ABUSIVE LENDING PRACTICES - AN INTRODUCTION
During the past two years there has been much
written regarding various abusive lending practices. The most recent
controversy now brewing is over what some believe to be widespread markups in
homebuyers’ settlement fees.
Consumers typically are unaware of the actual
costs of settlement services. Lenders are required to provide each borrower a
booklet, prepared by the Department of Housing and Urban Development (HUD)
explaining settlement costs. Unfortunately, the booklet is not easy reading and
is often accompanied by a joke that it represent good
reading for insomniacs. Few borrowers actually peruse the booklet.
The law indicates that no person may receive
“any portion, split or percentage of any charge . . . other than for
services actually performed”. On the other hand, it does not specifically
indicate that settlement companies can not mark up various fees.
Consumers have long been encouraged to
“negotiate” what often appear to be substantial closing costs fees
that accompany every loan transaction. This recent emphasis on possible lender
abuses in settlement fees will only heighten consumer concerns that they are
being disadvantaged.
So, let’s take a realistic look at how such
an abuse might occur. The most logical areas where markups might occur are:
·
appraisals: Depending upon the type of loan and property, most basic
appraisal fees will range from $300 to $350.
·
credit reports: Most real estate transactions require only a
“preview” three merge report at a cost of approximately $20. Such a
report provides the credit history and scores from three credit repositories.
If a borrower requires credit corrections or changes, a “full
factual” report may be required at an approximate cost of $55.
·
Including non-existent
fees: The list of what are commonly called the “garbage fees” can
be daunting to many borrowers. The list includes such things as underwriting
fee, tax service and flood certification fee, document preparation fee,
processing fee, etc. While most fees are legitimate, some unscrupulous lenders
tack on such non-existent fees as a document review fee, a courier fee (when no
courier was used), etc. Unfortunately, there are a lot of garbage fees related
to every loan . . . ranging from a low of about $700 to sometimes as high as
$1,000 (not including the processing fee which can range from $400 to $650).
When the garbage fees are over a $1,000 level, it is wise to ask questions. It
doesn’t automatically mean that unwarranted fees are being charged, but
it is wise to question exceedingly high fees.
·
Undisclosed Rebate
Pricing: A lender/mortgage broker acquires a “rebate” as a result
of a borrower accepting a higher than the base mortgage rate. For instance, if
the typical rate is 5.5% at a borrower’s cost of 1%, a borrower may
accept a higher rate, say 6.0% wherein the
lender/mortgage broker receives a rebate from the source lender. Typically, the
rebate equals approximately the 1% origination fee amount that the borrower
chose not to pay . . . hence, the label of a “zero point cost loan”
wherein the origination fee is paid via the rebate. While this is perfectly
legitimate and some borrowers choose to do zero point financing, the abuse
occurs when the amount of rebate is significant or, worse, is undisclosed to
the borrower. The borrower may be told that because of credit problems, lack of
reserve funds, etc. that they don’t qualify for the best loan rates and
are only eligible for the higher rate financing with the lender/broker
pocketing additional rebate.
Unfortunately, there are borrowers
who, for various reasons, did not qualify for the best rates and were thrust
into the niche type loans with their accompanying higher interest and fees. In
these cases, the rates and fees were legitimate at the time and the borrower
was not being disadvantaged. It is these sub-prime loans that are now the
subject of close scrutiny. While these loan options were widely adopted by
brokers, lender and investors during the past several years, it now appears
that soem3 borrowers may not have fully understood all the aspects of their
financing arrangement. It is another reminder that borrowers must be confident
that they are working with a reputable and honest mortgage person.
As indicated previously, borrowers are repeatedly
encouraged to “negotiate” fees. There are some fees (as indicated
above) that are a part of every loan and must be paid. The borrower generally
ends up paying these either via cash (in a purchase transaction), via inclusion
of the fees in a refinance transaction or via rebate pricing (also mentioned
above). Reputable lenders are normally unable to “negotiate” these
fees as they have to be paid. On the other hand, lenders who are most ready to
“waive a fee” when confronted by a borrower, may have inflated
their fees in the first place. It is difficult to know. Our best advice is to
trust your instincts and function with a lender about whom you feel confident
in their honesty and integrity.
