Predatory Lending and Mortgage Fraud
Predatory lending practices typically involve one or more of the following:
- Falsifying income/asset and other documentation. - Basing an unaffordable loan on the applicant's assets rather than his/her ability to repay the loan. - Loan Flipping: Encouraging a borrower to refinance a loan so that the lender can charge high points and fees for the new loan. Borrower may also pay higher interest rate than w/ OG loan. - Using fraud or deception to hide the true obligations of the loan from the borrower. - Failing to provide required RESPA documentation. - Mortgage fraud: Influencing an appraiser to inflate an appraisal to justify a higher loan amount. - Taking unfair advantage of a borrower's ignorance of the mortgage acquisition process.
Predatory Lending Dangers: Sub-Prime Loans
- Lenders charge higher interest rates and higher closing costs to make up for the loss the might suffer if the borrower defaults - Most home loans have fees that are less than 1% of the loan amount. A predatory loan can have loan fees in excess of 5%. The excessive costs are tucked into the loan amount so the lender can easily disguise them. - Predatory lenders often add insurance and other unnecessary products to the loan amt. The insurance they "require" can include regular mortgage insurance, fire and hazard insurance, life insurance, disability insurance, HO's insurance and health insurance. - A lender could require a higher down pmt from the unqualified buyer b/c of the type of neighborhood in which the property is located. This is known as redlining and violates fair housing laws. - As many as 80% of subprime mortgages may have have an abusive prepayment penalty, which often equals 5% of the OG loan as compared to 2% on other home loans. This penalty is so high that it eats up any equity the HO's have built up and can even leave them owing more $. HO's often are trapped into keeping the OG, high-interest mortgage, instead of being able to refinance to get a lower interest rate and lower pmt.
Predatory Lending Dangers: Loan Flipping
- Lenders who flip loans ten to charge higher origination fees w/ each successive refinancing and may charge these fees based on the entire amount of the loan, not on just the incremental amount (if any) added to the loan P through the refinancing. - Each refinancing may trigger prepayment penalties, which could be refinanced as part of the total loan amount, adding to the borrower's debt burden.
Predatory Lending Dangers: Debt Consolidation and Home Equity Loans
- Predatory
Predatory Lending Dangers: Balloon Loans
- Problem: Borrower has to come up w/ a large same of $ - If borrowers have made their pmts on time, lenders may choose to extend the balloon pmt for another term. - In some cases, lenders charge higher int rates for the extension. - If the borrower is unable to pay the higher part, he/she will be in trouble and possibly face foreclosure.
Paper grade lending categories *Borrowers below A are sub-prime borrowers.
A: Qualified borrower approved for loan B: Less qualified, may have to take loan at higher int rate C: Serious credit problems D: Overwhelming credit problems
Predatory Lending Dangers: Sub-Prime Loans
Loans given to unqualified homebuyers.
Predatory lending
Occurs when a financial institution dishonestly induces a customer to undertake a loan that the consumer is not qualified for or in other ways manipulates the borrower and the loan to the disadvantage of the consumer.
Loan Flipping
Repeatedly refinancing a mortgage loan within a short period of time w/ littler or no tangible net benefit to the borrower.
Predatory lending: IL Note (High Risk Home Loan Act)
The term "predatory lending" is not defined by Illinois law, but generally refers to a number of practices restricted under the High Risk Home Loan Act [815 ILCS 137] commonly referred to as the Illinois predatory lending law.
Predatory lending practices can leave victims
homeless and defeated, stripped of self-respect and hope, their credit ruined.
A predatory lender is one who
literally "preys" on customers who may fall into the "B," "C," or "D" lending categories. - Particularly those who do not speak English, are poorly educated, or are elderly.
Some lenders might insist on a "B" type loan for less than "A" borrowers. If the borrower has a solid track record of regular payments and no further credit issues have arisen, the lender might
upgrade the loan to an "A" position and lower the interest rate. *More beneficial for lender to keep now qualified buyer rather than to have that person refinance w/ another lender.