Buying a home is a very intense experience and can be even more anxiety-ridden if a consumer encounters some unethical and fraudulent practices. Sometimes, labeled as “Predatory Lending,” these practices, though not industry-wide, are common enough that you should use caution and scrutinize every transaction carefully to ensure fairness to everyone involved. Sadly, the term “Predatory Lending” has become part of our everyday vocabulary; so, what exactly does it mean? Simply stated it means taking advantage of borrowers who have little or no knowledge about financing. Unfortunately, because predatory lending takes many forms, there is no singular definition for it. In general, predatory lending involves practices that usually take advantage of the elderly, minorities, and inexperienced, uninformed consumers.
SOME BASIC EXAMPLES OF PREDATORY LENDING ARE
- Selling properties for much more than they are worth using false appraisals.
Encouraging borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan.
- Knowingly lending more money than a borrower can afford to repay.
- Charging high-interest rates to borrowers based on their race or national origin and not on their credit history.
- Charging fees for unnecessary or nonexistent products and services.
- Pressuring borrowers to accept higher-risk loans such as balloon loans, interest-only payments, and steep pre-payment penalties.
- Targeting vulnerable borrowers to cash-out refinance offers when they know borrowers are in need of cash due to medical, unemployment or debt problems.
Typical schemes and scams that can fall into the category of PREDATORY LENDING include:
It is perfectly acceptable to purchase a home, make significant improvements in the home and sell it. There are many instances where individuals will purchase foreclosed or run-down properties, invest 195 times and money into those properties and sell the property for a profit. However, flipping is illegal when no significant improvements are made or there is misrepresentation involved. Buyers might be convinced to borrow more than the property is worth and lenders, brokers or even appraisers approve the loan and share in the windfall.
This practice is used with consumers who may not have any problems with their credit history, are nevertheless “steered” by the broker or lender to a certain product with higher rates and fees, even though the consumer could qualify for less costly products. Consumers should be shown every product option available to them, regardless of their past or present credit situation.
HIDDEN LOAN TERMS:
This practice occurs when a broker or lender promises the consumer a lower monthly payment through refinancing but does not tell the consumer that they are paying interest only every month. The consumer will have a huge balloon payment of principal at the end of the loan term which he is not aware of. Additionally, there are reports of excessive origination and prepayment fees.
A financially desperate homeowner has equity in his/her house, but not much monthly income. An originator tells the owners that they can get a loan by “padding” their income on the application. The owner knows that he cannot make the payments, but goes ahead with the transaction hoping the house will go up in value and he will be able to sell it at a profit. The owner then cannot make the payments and the lender most likely forecloses and strips the equity in the house from the owner.
LOAN FLIPPING (COSTLY and UNNECESSARY REFINANCING):
These target homeowners who have had their homes for many years and enjoy a low-interest rate, affordable monthly payments, and equity in the property. An originator calls with the enticement of some extra cash that would be available through refinancing. Several months after the refinancing, the originator calls offering another inducement (e.g. a vacation for another refinance). All along, the originator charges high points and fees for each refinance, as well as prepayment penalties. In addition, the interest rate could continue to climb with each additional “flip,” or refinance.
FRAUDULENT “HOME IMPROVEMENT” LOANS:
A home improvement contractor approaches the property owner and tells him that he can remodel his house, install a new roof, etc. for a reasonable price. The homeowner, however, cannot afford the costs and the contractor states that he can assist the owner in getting financing. With this agreement, the contractor then begins work on the project.
The homeowner either signs blank loan papers or is rushed to sign before fully reading or understanding the terms of the agreement because the contractor has threatened to leave the job unfinished if the papers are not signed. Later, the homeowner realizes that the loan is a home equity loan with high fees, interest rates, and points. By this time, the job has become a low priority for the contractor and may not even be done correctly once it is completed. In addition, the broker or lender may have even paid the contractor to set up the transaction.
Property taxes are relied upon by local governments more than other types of taxes for several reasons: They are based on a known tax base, which is relatively stable 9 They provide a predictable income stream to the local government, and are typically more consistent when there are fluctuations in the economy than other types of taxes 9 Real estate is hard to conceal, it is visible to the municipality and ownership is public record.