Mortgage Loan Predatory Lending Information

All buyers should beware of unscrupulous lenders and unscrupulous lending practices. Here are some tips for spotting predatory lending and avoid becoming another statistic or victim and knowing what to do in the event you become a victim of fraudulent lending practices.

Getting snagged in a home mortgage lender's financing trap can be a very costly and disappointing experience that most can’t afford, so if something about your loan smells fishy chances are that should be your first warning signal to ask more questions or become better educated. Always get a second opinion.  Unfortunately, due to the internet online mortgage lending has evolved into a highly competitive sport in the real estate industry resulting in lending professionals who mislead a customer into believing the sky is the limit when actually he can’t afford high monthly payments or even a down payment for a home. You, as the customer have just become prey because the banking representative understands that purchasing a home is an emotional and confusing decision to most buyers. Or, maybe you have already entered into a contractual agreement on a home and are struggling to find a lender who will help you with financing.  Maybe you have a letter from a lender offering to finance the entire loan amount. This should be a big red flag sending you a signal that maybe something isn’t right or is a clue that you might not have the financial resources to purchase a home.

The advice and old phrase “you don’t get anything for nothing” is correct and any borrower should take it seriously when purchasing a home.  Here are a few scare tactics a lender may tell you to keep your business at their door. The lender will caution a buyer that shopping around would adversely affect his credit score. By saying this the mortgage lender is trying to scare the buyer into not investigating other loan possibilities. Closing cost estimates are applied to all mortgage loans regardless of the situation. You should always ask the lender for a written Good Faith estimate (GFE) of closing cost. This information can be reviewed by your real estate agent to determine if the cost estimates quoted are reflective of the actual amount you can expect to pay. On average you should be able to calculate that 3%+= of the purchase price for closing cost.  If your purchase price is $200,000 expect $6000.00 in closing cost. If your GFE is higher than the average you should shop around for other lending options.

What a buyer doesn’t get from a lender is the accurate picture of his monthly payments, since the lender doesn’t always know actual amounts to plug into the property taxes and escrow end of the equation. Once you learn this amount the end result may be a contract cancellation in which case you will be out a few hundred or a few thousand dollars spent on a home inspection, appraisal, application fee or worst case your escrow deposit because you as a buyer failed to secure financing. The money you have lost will depend on when you were made aware there the fluctuation in the amount.  Be suspicious of those who try to drive a wedge between you and the professional real estate agent. Sales associates are supposed to work together with the lenders, not against one another. A situation where the lender wants another professional real estate agent to stay out of the situation should be a huge red flag.

What defines unconscionable lending practices? Preying on vulnerable borrowers who lack financial resources and predatory lending often finds borrowers agreeing to unfair and abusive loan terms that run the gamut from high interest rates to exorbitant closing costs to the issuance of loans to those who simply cannot afford them (and who wind up losing their properties in foreclosure sales).

The prevalence of predatory lending appears to ebb and flow with the housing market. According to the Center for Responsible Lending (CRL) in Durham, N.C., abusive home mortgage-lending practices cost homeowners $9.1 billion each year. Predatory lenders often target borrowers with challenging or even precarious financial situations. Most abusive practices occur in the sub prime market, which comprises home loans for people with impaired or limited credit histories. And while not all sub prime loans are predatory, the CRL says nearly all predatory loans are sub prime. Between 2002 and 2003, sub prime lending increased by more than 50 percent, from $213 billion to $332 billion.
 Unaware that payments may increase significantly at some point during the life of an interest-only loan, for example, buyers can go into “payment shock” and never fully recover.

What’s being done to curb predatory lending, you ask? There’s currently an effort underway in Congress to establish uniform national standards that would combat such lending tactics. The end result would be a law that would create a set of national standards, thus ending the need for the separate state and local laws that now exist. 
Known as the Responsible Lending Act (HR 1295), the bill is currently being reviewed by the House of Representatives, with a companion bill expected to be drafted for the Senate.   The U.S. Department of Housing and Urban Development (HUD) is also working on a predatory lending initiative, and is reforming regulations implemented under the Real Estate Settlement and Procedures Act (RESPA).

