ABUSIVE LENDING PRACTICES – IN PERSPECTIVE
Abusive lending practices have been a part of the lending
community from the very beginning of loan arrangements. The controversy reached
a modern day peak during the subprime lending period leading up to the
recession beginning in 2008. A decade later, there remain some concerns,
exacerbated by Congress’s recent rollback of financial regulations
contained in the Dodd-Frank Act.
To recap a little history – the Dodd-Frank Act was
enacted in 2010 to protect consumers from future financial abuses, principally
from lending institutions. The Act created the Consumer Financial Protection
Bureau (CFPB) which then had jurisdiction over banks, auto loans, credit card
interest rates, pay-day loans, student loans, etc. While imperfect in some ways,
the CFPB did provide what many perceived as necessary oversight.
The banks railed against the legislation from the beginning
and the recent repeal seems to have removed most, if not all, of the past
regulations on the financial communities. Some believe that this rollback will
make the nation more vulnerable to another financial crises in the near future.
Time will determine if the financial markets can now control their own
In the meantime, there are a few areas of the lending
process about which borrowers might be aware. Borrowers seem to focus on loan
closing costs as an area wherein they feel vulnerable. Closing costs can be
confusing and are almost always under-estimated. Consumers have long been
encouraged to “negotiate” what appear to be substantial fees
accompanying every loan transaction. Lenders, on the other hand, have less
opportunity to exaggerate these fees than during “bad old days” of
Every borrower is required to receive a settlement cost
booklet from the Department of Housing and Urban Development explaining closing
costs. Few seem to peruse the booklet, often referred to as good reading for
insomniacs – boring and hard to read information. Mostly, the booklet
identifies that most lenders are prohibited from acquiring payment for any
third party fee in excess of the actual charge. This means that appraisal,
credit, title, escrow, etc. fees cannot be “marked up” to provide
additional income to a lender. (see the tip sheet in this webpage section related
to “closing costs”)
Not withstanding that fees are regulated, closing costs are
substantial. Here are a few of the areas that may be most misunderstood.
Appraisals: The cost can vary
depending upon the type of loan and property. The fee is generally paid via the
borrower’s credit card when the appraisal is ordered. The introduction of
the Home Valuation Code of Conduct (HVCC) following the recession caused by the
sub-prime lending practices resulted in an increase in the basic cost of appraisals.
(see the tip sheet entitled “Appraisal Process Explained”).
Credit Reports: With
rare exception, every loan transaction eventually requires a three merge report providing credit history and
scores from three repositories. A full report does affect the credit score
minimally and can be avoided by the acquisition of a free report that will
initially provide a sense of a borrower’s credit history.
Often, borrowers can acquire a sense of their credit history
via the acquisition of a free credit report. The full report can then be
accessed when the borrower is ready to proceed with a loan transaction. Check
with your loan representative for how to acquire a free credit report.
All those fees: The list of fees can be daunting and cause one
to wonder if they are all legitimate. The list can include such things as
underwriting fee, tax and flood certifications, document preparation,
processing fee, notary and recordation fees. These are in addition to the more
recognized escrow and title fees and impound deposits (wherein the taxes and
insurance costs are included with the monthly mortgage payment – required
for borrowers with less than 20% down payment). While in the past some padding
of fees occurred today’s borrowers will discover that these seemingly
endless costs are a necessary part of any loan acquisition.
Rebate Pricing: this
is a way in which a borrower may acquire assistance with paying closing costs.
The borrower must accept a higher than current interest rate that results in
the lender providing a rebate. In the past, these rebates were often
undisclosed but are for the most part today used to assist in reducing borrower
loan costs. This can be complicated and should be discussed fully with your
The bottom line regarding fees is that they are numerous and
usually more than anticipated. While borrowers may wish to
“negotiate” the fees (as noted above) reputable lenders typically
cannot do so. One might be suspicious of the lender who is readily willing and
able to “waive a fee” . It may suggest that the fee was either
unnecessary or inflated in the first place. Our best advice is to trust your
instincts and function with a lender about whom you feel confident in their
honesty and integrity.
Although abuses can still occur in the lending community
they are now the atypical and not the norm. The concern is that with the
deregulation of the oversight provisions we could easily return to the
practices preceding the subprime caused recession. It is now clear that some
past sub-prime borrowers made decisions that at the time seemed appropriate.
Other borrowers were “sold” on the adjustable rate mortgages
without fully understanding the risks involved. With that in mind, the
introduction of new loan options that in some ways mirror those of the sub-prime
era is disconcerting. In spite of rules or no rules, nothing will ever replace
the borrower’s own diligence and knowledge in protecting him or herself
from abusive lending practices.
LENDING PRACTICES . . . A FINAL COMMENT!
The introduction of sub-prime loan products played an enormous role in home
financing in past years. Such loans allowed numerous borrowers, who were
ineligible for more standard type loans, to acquire home financing.
On the other hand, some lenders abused consumers with high cost financing,
overcharging in both interest rates and loan fees while misleading some regarding
the actual terms of the subprime loan. In spie of this, sub-prime lending grew
in popularity as loan instruments became more and more flexible. It seemed that
nearly everyone could acquire a home loan via the “stated income”
or “no doc” type of loan. While borrowers were required to pay
higher interest rates, accept pre-payment penalties and often were hit with
higher fees, the enticement of being able to own a home overcame all reluctance
to this type of loan.
The sub-prime debacle where borrowers
regularly defaulted on this higher interest rate financing, accompanied
by complaints that the terms of the loan made it impossible for them to perform
resulted initially in a more restrictive lending qualifying atmosphere.
Lawmakers enacted legislation that "guaranteed” consumers
meaningful and clearly understandable disclosures of loan agreements.
Additionally, lenders were to be held accountable for extending credit to
borrowers without determining the borrowers' capability of repaying the loan on
its original terms. The term for these new fully qualifying loans was QM for Qualified
While other provisions were promoted by the legislation, this requirement to
determine the borrower's ability to repay the loan was perhaps the most
critical? We have returned to an old-fashioned criteria of requiring the
borrower to prove their ability to pay the mortgage. In other words, a return
to documentation of income along with a complete borrower profile that will
require “qualifying” for a loan using long time agreed upon qualifying ratios
. . . all seemingly a rational way to determine a borrower’s capacity to
acquire a loan.
After the financial crash it was determined that it was a good thing to
eliminate many of the niche or sub-prime loan options. Over 200 sub-prime
lenders (and some conventional lenders) literally shut their doors in 2010 with
more yet in 2011. But as qualification guidelines toughened there arose a fear
that in the interest of "protecting" consumers, some borrowers would
be denied the opportunity to obtain financing of any sort. While this seemed to
be the case initially current lending practices have become more flexible
allowing more borrowers to qualify to purchase.
It is in this atmosphere that some are concerned about the elimination of
oversight and the resulting re-introduction of loans that look in many ways similar
to the subprime loans that cause so much grief in the past.