HUD, in the meantime, is looking at ways to
prohibit unfair or abusive markups in fees (absent additional services having
been rendered). Too often, when steps are taken to correct this kind of abuse,
the actions taken represent an over-reaction and initially results in confusion
for everyone. Those who are willing to skirt the law often find other ways to
do so while those lender/mortgage brokers who have always functioned with
integrity face additional disclosure rules. Unfortunately, nothing will ever
take the place of a borrower’s own diligence and knowledge in protecting
him or herself from an abusive lender.
Web Page/Abusive Lending New
The following is the latest information regarding lenders under
review for abusive lending practices
ABUSIVE
LENDING PRACTICES . . .
UNDER REVIEW!
The introduction of sub-prime loan products played
an enormous role in home financing in recent years. Such loans allowed numerous
borrowers, who were ineligible for more standard type loans, to acquire home
financing.
On the other hand, some lenders have abused
consumers with high cost financing, overcharging in both interest rates and
loan fees. To make matters worse, some lenders seem to have preyed upon the
most vulnerable groups, the elderly, the low income and minorities. It is not
too long ago when some lenders literally went door to door encouraging home
owners to over-encumber their homes with equity financing known as 125% loans.
The "pitch" promoted converting credit debt to home debt. In other
words, home owners were "sold" the presumed benefits of acquiring a
home equity loan to pay off credit debt. The promise to borrowers was that by
transferring the credit debt to home debt would permit the borrower to take an
interest tax deduction for the equity financing. Unfortunately, many borrowers
were uninformed that the interest on borrowed money that exceeded the 100%
value of the property was not tax deductible. While there was a savings on the
interest rate (often reducing the 18 to 21% interest on credit cards to a more
desirable 6 to 8% home loan interest rate.) the new debt was secured by the
borrower's home and a default on the payments could result in the borrower's
loss of his/her home.
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 recent sub-prime
debacle where borrowers are regularly defaulting on this higher interest rate
financing, they complained that the terms of the loan made it impossible for
them to perform. Sub prime lenders simply added to a developing reputation of
being "predatory" in nature.
More recently, lawmakers have proposed legislation
that will "guarantee” consumers meaningful and clearly
understandable disclosures of loan agreements". Additionally, lenders will
be held accountable for extending credit to borrowers without determining the
borrowers' capability of repaying the loan on its original terms". While
other provisions are promoted by proposed legislation, this requirement to
determine the borrower's ability to repay the loan raises the most concern.
There is still no agreed upon criteria with which to make this determination.
There is a fear that anytime that a borrower defaults on a loan, they will
simply claim that they were misinformed and that the original loan terms made
it "impossible" for them to repay. Bottom line, it seems as if we are
returning 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 suing long time agreed upon
qualifying ratios . . . all seemingly a rational way to determine a
borrower’s capacity to acquire a loan.
The other proposed provisions of pending
legislation are less onerous than the above concern over how to determine the
borrower’s ability to pay:
-requiring lenders to warn consumers in writing
about the higher risks of such loans and the need for credit counseling.
- limit prepayment penalties to no more than 3% of the loan amount.
- the current definition of "high cost loans are
those with interest rates that are 10 or more percentage points above the yield
on Treasury securities with the same term. High fees are defined as those
exceeding 8% of the loan amount. Proposed legislation would lower those limits
to 6 or more percentage points and 5 percent of the loan, respectively.
We are already realizing the elimination of some
niche or sub-prime loan options. Over 200 sub-prime lenders (and some
conventional lenders) literally shut their doors in 2007 with more to follow in
2008. Expectations are that sub-prime lending will continue to change. The fear
is that in the interest of "protecting" consumers, some borrowers
will be denied the opportunity to obtain financing of any sort. Only time will
tell!
Niche Financing
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