1. What is Predatory Lending?

1. Based on what’s occurred to home mortgage borrowers over the last decade, we need to call guilty lenders what they really are: Lending Predators.
2. Since the vast majority of subprime loans were either under-explained or incorrectly explained, combined with the harsh reality that theses loans were inappropriate for the majority of borrowers, I suspect that most subprime borrowers victims will be able to call themselves Predatory Lending victims, too.

2. When does Predatory Lending occur?

1. As the front page story in the December 3, 2007 edition of the Wall Street Journal points out, there’s alotta borrowers stuck in subprime loans because (insert gasp of surprise here) subprime loan originators made higher commissions and profits by steering unwitting consumers to these loans.

2. That’s worth repeating: Hundreds of thousands of borrowers with good credit scores and financial statements were steered into subprime loans because mortgage brokers (originators) were enticed to make higher commissions and profits thanks to bonus schemes based on the Yield Spread Premium (YSP).

Wikipedia’s explanation is a good one: “The YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for.

For example, if a mortgage broker offers a borrower a loan of $100,000 at an interest rate of 6.25%, and the par rate is 6%, the broker may earn a YSP equal to 1.0% of the loan amount. This $1,000 fee is paid by the lender directly to the broker as a "rebate." The mortgage broker earns "one point" directly from the lender "POC" (Paid Outside Closing). Although the borrower is not charged the fee directly, the borrower does pay the fee indirectly by accepting a higher interest rate in exchange for lower fees.

U.S. mortgage brokers are required to disclose YSP as a fee "POC" (Paid Outside Closing) on page 2 of the HUD-1 Settlement statement, inside the margin, away from the column marked "Paid from Borrower's funds at Settlement.” Oops! Unfortunately, this information doesn’t always show up. In addition, the YSP is supposed to be disclosed on the Good Faith Estimate (GFE).

3. Who is to blame for the Subprime Loan crisis?

Most people — especially the media — think that bad credit is the driving force pushing borrowers into subprime loans. But as the generally-accepted “textbook” definition of subprime loans explains, it’s only one factor. A borrower could have perfect credit yet may not have been placed in an “A” paper or “prime loan” if…

1. …the collateral was either insufficient (appraised value of the property) or the home was to be built (i.e. new construction) in a planned community dominated by one builder pushing financing through their own ‘captive’ mortgage company;
2. …the borrower’s level of debt was too high (i.e. non-confirming “debt-to-income ratios”);
3. …the borrower is self employed — or — the lender or realtor steered them to do what’s known as a “No Doc” or “Stated Income” loan (also derogatorily referred to by critics as “Liar’s Loans”) because the borrower didn’t have to prove their income and assets by going through the standard (and far more stringent) underwriting process.

Once again, we’ll let Wikipedia provide the definition: “A stated income loan is a mortgage where the lender does not verify the borrower's income, by looking at their pay stubs, W-2 forms, income tax returns, or other records. Instead, the borrower is simply asked to state their income, and taken at their word. These loans are sometimes called "liar loans."

These loans are nominally intended for self-employed borrowers, or other borrowers who might have difficulty documenting their income. Stated income loans have been extended to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans particularly simple targets for fraud. U.S. Senator Chuck Schumer is currently leading an effort to restrict stated income loans; his Borrowers Protection Act of 2007 would essentially forbid them.”

4. Critics of the subprime debacle seem to love pointing the finger at subprime borrowers, especially those who did the “Stated Income” loans. Accusations of borrower fraud are pretty common, but once the Dover-exposed truth begins floating to the surface in 2008, lawmakers and enforcement agencies will be shocked at the number of loans made to borrowers who were coached by mortgage brokers or originators throughout the application process — a clear violation of the Fair Housing Act.

4. What do I look for in a predatory loan?

1. Predatory loans charge more in interest and fees than is required to not only cover the added lending risk, but to pay higher commissions to mortgage brokers or originators.
2. Predatory loans contain terms and language that the average consumer could ever understand. These terms and conditions can frequently trap borrowers because they’ve been poorly, incorrectly, or not explained at all…with increased indebtedness being the most frequent end result.
3. Predatory loans often target women, minorities, and low income communities with subprime loans disguised as homeownership opportunities. The fact is that the majority of subprime loans are “equal opportunity predatory loans.”
4. Predatory loans may have pre-payment penalties which exceed three years.
5. Many predatory loans were pitched to borrowers with the promises like: “Don’t worry! You’ll be able to re-finance the loan when the principal comes due!” As the nation is now learning, these promises were misleading, to say the least.

