Mortgage problems can arise when you purchase a home, refinance
your mortgage or take out a ‘home equity’ loan, or even while you are making your payments. The last is
referred to as “servicing” problems). Common violations of state and federal law include:
- Mortgage company (or servicer) does not respond to complaints and requests for explanations of accounts.
- Duplicative fees, such as a release of mortgage fee, being charged by both the
seller’s lender and the title company.
- Mortgage brokers receiving a fee
from the lender then increasing the interest rate without proper disclosures. These fees are referred to as “yield
spread premiums" or "YSP" or "premium" on the HUD-1.
- Adjustable rate mortgages without proper prior disclosures or erroneous rate adjustments.
- You refinanced your home or borrowed on the equity and received a high rate mortgage, either in
points and fees (8% of the loan), or in interest (over 10%), and the special requirements applying to those loans were not
- You were charged recording fees in excess of the amounts
disbursed to the Recorder.
- Payments are not posted the same
day as received and late charges are imposed as a result.
- Additional settlement
charges when you get to loan closing.
- Grossly overpriced home improvement
BEFORE AND DURING
Broker’s Fees and Kickbacks. Predatory mortgage lenders
also originate loans through local mortgage brokers who act as “bird dogs”, or finders for the lenders.
These brokers represent to the homeowners that they are working for them to help them obtain the best available loan, and
the homeowners usually pay a broker’s fee. In fact, the brokers are working for predatory lenders, who pay brokers
kickbacks to refer borrowers for loans at higher interest rates than those for which the borrower would otherwise qualify.
On loan closing documents, the industry uses euphemisms to describe these referral fees: yield spread premiums and service
release fees. Also, unbeknownst to the borrower, her interest rate is increased to cover the fee. The industry
calls this bonus upselling or par-plus premium pricing; we call it paying unlawful kickbacks.
- Steering to High Rate Lenders.
Some banks and mortgage companies steer customers to high rate lenders, even though those customers may have good credit and
would be eligible for a conventional loan from that bank or lender. Sometimes the customer is turned or steered away
even before completing a loan application. In other cases, the loan application is wrongfully denied and the customer
is referred to a high rate lender, who is often an affiliate of the bank or mortgage company. Kickbacks or referral
fees are paid as an incentive to steer the customer to a higher rate loan.
- Making Unaffordable Loans. Some predatory mortgage
lenders purposely structure loans with monthly payments that they know the borrower cannot afford so that when the homeowner
is led inexorably to the point of default, she will return to the lender to refinance the loan, and the lender can impose
additional points and fees. Other predatory mortgage lenders, called hard lenders, intentionally structure the loans
with payments the homeowner cannot afford in order to lead to foreclosure so that they may acquire the house and the valuable
equity in the house at a foreclosure sale.
- Falsified or Fraudulent Applications. Some lenders knowingly make loans to unsophisticated homeowners who do not have
sufficient income to repay the loan. Often, such lenders wish to sell the loan to an investor, which requires that the
borrower appear to have sufficient income to repay the loan. Such lenders have the borrowers sign a blank application
form, and then insert false information on the form, claiming that the borrower has employment or income that she does not,
so it appears that she can make the payments.
Co-signers. This is done to create the false impression
that the borrower is able to pay off the loan, even though the lender is well aware that the co-signer has no intention of
contributing to the payments. Often, the lender requires the homeowner to transfer half ownership of the house to the
co-signer. The homeowner thereby loses half the ownership of the home and is saddled with a loan she cannot afford to
- Incapacitated Homeowners. Some predatory lenders make loans to homeowners who are clearly mentally incapacitated.
They take advantage of the fact that the homeowner does not understand the nature of the transaction or the papers that she
signs. Because of her incapacity, the homeowner does not understand that she has a mortgage loan, does not make the
payments, and is subject to foreclosure and subsequent eviction.
- Forgeries. Some predatory lenders forge loan documents. In an ABC Prime Time Live
news segment that aired on April 23, 1997, a former employee of a high cost mortgage lender reported that each of the lender’s
branch offices had a “designated forger” whose job it was to forge documents. In such cases, the unwary
homeowners are stuck with loans they know nothing about.
- High Annual
Interest Rates. Because the purpose of engaging in predatory
lending is to reap the benefit of high profits, these lenders always charge extremely high interest rates. This drastically
increases the cost of borrowing for homeowners, even though the lenders’ risk is minimal or non-existent. Predatory
lenders may charge rates of 19 to 25%, or 2 ½ times the rates of 7 to 7.5 percent being charged for conventional mortgages.
- High Points. Legitimate lenders charge points to borrowers who wish to buy down the interest rate on the loan.
Predatory lenders charge high points, but offer no corresponding reduction in the interest rate. These points are imposed
through prepaid finance charges (or points or origination fees), which are usually 5 to 10%, but may be as much as 20%, of
the loan. The borrower does not pay these points with cash at closing. Rather, the points are always financed
as part of the loan. This increases the amount borrowed, which produces more actual interest to the lender.
- Balloon payments.
