Predatory
Lending
Most
mortgage lenders and brokers are trustworthy, but unfortunately
some are not. Predatory
lending refers to a number of sleazy practices that cost you
money and perhaps your home.
Predatory lenders sometimes push borrowers away from
loans with more affordable interest rates.
Instead, they offer loans that carry very high
interest rates, questionable fees, and unnecessary charges,
and use “bait and switch” tactics.
A
predatory lender may be a large Fortune 500 company that is a
household name, or it may be a small company or a loan broker
you have never heard of.
Predatory
lenders offer loans based solely on the equity in a home, not on
the borrower's ability to repay the loan; charge
unusually high interest rates for loans; add excessive
points to a loan without lowering the interest rate; include
excessive fees; and tack on unnecessary costs, such as
prepaid single-premium credit life insurance.
Predatory lenders advertise and/or quota impossibility
low rates to bait you and then switch the rate the last minute
or add pre-payment penalties to the loan.
With
or without these extra charges, you may find it difficult
or even impossible to repay the loan. If you fall behind in your monthly payments, late
charges will be added and your credit will suffer. The predatory lender may suggest that you refinance the loan
to lower your monthly payment.
The unpaid payments and late charges will be added
to the new loan amount, costing you even more money
over time. Then the
mortgage becomes even more difficult to repay.
If you can't make the payments, you will lose your home.
Most
often, the victims of predatory lenders are low and
moderate-income persons, minorities, and the elderly. A predatory lender targets borrowers with lack of knowledge
or the greed for a rate too good to be true.
They can mislead anyone, including you.
Predatory
lenders bombarded you with ads on the radio, television, and
with direct mail, or call you on the phone.
Predatory lenders need to market so heavy as no borrower
comes back to twice. These
lenders do not rely on referrals from their past customers, as
their past customers would never refer the predatory lender to
any friend or family member.
Therefore, these lenders have to continually market for
new victims using advertising to promote themselves as a
trustworthily lender.
Here are examples of what can happen if you are not careful:
Johnny Smith
Johnny
Smith was going to make sure he got the best rate on his
mortgage. He asked
around and got the name of a loan officer his friend said was
knowledgeable and honest. Johnny
Smith called the loan officer and asked the rate.
The loan officer tried to explain that the rate would
depend on the type of program; with points or without; with full
documentation or stated income; etc.; that the loan officer
would be happy to come to Johnny’s house and meet with him to
discuss his plans, goals, and qualifications, and recommend
options.
Johnny
was getting irritated. His friend had told him this was a good loan officer and all
he wanted to know was the rate, because he was going to make
sure he got the best rate.
The loan officer replied, “Ok, today’s conforming 30
year fixed with no points is X%.
Rates go up or down every day.
Thus, tomorrow the rate can be higher or lower.
I don’t advertise as I get all my business from
referrals because I get people a great deal.”
Johnny
Smith then called every number under listed under mortgages in
the yellow pages and asked “their rate” until he found the
lowest the lowest one. He
then called the loan officer back with pride on the super low
rate he found and asked if the loan officer could match it.
The loan officer had already given him the best rate for
that loan product and wished Johnny Smith all the best.
The
loan officer knew Johnny Smith got “baited and switched” as
that super low rate was an impossible rate.
Further, the loan officer received a call two months
later from a first-time homebuyer referred to him by Johnny
Smith. Johnny Smith
had told his friend to call, as he said that that loan officer
is both honest and a professional.
Assumabley,
the loan officer Johnny Smith got his loan from was neither
honest nor professional.
Jane Doe
Jane
Doe, an immigrant, received a call from a large Fortune 500
company asking if she could use more money. Naturally she replied yes.
They talked her into refinancing her house with a 1st
and a 2nd mortgage.
They explained that unlike mortgage brokers that don’t
have her interested in mind and require her to pay pre-paid
interest at the closing, she didn’t have to pay pre-paid
interest with their firm if she didn’t want to.
Naturally she replied that she didn’t want to pay
pre-paid interest.
Jane
Doe bought a new car and furniture.
Two months later, the Fortune 500 Company called and told
her as such a good customer would she like even more money?
Naturally she replied yes.
They added a 3rd mortgage on to her home
stripping the property of all equity and making it difficult to
refinance.
The
payments were killing her when she received a call from the
Fortune 500 Company asking if she would like “skip” a month
of payments for being a good customer.
