There’s been a lot in the news lately about predatory mortgage lenders. But how easy are they to spot and what tactics do they typically use to capture and take advantage of unwitting mortgage consumers?
First, it’s important to realize that, like other professions, there are only a handful of bad apples spoiling the mortgage lender barrel! Unfortunately, this unscrupulous, unethical handful is making quite an impact on how the majority is perceived by consumers. That’s why The Mortgage Bankers Association (MBA) has launched a campaign to inform consumers about inappropriate and illegal practices and help eliminate abuses in mortgage lending. Although you won’t catch predatory mortgage lenders advertising as such, the MBA pinpoints twelve lending practices that encompass the majority of improper actions. Divided into time-frames in the mortgage process, they include:
When Locating A Lender & Shopping For A Loan:
1) Lenders who steer borrowers to high-rate programs: Borrowers with credit problems and/or who already have first and second mortgages may be led to believe that paying an astronomical interest rate is the only way they can tap into additional equity in their home. The key is to comparison shop loan programs between various lenders to ensure you receive the most affordable loan.
2) Falsely identifying loans as line of credit or open-end mortgages: In order to entice a consumer to take a loan, a predatory lender might claim or infer that a loan has the flexibility of an open line of credit where the borrower makes payments based only on the outstanding loan balance each month and is not penalized for making pre-payments to the principal. Once the loan is closed, the borrower realizes that payments are based on the entire amount borrowed, perhaps with hefty prepayment penalties to retire the loan early. Complete review of all loan documents prior to closing can help sidestep this problem.
During The Mortgage Process & Prior To Closing:
3) Intentionally structuring high-cost loans with payments the borrower can’t afford: While it’s true that some credit-damaged borrowers may only qualify for sub-prime mortgages bearing higher-than-average interest rates, this unscrupulous practice is much different. A predatory lender might purposely place a consumer in a mortgage where interest rate increases and/or other negative aspects of the loan make the payment impossible to pay over time. After foreclosure, the lender would financially benefit by reselling the property. It’s in a consumer’s best interest (especially for someone with blemished credit) to ask an attorney or other knowledgeable third party to review loan documents prior to closing.
Falsifying loan documents:
4) Falsifying loan documents: Even though this practice is illegal, it can occur when a mortgage has unfavorable terms that the lender believes the consumer wouldn’t otherwise agree to. The best bet is to have an impartial third party closing company review all documents with you, and then ask to receive another complete set of documents from the lender a week or so after closing to compare with those received from the closing company.
5) Making loans to mentally incapacitated homeowners: Perhaps the most despicable of practices, a predatory lender could find unassisted mentally-challenged consumers vulnerable, willing to take any loan at any price. Just as it’s wise for all consumers to have a third-party advocate review mortgage documents prior to closing, a mentally incapacitated borrower should seek assistance in the mortgage process from beginning to end. A real estate attorney aware of the borrower’s situation is often best.
6) Forging signatures on loan documents: Especially when additional mortgage riders are added on to the loan package after the borrower has signed the closing papers. As referenced previously in #4, obtaining a second set of document copies from the lender a week or so after closing can help ensure that the borrower’s signature has not been forged.
At Or Prior To Closing
7) Changing the loan terms at closing: One of the most rampant abuses is to change the loan terms prior to closing. (As a mortgage borrower, I’ve had it attempted.) The consumer agrees to take a certain type of loan at a pre-determined interest rate, but at closing learns he’s expected to sign closing papers for a different interest rate and/or other set of loan guidelines.
If the lender hesitates to provide the initial loan you qualified for, agreed to take and received the Good Faith estimate for, walk away, don’t look back and file a claim with federal authorities against the lender.
8.) Requiring credit insurance: A predatory lender might claim that the only way a borrower can receive a loan (often being notified of this fact at the eleventh hour!) is to insure the loan against the death or incapacity of one or more of the borrowers. Loan comparison shopping between lenders can help avoid this. After the mortgage is closed.
9) Increasing interest charges when loan payments are late: Since a majority of borrowers never read the mortgage documents they sign, the first the consumer hears of this may be when he’s notified of the monthly payment increase. Reading all of the mortgage documents and/or having them interpreted for you by your own advisor/advocate is the safest route to avoid this.
Charging excessive prepayment penalties
10) Charging excessive prepayment penalties: This is often touted or “sold” by the lender as a way to receive a lower interest rate for the loan you’re seeking. Unfortunately, should you pay off the mortgage or have to sell the property (typically during the first five years of the loan) you’ll be hit with fees ranging from hundreds to thousands of dollars in prepayment penalties. While a lender might waive the penalty if you obtain a new mortgage from their company, short-term owners or those with uncertain ownership timeframes are best to avoid loans with prepayment penalties.
11) Failing to report good payment on borrower’s credit report: This may not appear to be a negative factor until you need the payment reference to establish good credit or to streamline your next mortgage application and closing. After making several payments on your loan, it’s wise to check your credit report to see if the lender has reported your payment history. If not, contact them in writing (saving a copy of the letter) and let them know you’d like it reported. Don’t wait until you need the credit reference to ask the lender to piece your payment record together since it may be incomplete or the request ignored entirely.
And Last But Not Least:
12) Failing to provide accurate loan balance and payoff information: While this typically happens when you’re selling, it could require you to come up with extra cash outside of the formal closing in order to settle the mortgage debt and clear the title. In a related matter, some lenders drag their feet in providing payoff balances since prompt pay off (especially on a loan with a high rate of interest) is less money they’ll receive.
As with all industries, it’s only a small percentage of individuals in the mortgage business who take unfair advantage of consumers. Awareness campaigns like the Mortgage Banker Association’s push to educate consumers regarding unscrupulous mortgage practices are to be commended. To learn more about predatory lenders as well as become alert to various mortgage scams, visit the Mortgage Bankers Association of America’s Website or contact them at (202) 557-2700, Monday through Friday from 9AM to 5PM EDT.
For more information please contact Robert Prophet and the Robert Prophet Group. Send us an email or visit our web site: RobertProphet.com
Special thanks to Julie Garton-Good
