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*** Seven Signs Of Predatory Lending ***
Predatory mortgage lending involves
a wide array of abusive practices. Here are brief
descriptions of some of the most common.
- Excessive Fees
- Abusive Prepayment Penalties
- Kickbacks to Brokers (Yield Spread Premiums)
- Unnecessary Products
- Mandatory Arbitration
- Steering & Targeting
Excessive fees
Points and fees are costs not
directly reflected in interest rates. Because
these costs can be financed, they are easy to
disguise or downplay. On competitive loans, fees
below 1% of the loan amount are typical. On predatory
loans, fees totaling more than 5% of the loan
amount are common.
Abusive prepayment
penalties
Borrowers with higher-interest subprime loans
have a strong incentive to refinance as soon as
their credit improves. However, up to 80% of all
subprime mortgages carry a prepayment penalty
-- a fee for paying off a loan early. An abusive
prepayment penalty typically is effective more
than three years and/or costs more than six months’
interest. In the prime market, only about 2% of
home loans carry prepayment penalties of any length.
Kickbacks to brokers
(yield spread premiums)
When brokers deliver a loan with an inflated interest
rate (i.e., higher than the rate acceptable to
the lender), the lender often pays a “yield
spread premium" -- a kickback for making
the loan more costly to the borrower. "Yield-spread
premiums" is what lenders call them. Consumer
groups call them kickbacks.
They're the cash that mortgage brokers get for
steering a borrower into a home loan with a higher
interest rate.
They're everywhere - even though prominent academics,
state attorneys general and even some lenders
say that often they're an invitation to steal.
Kickbacks can cost homebuyers thousands of dollars
extra on their mortgages. "Consumers,"
Iowa Attorney General Tom Miller said recently,
"are paying more than the fair market price
of their loan."
Loan Flipping
A lender "flips" a borrower by refinancing
a loan to generate fee income without providing
any net tangible benefit to the borrower. Flipping
can quickly drain borrower equity and increase
monthly payments -- sometimes on homes that had
previously been owned free of debt.
Unnecessary Products
Sometimes borrowers may pay more than necessary
because lenders sell and finance unnecessary insurance
or other products along with the loan.
Mandatory Arbitration
Some loan contracts require "mandatory arbitration,"
meaning that the borrowers are not allowed to
seek legal remedies in a court if they find that
their home is threatened by loans with illegal
or abusive terms. Mandatory arbitration makes
it much less likely that borrowers will receive
fair and appropriate remedies in cases of wrongdoing.
Steering & Targeting
Predatory lenders may steer borrowers into subprime
mortgages, even when the borrowers could qualify
for a mainstream loan.Vulnerable borrowers may
be subjected to aggressive sales tactics and sometimes
outright fraud. Fannie Mae has estimated that
up to half of borrowers with subprime mortgages
could have qualified for loans with better terms.
According to a government study, over half (51%)
of refinance mortgages in predominantly African-American
neighborhoods are subprime loans, compared to
only 9% of refinances in predominantly white neighborhoods.
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