to race, color, religion, marital status, sex, and national origin. There are also rules by HOEPA or the Home Ownership and Equity Protection Act that protects borrowers from high fees and rates. If you are getting a loan with excessive rates or fees, these are required to have additional disclosures, and there are restrictions on how high the fees and rates can go.
Choose The Right Mortgage Lender
As previously mentioned, you can never be too careful when dealing with lenders and falling for some deceptive practices that can land you in a lot of trouble down the road. Ensure you get the truth when dealing with a natural resource like Gustan Cho Associates
September 28, 2022 - 9 min read