Predatory Lender Red Flags
Sales associates and brokers can help their buyers steer clear of predatory lenders on several fronts. It’s important to know that the vast majority of predatory lending takes place in the subprime market, much of it through “push marketing” tactics that reach out to buyers who are unfamiliar with the home-financing process. A predatory broker may target a certain neighborhood where a high number of low- to mid-income renters live.  Through direct mail offers or phone calls, those predatory lenders push their products on these unknowing consumers, many of whom wouldn’t otherwise be able to afford a home. Ultimately, if the deal seems too good to be true, the buyer should probably walk away.

Another red flag is the lender who doesn’t return phone calls.. During our years in real estate, we have encountered more than one predatory lender, most recently when a buyer relied on a “family friend” for a mortgage.  To help a buyer steer clear of such tactics we educate ourselves through various independent and bank-sponsored news services, and generally keep an eye out for anything that “just doesn’t seem right” during the early stages of applying for a loan.
After many years of doing this, I know which lenders I want to use and which ones I don’t want to use. Buyers have the right to use whomever they want to, so while we can’t dictate who they ultimately choose, we can provide you with the best possible choices and guidance.

Report Fraud
The Federal Trade Commission keeps a careful eye on predatory lending scams and frauds. To report such abuses, call (877) FTC-HELP (382-4357), write to the Federal Trade Commission at CRC-240, Washington, D.C. 20580 or visit www.ftc.gov to file a complaint online.
Complaints can also be filed with the Florida Attorney General’s office by calling (866) 966-7226.

The nonprofit Florida Association of Mortgage Brokers (FAMB), established in 1960, is working diligently to rid the industry of unscrupulous lending individuals and companies. Here are some tips from the FAMB that sales associates and brokers, who are often the first people with whom consumers come in contact, can pass along.
• Shop around and compare. If you need to borrow money for a home purchase, refinance, home repairs, medical expenses or bill consolidation, shop around with different brokers and lenders. Compare interest rates and find out what the total costs of the loan and your monthly payment will be before making a decision. Use the Good Faith Estimate from each application to compare the loan terms and costs.
• Negotiate. Don’t let the promise of extra cash or lower monthly payments get in the way of your good judgment about whether or not the cost you will pay for the loan is really worth it. Don’t agree to a loan that includes extra products you don’t want. Negotiate the loan terms and agree to a loan amount only for what you need.
• Be cautious. Be wary of anyone who calls you on the phone, solicits you via mail or comes to your door offering bargain loans. Beware of claims that the offer is available for only a short period. Beware of lenders claiming “Bad credit? No problem.” If the loan seems too good to be true, it probably is.
• Never act immediately. Say no to lenders who ask for upfront fees allegedly to cover a first loan payment and other expenses as part of the application. Never pay a lender cash for any fees, and always make the check payable to the lender, not the individual loan officer.
• Understand the terms of your loan. Some loans may sound very attractive because the monthly payment is small. Ask about balloon payments at the end of the loan period. Make sure you know the dollar amount of each monthly payment and ask if the monthly payment can change at anytime during the repayment process. If so, find out when it will change and by how much.
• Don’t be afraid to ask questions. You have a legal right to know the total cost of the loan, the annual percentage rate (APR), the amount of the monthly payment and how long you have to pay back the loan. If you’re unsure of any terms of the loan, ask. If you don’t get a straight answer, go elsewhere for your financing needs.
• Please read carefully before you sign. Don’t sign any document you haven’t read or one that has blank spaces to be filled in after you sign. Don’t be pressured into signing any loan papers that you do not understand. If you need an explanation of any terms or conditions, talk to someone you trust, such as an attorney. Get copies of everything you sign.
• Borrow only the amount you need and can afford to repay. Just because you qualify for a certain amount of money doesn’t mean you can afford to pay it back. Determine exactly how much money you need, borrow only that amount and find out exactly how much you will have to repay every month. Make sure you’ll have enough money left over to pay your other bills.
• Immediately get help if you feel you have been victimized. Contact your local Better Business Bureau to report the individuals and companies with whom you worked.
Want more information? Visit the FAMB Web site at www.famb.org.