Predatory lenders frequently structure loans so that the borrower’s payments are applied primarily to interest, and
at the end of the loan period, the borrower still owes most or all of the principal amount borrowed. The last payment
balloons to an amount often equal to 85% or so of the principal. The homeowner cannot afford to pay the balloon payment,
and either loses the home through foreclosure or is forced to refinance with the same or another lender for an additional
term at additional cost.
- Negative Amortization. This involves structuring the loan so that interest is not amortized over the
term. Instead, the monthly payment is insufficient to pay off accrued interest and the principal balance therefore increases
each month. At the end of the loan term, the borrower may owe more than the amount originally borrowed. With negative
amortization, there will almost always be a balloon payment at the end of the loan.
- Credit Insurance – Insurance Packing. Predatory mortgage lenders market and sell credit insurance as part of their loans, often without the knowledge or
consent of the borrower. Typical insurance products sold in connection with loans include credit life, credit disability,
credit property, and involuntary unemployment insurance. Lenders frequently charge exorbitant premiums, which are not
justified based on the extremely low actual loss payouts. Frequently, credit insurance is sold by an insurance company
which is either a subsidiary of the lender or which pays the lender substantial commissions. Another way of charging
excessive premiums is to over-insure borrowers by providing insurance for the total indebtedness, including principal and
interest, rather than merely the principal amount of the loan. In short, credit insurance becomes a profit center for
the lender and provides little or no benefit to the borrower.
Closing Costs. In this scheme, certain costs are increased
above their market value as a way of charging higher interest rates. Examples include charging document preparation
fees of $350 or credit report fees of $150, which are many times the actual cost.
- Inflated Appraisal Costs. In most mortgage loan
transactions, the lender requires an appraisal. Most appraisals include a detailed report of the condition of the house,
both interior and exterior, and prices of comparable homes in the area. Others are “drive-by” appraisals,
done by someone simply looking at the outside of the house. The former naturally costs more than the latter. However,
in some cases, borrowers are charged for a detailed appraisal, when only a drive-by appraisal was done.
- Padded Recording Fees. Mortgage
transactions usually require that documents be recorded at the local courthouse, and state or local laws set the fees for
recording the documents. Predatory mortgage lenders often charge the borrowers a recording fee in excess of the actual amount
established by law.
- Bogus Broker Fees. In some cases, predatory lenders charge borrowers broker fees when the borrower
never met or knew of the broker. This is another way such lenders increase the cost of the loan for their own benefit.
- Unbundling. This is another way of padding costs by breaking out and itemizing charges that are duplicative or should
be included under other charges. An example is charging a loan origination fee, which should cover all costs of initiating
the loan, but then imposing separate, additional charges for underwriting and loan preparation.
- Excessive Prepayment Penalties.
Predatory lenders often impose exorbitant prepayment penalties. This is done in an effort to lock the borrower into
the predatory loan for as long as possible by making it difficult for her to refinance the mortgage or sell the home.
This practice provides back end interest for the lender if the borrower does prepay the loan.
- Mandatory Arbitration Clauses.
By inserting pre-dispute, mandatory, binding arbitration clauses in contractual documents, some lenders attempt to obtain
an unfair advantage by relegating their borrowers to a forum perceived to be more favorable to the lender. This perception
exists because discovery is not a matter of right, but is within the discretion of the arbitrator, the proceedings are private,
arbitrators need not give reasons for their decisions or follow the law, a decision in any one case will have no precedential
value, judicial review is extremely limited, and injunctive relief and punitive damages are not available.
- Flipping. Flipping involves
successive, repeated refinancing of the loan by rolling the balance of the existing loan into a new loan instead of making
a separate, new loan for the new amount. Flipping always results in higher costs to the borrower. Because the existing
balance of one loan is rolled into a new loan, the term of repayment is repeatedly extended through each refinancing.
This results in more interest being paid than if the borrower had been allowed to pay off each loan separately. A powerful
example of the exorbitant costs of flipping is the case of Bennett Roberts, who had eleven loans from a high cost mortgage
lender within a period of four years. See Wall Street Journal, April 23, 1997. Mr. Roberts was charged in excess
of $29,000 in fees and charges, including 10 points on every financing, plus interest, to borrow less than $26,000.
- Spurious Open End Mortgages. In order to avoid making required disclosures to borrowers under the Truth in Lending Act, many lenders are making
“open-end” mortgage loans. Although the loans are called “open end” loans, in fact they are not.
Instead of creating a line of credit from which the borrower may withdraw cash when needed, the lender advances the full amount
of the loan to the borrower at the outset. The loans are non-amortizing, meaning that the payments are interest only
so that the balance is never reduced.
- Paying Off Low Interest Mortgages. A predatory lender usually insists that its mortgage loan pay off the borrower’s
existing low cost, purchase money mortgage. The lender is able to increase the amount of the new mortgage loan by paying
off the current mortgage and the homeowner is stuck with a high interest rate mortgage and a principal amount that is much
higher than necessary.
