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4/15/02: The following is from ACORN and offers
wonderful tips on how everyone can combat Predatory Lending.
Predatory Lending: What Can
Recommendations for Consumers
Recommendations for Legislators and Regulators
Before you begin loan shopping, visit your local
non-profit housing counseling center to set up an appointment with a counselor to
evaluate your financial situation and to discuss your loan needs. You can call HUD
for a list of the certified counseling agencies nearest you.
You can and should also talk with a housing counselor
to evaluate the loan offers you are receiving if you are already in the middle of
the loan process. Many of the borrowers who receive high cost loans could have qualified
for a lower cost loan from a bank.
Ignore high-pressure solicitations, including
home visit offers. Before you sign anything, take the time to have an expert - such
as a housing counselor or lawyer - look over any purchase agreement, offer, or any
Don't agree to or sign anything that doesn't seem
right even if the seller or lender tells you that "it's the only way to get
the loan through" or "that's the way it's done." Look over everything
you sign to make sure all your information is correct, including your income, debts,
and credit. Do not sign blank loan documents or documents with blank spaces "to
be filled out later."
Before closing your loan, get a copy of your loan
papers with the final loan terms and conditions so you have enough time to examine
them. If anything is dramatically different at closing, don't sign it.
Don't accept a lender's statement that you have
bad credit without reviewing your credit report yourself for mistakes and inaccuracies
and having an independent person evaluate your credit.
Make sure you are comparing apples to apples.
Know exactly what debts will and will not be paid and if your new payment will include
taxes and insurance. You should also understand if the payment being quoted is sufficient
to pay off the loan or only goes toward the interest.
Be wary of any lender or broker who encourages
you to refinance your first mortgage if that's not what you are looking to do or
if encouraged to add more and more of your other debts into the loan.
Think twice about borrowing more than the value
of your house. Some lenders may make loans for more than your house is worth, up
to a 125% loan to value. Owing more than your house is worth can prevent you from
selling your house or refinancing to a better rate in the future.
Beware of loan terms and conditions that may
mean higher costs for you:
High points and fees: Bank loans usually cost
1-3% of the loan amount for points and fees to the lender. If you are being charged
more, find out why. Then shop around.
Single premium credit life or credit disability
insurance: This kind of insurance is very expensive compared to other insurance
policies, and paying it up front requires you to pay interest on it as well. Beware.
Prepayment Penalty: Many subprime loans include
prepayment penalties, which require you to pay thousands of dollars extra if you
refinance your loan within the first several years of the loan. Make sure you know
if the loan you are being offered has a prepayment penalty, how long it is in effect,
and how much it will cost. If there is a chance that you will refinance during that
time, you need a loan without a prepayment penalty.
Balloon Payments: Balloon mortgages have the payments
structured so that after making all your monthly payments for several years, you
still have to make one big "balloon payment" that is almost as much as
your original loan amount.
Adjustable Rates: Beware of low "teaser"
introductory rates on adjustable mortgages because many of these adjustable rate
loans only adjust one way - up. If your loan has a fixed initial rate, make sure
you know when and by how much the interest rate will increase and what your new
monthly payments will be. Find out the highest rate your can go to and what the
monthly payments would be at that rate. Don't count on a promise that the lender
will refinance the loan before your payments increase.
Mandatory Arbitration: Some predatory lenders
include mandatory arbitration clauses in their home loans. Signing these mean giving
up your right to sue in court if the lender does something you believe is illegal.
Be Careful with Debt Consolidation Loans.
If you are thinking of a debt consolidation loan, be aware that although it may
lower your monthly payments in the short term, you may end up paying more in total
over time. Also, there is an important difference between most of your bills, such
as for credit cards, and mortgage debt. When you consolidate other bills with your
mortgage, you increase the risk of losing your home if you can't make the payment.
Watch Out for Property Flipping Scams When
Buying a Home. A property flipper buys a house cheap and then sells it to an
unsuspecting homebuyer for a price that far exceeds its real value. Too often, the
buyer finds out after closing that the home needs major repairs they can't afford
and they lose the house in foreclosure.
Have an independent home inspector make sure the
house is in good condition. This should be in addition to the appraisal that the
bank orders. While an appraisal estimates the value of your home, a good home inspection
will identify needed repairs. Do your own homework to find a good inspector - an
inspector recommended by the seller may not be working in your interest.
