Subprime Lending, Predatory Lending, and Mortgage Fraud

The borrower's identity is concealed behind someone else's name and credit history.

Straw buyers

Inflated appraisals occur when an appraiser secretly works with a borrower and

provides a misleading appraisal report to the lender.

The FBI defines mortgage fraud as ________________ relied upon by an underwriter or lender to fund, purchase, or insure a loan." This is definitely something that you and your clients want to avoid.

"a material misstatement, misrepresentation, or omission

Mortgage Fraud and Red Flags

-Large adjustments to sales price without supporting comparable data, or a request that the list price be changed to reflect appraised value. -The buyer requests a particular appraiser. -The seller contributions include large décor or improvement allowances. -The mortgage broker refers a pre-qualified buyer to an agent. -It's suspected that the buyer doesn't intend to live on the property. -The buyer's credit history is limited and provided by companies that either charge high interest rates, or the buyer's loan payoff history doesn't include interest payments. -The stated income is unrealistic. -Drastic increase in income from a recent raise or new job. -Missing or inconsistent information on purchase and sales agreement

From her visit with Mike, Kacie learned that not all lenders are equal. She learned that predatory lenders will often use incentives to entice borrowers, such as a super-low introductory interest rate, but that after the introductory period is over, that rate could go quite high. Anything greater than 5% above the current market rate can be expected with these kind of lenders. Kacie understood that she may be able to get a loan, but because of her lower credit rating, her interest rate may be between

1 and 5% higher than the current market rate.

In the residential mortgage market, charging borrowers more than ______ over market rate for interest is considered a predatory lending practice.

5%

Borrowers with _____________ credit ratings are considered subprime borrowers.

B, C, and D

Mortgage fraud is committed through the use of

False documents Identity theft Straw buyers, and sometimes with the assistance of real estate or other professionals.

Mike's been friends with Tim since college. They often work together: Mike flips houses and Tim's an appraiser that he uses frequently. It works out great for both friends and Mike definitely gets a better appraised value on the flips Tim handles. For every appraisal Tim handles for him, Mike gives him a $100 gift card. In what illegal practice does it sound like they're engaging?

Falsely inflating appraisals

Addresses abusive practices in refinancing and home equity loans by requiring special disclosures and restrictions on loan terms.

HOEPA

Summary of Existing Predatory Lending Regulations -Amendment to TILA -Applies to certain types of loans that use the borrower's primary residence as collateral, such as refinances and home equity loans, and revolving credit --Does not apply to loans for investment properties, commercial properties, first mortgages, or reverse mortgages -Requires full disclosure of key information to the consumer -Restricts certain loan terms -Restricts fees -Requires pre-loan counseling for consumers

Home Ownership and Equity Protection Act (HOEPA)

The property is purchased, falsely appraised at a higher value, and then quickly sold.

Illegal property flipping

The most common mortgage schemes are

Illegal property flipping Inflated appraisal Silent second Nominee loans/straw buyers Equity skimming False identity

The most common schemes of mortgage fraud are:

Illegal property flipping Inflated appraisals Silent second Nominee loans/straw buyers Equity skimming False identity

Which of the following are characteristics of RESPA?

Includes provisions for buyers who are victims of over-charging Applies to mortgage loans and settlement services

An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender.

Inflated appraisals

What is Predatory Lending? What do you think of when you hear the term "predatory lending"? Overdraft loans? Payday loans? Tax-refund loans? Or high-interest subprime mortgages? Predatory lending is the practice of charging fees and interest much higher than necessary. Consumers are taken advantage of by predatory lending practices to the tune of billions of dollars every year! How is it accomplished? Here are some ways that unscrupulous lenders take advantage of consumers:

Inflating appraisal values in order to lend more than a property is worth Charging excessive fees-sometimes for services that don't even exist Instructing borrowers to give false information about their income and expenses Charging higher interest rates for consumers of different races and nationalities Charging in excess of 5% over the current market rate for interest on subprime mortgages

______ lending was a contributing factor to the housing collapse in the mid-2000s.

Predatory

Mortgage Fraud: Common Schemes

Property flipping Inflated appraisals Silent second Nominee loans/straw buyers Equity skimming False identity Undisclosed buyer rebate

Which of the following lending regulations apply to mortgage loans and settlement services?

Real Estate Settlement Procedures Act

Summary of Existing Predatory Lending Regulations Applies to mortgage loans and settlement services (e.g., real estate licensees, appraisers, title companies) Requires certain disclosures: -Loan Estimate -Closing Disclosure -Initial escrow statement -Annual escrow statement Buyer may choose their own title insurance company Provisions for borrowers who are victims of over-charging

Real Estate Settlement Procedures Act (RESPA)

Which of the following are regulations that have been enacted to prevent predatory lending?

Real Estate Settlement Procedures Act (RESPA) Homeowner and Equity Protection Act (HOEPA) Truth in Lending Act (TILA)

Federal Regulations on Predatory Lending When it came to light that some lenders were using predatory practices to take advantage of consumers, several federal regulations were enacted, including

Real Estate Settlement Procedures Act (RESPA) Truth in Lending Act (TILA) Home Ownership and Equity Protection Act (HOEPA)

Which of the following are characteristics of the Home Ownership and Equity Protection Act (HOEPA)?

Restricts fees Requires pre-loan counseling for consumers

Which of these statements are red flags or warning signs that a real estate professional should investigate further to avoid becoming unwittingly involved in mortgage fraud? If these warning signs are present in your transaction, bring the situation to your broker's attention. It might not be fraud. But if it is, you don't want to be involved.

Significant sales price adjustments that are not supported by comparable market data Missing or inconsistent information in the purchase and sales agreement Buyer has a very limited credit history Unrealistic income for the borrower's occupation A recent drastic increase in income due to a raise or a new job.

Borrowers who fall into the ______ category may be faced with paying interest 1% to 5% over the current market rate.

Subprime

Borrowers with B, C, and D credit ratings are ______ borrowers.

Subprime

A type of loan that is legitimate, it carries more risk for the lender, and isn't predatory lending.

Subprime loans

__________ are a valuable part of the mortgage process, making homeownership possible for many who would not otherwise qualify for loans.

Subprime loans

HOEPA is actually an amendment to ____________ and it does apply to revolving credit.

TILA

An amendment to the Truth in Lending Act.

The Homeowner and Equity Protection Act

Summary of Existing Predatory Lending Regulations Applies to most types of loans and revolving credit Regulates advertising of credit services Requires full disclosure of key information to the consumer, including annual percentage rate (APR)

Truth in Lending Act (TILA)

Straw buyers conceal their real identity behind someone else's name and

credit history

Illegal property flipping is property purchased, __________________, and then quickly sold.

falsely appraised at a higher value

Gina has decided she wants to buy a house. According to her mortgage broker, Gina has a FICO score of 630, but he says despite Gina's credit score, he can still help her obtain a loan. He explains it will be a subprime loan and it will cost her 1 to 5% over the current market rate for ______. Gina will have to decide if the cost is worth it for her, or if she'd rather wait until her score is just a bit higher.

interest

RESPA requires certain disclosures for things such as

loan estimates closing initial escrow statement annual escrow statement

One of the most important documents in detecting fraud is

the original sales agreement and any addenda to that agreement.

Predatory lending is a term reserved for lending that involves _______________

unfair or abusive terms for borrowers.

Red flags include buyers with

very limited credit history missing or inconsistent information in the sales agreement significant sales price adjustments not supported by market data drastic increase of income or unrealistic borrower income