A
relatively new term, predatory lending, refers to
mortgages that are particularly burdensome to
borrowers because they are unaware of hidden
and abusive costs as well as alternative sources
of finance. According to Federal Reserve Board
Governor Edward M. Gramlich, this lending
practice typically has some or all of the following
characteristics:
• Making unaffordable loans based on the assets of
the borrower rather than on the borrower's ability
to repay an obligation;
• Inducing a borrower to refinance a loan repeatedly
in order to charge high points and fees each
time the loan is refinanced; and/or
• Engaging in fraud or deception to conceal the true
nature of the loan obligation from an unsuspecting
or unsophisticated borrower. (Cleveland State
University, Cleveland, Ohio, March 23, 2001)
Predatory lending has become a hot topic in the
real estate industry because of low interest rates and
more lending activity in our industry. More first
time home buyers are purchasing
and, perhaps because of
their inexperience, are more subject
to predatory lending then
some one who purchased before.
Females, the elderly and
minorities are particular targets
of predatory lending.
According to the Mortgage
Brokers Association (MBA),
conventional home-purchase
mortgage lending to low-income
borrowers nearly doubled between
1993 and 1999, whereas
that to upper-income borrowers
rose 56%. Also over the same
period, conventional mortgage
lending increased by about
120% to African-American and
Hispanic borrowers, compared with an increase of 48 % to white
borrowers. The
number of sub-prime (less-than-perfect credit borrowers)
home equity loans has increased 1300%. In
addition, buyers sometimes do not use real estate
professionals to assist in their purchase and are
trying to complete the transaction on their own
using the Internet. New lending companies pop up
all the time.
In 2000, Congress passed legislation that cracked
down on unfair lending practices. A number
of
other federal bills and
amendments to
existing legislation
are now in progress to eliminate predatory
lending (see http://www.mbaa.org/resources/predlend/ ).
In addition, many state governments have recently
passed laws to prevent predatory lending. For
example, Illinois approved House Bill 2146 that
would create a board to set guidelines for mortgage
companies. Alabama is another state that introduced
guidelines centered around high cost fees
and counseling for the buyer. Washington, D.C.
enacted the Protections from Predatory Lending and
Mortgage Foreclosure Improvements Act of 2000 to go
into effect as of Aug 31, 2001. Connecticut recently
passed the Abusive Home Loan Lending Practices Act.
This Act limits prepaid finance charges on all purchases
and refinance transactions and contains
specific guide lines that focuses on "high cost loans"
by definition.
Unfortunately, in spite of state regulation,
predatory lending is still practiced. This happens
because of the influx of new loan officers from
other industries. Training and understanding of the
business for these new loan officers are limited to
the attitude of the company for which they work.
Some companies monitor the activity of its loan
officers and restrict them from any practice of
predatory lending.
Predatory lending continues to exists because
the public, buyers, borrowers and real estate professionals
themselves do not recognize what it is or
even which lenders are involved in this illegal and
unethical. Some red flags for borrowers and their
agents should be:
• Unusually high up-front loan fees
• A loan officer guarantees buyer/borrowers
that they will get a loan
• An out-of-state lender with no local office
• No Good Faith Estimate (GFE) provided—
the GFE should explain all lending costs
and is supposed to be mailed within three
days of application
• A promise of " closing costs" when what
is really meant is that the closing costs will
not be paid up-front but rather financed as
part of the loan
• No verbal promise to lock in an interest rate
• Bait and switch: a low interest rate is quoted
at loan application only to discover at closing
that the rate quoted was for an adjustable
rate mortgage In order to help their clients avoid predatory lending,
here are some practices that real estate professionals
can pass along to their buyer-borrowers:
1.
Buyer/borrowers should go to a
recognized lender with a good local
reputation.
2.
Buyer/borrowers should
get everything
in writing.
3. Buyer/borrowers
should
understand
the type of loan that was applied for.
4. Buyer/borrowers
should receive
a Good Faith Estimate form.
5.
All up-front fees and closing
costs
requested should be explained.
6.
Buyer/borrowers should know
that
there is an option to lock or not
to lock. If the loan is locked, have
the lock term payment in writing.
7. Buyer/borrowers
should find
out
who is going to fund the loan.
8.
State lending laws should be
reviewed
and understood by real estate
professionals.
Predatory lending has been around as long as
currency has existed. However, unethical and
illegal lending practices can only flourish where
there is ignorance. Real estate educators and their
students can significantly influence the practice of
predatory lenders if they encourage consumers to
seek guidance in obtaining loans and managing
their debts.
Ed Oneto has been in sales and real estate finance for 40 years. For
the last 10
years, he has been with Wells Fargo where he currently holds the
position of
assistant vice-president of the mortgage division in New Orleans, LA.
Training
agents on how to use finance as a sales tool is one of his specialties.
NOTE:
For more information on predatory lending, visit the Mortgage Bankers
Association website at
http://www.mbaa.org/resources/predlend/ .
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