Volume 2, Number 3
|Table of Contents|
Don’t Be A Victim Of Predatory Lending
In a robust estate market, the rate of refinancing and times that ownership of real estate changes hands is at its highest. In Chicago particularly, where real estate is one of the few stable investments left for investors and homeowners of every income bracket. But with the good comes the bad as well. It is in these times where most of the flurry of abusive lender practices occur against the unwary homeowners. This article will cover some of the types of predatory lending practices that are perpetrated against homeowners, minorities and elders alike. The list is by no means exhaustive but will at least give you a framework of the types of abuses occurring in the market place and hopefully help one avoid them should one cross his/her path.
I. What Is Predatory Lending?
Predatory lending is any unfair credit practice that harms the borrower and eventually affect the credit or ownership interest of the borrower. It is a broad definition but there really is not one accepted definition of predatory lending. There are many different types of predatory lending practices that not one definition captures it all.
A predatory loan is one that is lent based on the borrower’s equity in the property, and not on the borrower’s ability to repay the loan. For example if a borrower has a high equity in the home but does not have the ability to repay that loan based on his low income the lender will lend the loan anyway since the intent is to seize the equity in the home possibly through foreclosure or some other dramatic way.
II. Prime V. Subprime Loans
Most predatory lending occurs in the subprime lending market. Subprime markets involve borrowers that have less than perfect credit, have low FICO scores and are individuals lenders consider as risky borrowers.
In most situations, these borrowers, because of their less than perfect credit, have limited choices in terms of loan packages. Most packages offered to them contain terms that are pretty high as compared to prime borrowers and are forced to take them.
III Types Of Predatory Lending Practices
Although not an exhaustive list, I will focus on 5 of the more common predatory lending practices that any borrower/homeowner should be aware of:
Loan Flipping/Excessive Refinancing
“Loan Flipping” involves repeated refinancing of a loan by a homeowner thereby repeatedly rolling the existing loan into a new loan instead of paying off the existing loan and making a new mortgage. As a result of the successive and repeated refinancing of the property, refinance closing costs and additional lender charges on fees and points are also rolled into the new amount thereby increasing the principal amount owed. Loan flipping normally occurs within a short period of time.
Equity skimming is another abusive practice that comes in various forms. The most common practice and scenario involve one where the property is in foreclosure. The homeowner the property is in foreclosure. The homeowner is approached by B who promises to help him/her out of the foreclosure. B asks homeowner to convey the property to B as security for his/her loan to be used to payoff the existing mortgage. B promises that when the homeowner pays off B, B will convey the property back to homeowner. Invariably, what happens is that B gets the title in his/her name and refinances the property, taking out all of the equity in the property. Once B refinances, he skips out, does not pay the new mortgage leaving homeowner with a new foreclosure suit. The other scenario is that B takes out the new mortgage and once the homeowner fails to pay B, B evicts the tenant from his home. Hence, the coined term equity skimming: The homeowner’s equity has been skimmed off.
Bait And Switch
Throughout the whole loan application process, lender represents to borrower the terms of the loan, the APR, closing costs and finance charges. However at closing, the terms of the loan are different from that which was disclosed. Since the parties are already at closing the borrowers are left with two choices whether to proceed or cancel the loan and go through the whole application process again. When dealing with subprime borrowers, the bait and switch occur more frequently since borrowers in this category are believed to have less than perfect credit and are given very limited choices in terms of loan packages. Most of the time, these borrowers resign to closing the deal despite the higher rates and fees.
Change Of Servicer/Unaccounted Payments
It is not uncommon that lenders transfer their servicing rights to the loan to another lender. More often, the loan gets transferred to two or three servicers during its lifetime. It could very well be that the homeowner makes a mortgage payment to the old servicer during the transfer period but the old servicer fails to turn the payment over to the new servicer. The new lender now will continue to charge the borrower for late fees for the alleged missed payment.
This perpetuates until such time that the late fees become substantial. Not only that, but this scenario will severely affect one’s credit rating since the late payments will always be reported to the credit agency until cleared.
Credit Insurance Packing
Predatory lenders market and sell credit insurance as part of their loan package services, mostly without the knowledge of the borrower. Most of the time, lenders automatically order the insurance and charge the borrowers exorbitant premiums which are then financed into the cost of the loan. Not only are the premiums exorbitant but they are not even based on any loss experience. Most often than not, the insurance company is either an affiliate or a subsidiary of the lender or has a lucrative commission arrangement with the lender based on the premium paid.
Although, there are many more types of predatory lending practice that abound in the real estate market and the ones listed above are certainly not exhaustive, it is the author’s hope that by identifying some of them, readers may well avoid being embroiled in such instances. This is why having a qualified real estate lawyer represent you in what is the largest financial investment in your lifetime is so important. Your lawyer can help identify these predatory lending practices and protect your interest. Your lawyer can also assist you in pursuing claims against the predatory lenders for violations of various consumer protection laws such as the Truth In Lending Act (TILA), Home Owner’s Protection Act of 1994 (HOEPA), Real Estate Settlement Procedures Act (RESPA), Equal Credit Opportunity Act (ECOA) and various state consumer fraud remedies such as the Illinois Consumer Fraud and Deceptive Business Practice Act.