Three factors work against borrowers ever getting their properties re-financed:

1. Lower credit scores: The lower credit scores that result from over-stretched budgets and the struggle to pay the cost of poorly or non-disclosed interest rate escalations practically guarantee that a subprime homeowner will have an extremely difficult time refinancing...if they're successful at all.
2. An original artificially inflated property value: This would prevent any legitimate lender from refinancing the non-existent value
3. Declining property values: The housing market bubble has burst in most parts of the country. In areas with high numbers of foreclosures, the downward pressure on housing values makes an already tough situation virtually insurmountable.

5. Predatory loan victims are a favorite target of scam artists that use the promise of rescuing vulnerable borrowers from foreclosure to strip any equity you may have left in your home. Check out this terrific video (it’s only 2 minutes!) from Freddie Mac. It really does a great job of illustrating the latest home foreclosure scams now targeting financially distressed homeowners.

6. Wikipedia’s definition of “Equity Stripping” is a good one: “Equity stripping, also known as “equity skimming” or “foreclosure rescue,” is any of various predatory real estate practices aimed at vulnerable, often low-income, homeowners facing foreclosure in the United States. Often considered a form of predatory lending, equity stripping began to spring up in the early 2000s and is conducted by investors or small companies that take properties from foreclosed homeowners in exchange for allowing the homeowner to stay in the property as a tenant.

Most often, these transactions take advantage of uninformed, low-income homeowners.

Because of the complexity of the transaction and false assurances given by rescue artists, victims are often unaware that they are giving away their property and equity. In recent years, several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure reconveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or un-meetable (sic) terms.”

7. Predatory loans often require the purchase of single premium credit insurance. Credit Insurance” or “Credit Life Insurance” targets unsophisticated borrowers by offering insurance policies associated with a specific loan or line of credit (like credit cards), promising to pay back some or all of any money owed should certain things happen to the borrower, such as death, disability, or unemployment.

1. These policies are always expensive, and if the borrower should become unemployed or disabled, the issuers of these policies make it extremely difficult for them to collect.
2. Instead of signing up for credit (or credit life) insurance, borrowers get far more bang for their buck by purchasing a term life insurance or disability insurance policy to cover any borrowing- related liabilities.
3. Single Premium Credit Insurance (SPCI) is another opportunity for lenders to pad their bottom lines by taking advantage of unsophisticated subprime mortgage borrowers. These policies charge a one-time premium at the time the loan is originated. Aside from being expensive, it’s added on to the total original loan balance, meaning the cost of the insurance is expensively financed over the life of the loan.

Oops! If you decide to re-finance the loan, you’ll lose the entire “benefit” of the original policy since it only lasts for the duration of the loan, and by re-financing, the original loan is paid off.

While it’s illegal for lenders to tell borrowers they must buy a “Credit Life” policy in order for them to make the loan, some lenders insinuate that the loan will not be made unless the unsophisticated borrower signs up for the policy. Why the push by lenders? Because they get paid a substantial commission on the sale of credit life policies. (Surprise!)

8. When did Predatory Lending start?

Ever since there has been some form of barter or currency system in place, there have been predators and victims. Nothing new here, except today’s schemes are more creative and deceptive, and the stakes are higher.

9. Are there consumer laws to protect the consumer?

You bet! There are lots of federal laws designed to help consumers, but unfortunately, they were written by attorneys and are extremely consumer un-friendly. (Hmmmmm…sounds like all of the disclosures made to home buyers, doesn’t it?) Here are several laws that regulate the mortgage lending industry:

1. The Federal Fair Housing Act (FHAct)
2. Home Mortgage Disclosure Act (HMDA)
3. Equal Credit Opportunity Act (ECOA)
4. Community Reinvestment Act (CRA)
5. Truth In Lending Act (TILA)
6. Fair Debt Collection Practices Act (FDCPA)
7. Fair Credit Reporting Act (FCRA)
8. Home Ownership and Equity Protection Act (HOEPA)
9. Real Estate Settlement Procedures Act (RESPA)

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