- Shifting Unsecured Debt Into Mortgages. Mortgage lenders badger homeowners with advertisements and solicitations that
tout the “benefits” of consolidating bills into a mortgage loan. The lender fails to inform the borrower that
consolidating unsecured debt into a mortgage loan secured by the home is a bad idea. Paying off the unsecured debt,
which necessarily increases closing costs, since they are calculated on a percentage basis, increases the loan balance.
Moreover, this practice increases the monthly payments, and exacerbates the risk that the homeowner will lose the home.
- Making Loans In Excess of 100% Loan to Value (LTV). Some lenders are making loans to homeowners in amounts that exceed the fair market value of the
home. This makes it very difficult for the homeowner to refinance the mortgage or to sell the house to pay off the loan,
thereby locking the homeowner into a high cost loan. Normally, if a homeowner goes into default and the lender forecloses
on a loan, the foreclosure sale generates enough money to pay off the mortgage loan and the borrower is not subject to a deficiency
claim. However, where the loan is 125% LTV, a foreclosure sale may not generate enough to pay off the loan, and the
lender may pursue the borrower for the deficiency.
SERVICING OF THE LOAN
- Force Placed Insurance. Lenders require
homeowners to carry homeowner’s insurance, with the lender named as a loss payee. Mortgage loan documents allow
the lender to force place insurance when the homeowner fails to maintain the insurance, and to add the premium to the loan
balance. Some predatory lenders force placed insurance even when the homeowner has insurance and has provided proof
of insurance to the lender. The premiums for the force placed insurance are frequently exorbitant. Often the insurance
carrier is a company affiliated with the lender, and the force placed insurance is padded because it covers the lender for
risks or losses in excess of what the lender may require under the terms of the loan.
- Daily Interest When Payments Are Made After Due Date. Most mortgage loans have grace periods, during which a borrower may make the monthly payment after the
due date without incurring a late charge. The late charge often is assessed as a small percentage of the late payment.
However, many lenders also charge daily interest based on the outstanding principal balance. While it may be proper
for a lender to charge daily interest when the loan so provides, it is deceptive for a lender to charge a late fee as well
as daily interest when a borrower pays before the grace period expires.
COLLECTION OF THE LOAN
- Abusive Collection Practices. In order to maximize profits, predatory lenders either set the monthly payments at a level the borrower can barely
sustain or structure the loan to trigger a default and a subsequent refinancing. Adding insult to injury, the lenders
use aggressive collection tactics to ensure that the stream of income flows uninterrupted. The collection departments
call homeowners at all hours of the day and night, send late payment notices (in some cases, even when the lender has received
timely payment or even before the grace period expires), send telegrams, and even send agents to hound homeowners, who are
often elderly widows, into making payments. These abusive collection tactics often involve threats to evict the homeowners
immediately, even though lenders know they must first foreclose and follow eviction procedures. The resulting impact
on homeowners, especially elderly homeowners, can be devastating.
- High Prepayment
Penalties. See description above. When a borrower
is in default and must pay the full balance due, predatory lenders will often include the prepayment penalty in the calculation
of the balance due.
- Flipping. See description above. When a borrower is in default, predatory mortgage lenders often use
this as an opportunity to flip the homeowner into a new loan, thereby incurring additional high costs and fees.
- Foreclosure Abuses. These include persuading borrowers to sign deeds in lieu of foreclosure, giving up all rights to protections afforded
under the foreclosure statute, sales of the home at below market value, sales without the opportunity to cure the default,
and inadequate notice which is either not sent or backdated. We have even seen cases of “whispered foreclosures”,
in which persons conducting foreclosure sales on courthouse steps have ducked around the corner to avoid bidders so that the
lender was assured he would not be out-bid. Finally, foreclosure deeds have been filed in courthouse deed records without
a public foreclosure sale.
Think very hard before
you decide to use your home for debt not connected to your home itself. While it may appear appealing to use your equity
for things such as vacations, a home equity loan is a mortgage on your house and that vacation could result in the loss of
your home. Refinancing your home to pay unsecured debt, such as credit cards turns the debt into a possible way to lose
If you do decide that a home equity loan is right for you, select the lender very carefully.
Stay away from lenders that use high pressure tactics to solicit your business. Analyze the fees associated with the
loan to determine what the loan really costs you and what the true benefits are. Read documents carefully to see what
type of loan is being offered. Some lenders will push for a “Home Equity Line of Credit.” This is
a type of credit card, using your home as collateral. You are given a credit limit, just as with any other credit card,
and an interest rate that is usually far above a normal home mortgage. You will not know how much this loan will cost
you over time, due to possible new charges, varying payments by you, just like you do not know how much other credit cards
will cost you over time.
If you seek to borrow a specified amount of money for a one time expense, such as a new roof
on the house, and the lender suggests a Home Equity Line of Credit, find another lender. If you want to do a series
of small projects, and anticipate making repeated charges, and can make payments high above the minimum amounts required,
a line of credit may be useful to you.
The more traditional home equity loans
are referred to as “closed end transactions,” meaning you borrow a set amount of money and know exactly how much
your payments will be, how long it will take you to pay the loan, and how much the loan will cost you in total.
OTHER HELPFUL INFORMATION