Naturally she replied yes.
She
began to realize something was wrong and was referred to
Mortgage Trust Group. When
the Mortgage Trust Group loan officer came out to meet her, the
loan officer was shocked to find her with a 9.5% first mortgage,
13% second mortgage, and 18% third mortgage.
Not only were the rates outrageous, but also Jane Doe had
paid numerous points to great this “great deal”.
As
the payments were too much for her, Jane Doe’s credit had
suffered, she did not have the income to qualify for the loan,
and the property was stripped of all equity.
It took the our loan officer 1 year to get Jane Doe and
the property’s value in a position to refinance her out of her
situation
During
the refinance as is customary, the closing attorney ordered the
mortgage pay-off. Once
the Fortune 500 Company received the pay-off request and they
knew Jane Doe was refinancing.
They started harassing her with phone calls stating why
would she want to “refinance with another company that will
rip her off”, how helpful they have been to her, even allowing
her “to skip a month’s payment.”
The
Fortune 500 Company refused to send the closing attorney a
pay-off and require her to go in person to pick it up at the
local office. After
4 hours of harassment, she still wasn’t given the pay-off.
It took the accompaniment of our loan officer and the
closing attorney to get a pay-off.
The pay-off was $12,000 more than the balance her
mortgage statement showed. The representative from the company explained that the
balance on her statement showed what her principal “would be
if she had made full payments.”
However, she had been making payments “short” as the
“payments are first applied to the deferred interest and then
to the current principal and interest due.”
What
she had believed to be a standard amortizing loan was in fact a
negative amortization loan.
As Jane Doe “elected” not to pay pre-paid interest at
her closing, she was in fact in the red from the moment she
closed. When Jane Doe elected not to make one of the month’s
mortgage payment, her “deferred interest” grew by that
amount.
Basically,
this is the same as paying a minimum credit card balance that
does not cover that month’s interest so your balance gets
larger not smaller. Not
only had they not disclosed this to her, they hid it by putting
a false principal balance on her statement.
Jane Doe owed significantly more than she had borrowed 2
years before.
This
Fortune 500 Company has since been sued by a number of state
attorney generals for their predatory lending practices and has
paid several hundred million dollars in fines.
The Smiths
The
Smiths had dreamed of buying their own home.
They had some credit problems in the past, but had
paid their bills on time for the past two years.
They were afraid that their previous credit problems
would make it impossible to qualify for a mortgage.
They were excided to get a letter from ABC Mortgage
that offered mortgages for everybody regardless of their past
credit, as they, ABC Mortgage, “believed everyone should have
a second chance.” The
Jones’s had heard ABC Mortgage’s ads on the radio, and were
please that such a large company would be interested in them.
After
calling ABC Mortgage, the Jones’s thought they must be getting
a great deal. The
loan officer told them that ABC Mortgage specialized in
people with credit problems, quoted them a great rate, and
mailed them an application.
The Jones’s looked for and made an offer on a house.
At the closing, not only was the rate much higher, but
also an adjustable versus the fixed rate they had been quoted,
and there was a pre-payment penalty.
After
they had moved in, they told some friends about their experience
and found out their mortgage company had a terrible reputation.
One friend recommended a loan officer at Mortgage Trust
Group, which they had not heard of. They call the loan officer who came out to their home to meet
them. The loan
officer explained their credit report to them and that their
credit was not bad.
The
loan officer told them they qualified for a lower fixed rate,
however they have a large pre-penalty on their current mortgage.
As they had put all their savings into the purchase of
the property, they would have to dilute their equity to finance
the pre-payment penalty. Thus,
perhaps, the Jones’s wanted to wait two years for the
pre-payment penalty to expire and then refinance.
Now
the Jones’s had to decided whether to refinance to get the
loan they should have gotten from the beginning and pay a
pre-payment penalty. At
the same time they feared what the rates may be in two years if
they waited to refinance.
Mortgage
Trust Group is often referred victims of predatory lending in
their hope to get out of their situation. As we look at the situations borrowers have gotten themselves
into, it is easy to wonder what they were thinking. Their behavior has common characteristics with victims of any
fraud - a lack of knowledge and greed in believing what was too
good to be true.
When
looking for a loan, look for a professional loan officer just as
you would an attorney, CPA, or stockbroker.
If you are dealing with a professional, you will get the
best deal.
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