Make sure you have your own Realtor or real estate
agent who is working for you. Never deal directly with a seller or a seller's agent
unless you have extensive real estate experience. Having your own Realtor will not
cost you anything more because they are paid out of the sales price of the house.
If the seller agreed to make repairs to the home,
conduct a final walk-through to make sure the repairs have been completed before
the loan closing.
Look Out for Home Improvement Scams. Some
home improvement contractors work together with lenders and brokers to take advantage
of homeowners who need to make repairs on their homes. They get the homeowner to
take out a high-interest, high-fee loan to pay for the work, and then the lender
pays the contractor directly. Too often, the work is not done properly or even at
Get several bids from different home improvement
contractors. Don't get talked into borrowing more money than you need.
Check with the state Attorney General's office
to see if they have received any complaints about the contractor.
Don't let a contractor refer you to a specific
lender to pay for the work. Shop around with different lenders in order to make
sure that you are getting the best possible loan.
Make sure any check written for home improvements
is not written directly to the contractor. It should be in your name only or written
to both you and the contractor, and you should not sign over the money until you
are satisfied with the work they have completed.
Recommendations for Lenders
ACORN recommends that Congress, state legislatures,
and local officials should pass strong anti-predatory lending legislation that would
protect consumers from abusive practices, which have been especially targeted at
lower-income and minority communities. Federal legislation has already been introduced
that would strengthen the protections in the Home Ownership Equity Protection Act
(HOEPA), extend those protections to more borrowers in high-cost home loans, and
establish penalties for violating the law that are more in line with the damage
caused to borrowers.
Federal banking regulators, in their evaluations
of a bank's CRA performance, should give closer scrutiny to a bank's involvement
in predatory lending. Regulators should consider not just the number of loans the
bank originates to low-and moderate-income borrowers, but also the quality of those
loans. In addition, banks that make high-cost loans directly or through their subsidiaries
or purchase high-cost loans with predatory terms should be penalized under CRA for
those activities, not rewarded.
ACORN recommends the Federal Reserve Board, at
a minimum, act on its proposed rule revisions to HOEPA and HMDA, and begin requiring
APR data collection on loans, include financed credit insurance as part of the definition
of points and fees, and lower the HOEPA threshold from 10 to 8 points above Treasury
rates. The Federal Reserve Board should go further than their proposed rule in a
number of respects, including collecting additional data and more stringently regulating
unfair and deceptive practices.
Congress should increase the funding level for
HUD's Housing Counseling Program for future years to $100 million annually to increase
the availability or housing counseling for potential predatory lending victims.
All lenders which engage in subprime lending should
pledge adherence to a meaningful "Code of Conduct" that includes: fair
pricing; limits on financed fees and interest rates to those consistent with the
actual credit risk represented by the borrower; avoidance of abusive and equity
stripping loan terms and conditions, such as balloon payments, prepayment penalties,
and single premium credit insurance; full and understandable disclosures of loan
costs, terms, and conditions; a loan review system that rejects fraudulent or discriminatory
loans; making no loans which clearly exceed a borrower's ability to repay; and not
refinancing loans where there is no net benefit to the borrower. These lenders should
review their loan portfolios and compensate borrowers whose loans clearly violate
Lenders that offer prime as well as subprime products
should establish uniform pricing and underwriting guidelines for all of their lending
subsidiaries, and for all of the communities in which they do business, so that
consumers in lower-income and minority communities do not receive worse terms because
of where they live or the color of their skin. All "A" lenders should
increase their outreach and loan volume in underserved communities for their prime
Lenders should fund nonprofit housing counseling
agencies to work with low and moderate income borrowers in the subprime market.
Consumers need correct information to make informed loan decisions in the complex
and often misleading subprime market transactions. Housing counselors will review
income, credit, debts, and loan products to help the borrower find the best loan
product for their needs and avoid predatory loan terms.
Fannie Mae, Freddie Mac, mortgage lenders, and
state and local governments should mandate and expand funding for programs that
provide basic information about lending and enable people to protect themselves
from predatory practices. The most effective tool for helping minority and lower-income
families to become successful homeowners is high quality loan counseling and home
buyer education by community based entities.
Federal and State regulators should increase their
scrutiny of predatory lending practices, including examining the interest rates
other costs of loans as well as their distribution. Federal and state authorities
should devote the necessary resources to investigating and prosecuting lending abuses.