The American Dream

 

     Sure, this is a subject oftened talk about and frequently talked about on Active rain. But I wanted to give a little more information on what predatory lending is all about and not the misconception of what most might think it is. 

 

     Anyone’s commitment in the financing/mortgage industry should be to provide borrowers with the best possible financing, in the least amount of time, and for a reasonable fee. Home ownership is an American Dream and it is priceless. A loan should not be offered that would keep that dream from coming true. Or actually hurt that client down the road that would later hurt this dream and financially bankrupct them.

 

confusion

Predatory lending is often confused with Sub prime lending. Sub prime lending, the provision of loans to households with relatively poor or no credit histories, is a necessary component of our housing and consumer finance system. These loans are priced at a premium in return for the higher risk that the lender assumes with buyers who have lower Credit ratings. But when sub prime lending oversteps the reasonable risk-return tradeoff, it can do more harm than good for borrowers and communities and can be considered predatory. Predatory lending is “a set of loan terms and practices that falls between risk-based pricing by sub prime lenders and outright fraud.” Determining an exact definition for predatory lending is difficult because of the complex manner in which predatory lenders operate.

Three broad features, either alone or in a combination, can constitute predatory lending practices:

  1. Aggresive and targeted marketing to financially vulnerable households, including low-income, minorities, and the elderly. Basically steering borrowers to sub prime loans just to make more money.
  2. Unreasonable and unjustifiable loan terms. As much as 35 to 50 percent of the borrowers in the sub prime market could have qualified for the lower-cost prime market loans. This could include excessive fees which would be 3 to 4 percent of the loan amount, depending on the loan. And even the prepayment penalties that trap borrowers into high-cost loans.
  3. Outright fraudulent behavior, either before or after closing of the loan. And actions that maximize the destructive financial impact of inappropriate strategies. This could be loan flipping or repeated refinancing that does not benefit the borrower. Falsifying loan documents such as appraisals or required disclosures.

Although a loan that involves any one of these tactics might legally be considered predatory, much predatory lending combines all three which would extract the greatest profit for the lender and inflict the greatest financial harm on its victim.

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

 
This post has been included in New Jersey Real Estate News Camden County, NJ Real Estate News Cherry Hill, NJ Real Estate News
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19 Comments on The Confusion of Predatory Lending........

OCT
31
2006
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master
Other than in the case of 3 above, can "A" paper borrowers ever be involved in predatory lending, or does it only involve subprime?
8:39pm • #1
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Maureen....... very good question. Yes, "A" paper borrowers can be involved in predatory lending.

Here are a few examples:

1. Again, excessive fees. Or giving you the highest rate in the "A" category and still charging some points.

2. another one... a lender putting their client in a level 2 or 3 loan, even though it still is a conventional loan. But I could put them in an FHA loan and that would drop their rate by at least 1% and the mortgage insurance would be cheaper if less than 80%.

3. The "bait and switch" can also fall into predatory lending. I had a client once in Florida that bought a house with 15% down. She was told by the lender that she didn't have to pay mortgage insurance. This is true, but you don't get the lowest rate. There are programs for this. But she was guaranteed a low rate and no mortgage insurance.  Well, when she got to closing, she had the same rate, but there was mortgage insurance. This can be considered predatory lending also. This would fall under #3.

There are a few more, but again, great question. Overall, people can be taken advantage on all levels.

8:47pm • #2
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

In the Denver metro area we had two agents and their mortgage broker go to prison for "helping" with the paperwork. Their scam was to create loans for illegals.  They also created all the necessary documentation needed for the loans to get through.

One guy got 6 months and the other 5 years.  

9:44pm • #3
1,360,942 Points 244 Featured Posts Outside Blog Attended Rain Camp Called Shot Master
Jeff, I have talked to two Loan Officers lately that use to work for a Mortgage Company, that during the Refi boom were not only charging high interest rates but also 4 - 6 points to go with them. I asked how could they sleep at night, and the answers was, they couldn't and that is why they are no longer working for this company.
9:51pm • #4
297,841 Points 110 Featured Posts Outside Blog

George,

I'll bet that company was Argent.  If it was, what they did wasn't wrong.  Again, no fiduciary responsibility exists for the direct lending rep; the only party to whom he/she is responsible is his employer.  Direct lenders offer their products only and if the borrower takes their terms without shopping, so be it.

We really need to establish a fiduciary relationship for loan brokers (and correspondents) so borrowers can understand that we are the superior choice to direct lenders. 
9:54pm • #5
385,800 Points 75 Featured Posts Localism Sponsor Outside Blog

Where does the consumers responsibility for educating themselves come in to play? 

We can't all charge the same fees for a number of reasons, first being that we do not participate in price fixing behavior.

So I expect that some will charge me more because their cost of doing business is higher.  

How do you draw the line? 
9:59pm • #6
1,360,942 Points 244 Featured Posts Outside Blog Attended Rain Camp Called Shot Master
Brian, it wasn't Argent. I won't mention the name here, but I will give you a clue. they also do income taxes for people.
10:07pm • #7
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Kristal.....this is happening more often. And to some of you, 6 months might not be much, but it's enough to ruin many lives. And is it worth it?

George......they basically left because of what they did to their clients? Was it because the lender that they worked for, basically gave an order that it was mandatory that they charge this? Just curious.

Brian......as much as you and I even talk about this...and as much as you think they have no fiduciary responsibility, I semi disagree with that. I think they do have a responsibility. Just because they don't shop it, doesn't mean that it's right. Again, sure, we all need to make money. But where is the line drawn??? This is the question.

10:07pm • #8
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Maureen.... you flew right under my radar as I was writing that. So we actually agree. Drawing the line. This is the basics that so many fail to realize or actually think about what they are actually doing to the client. It can have a negative impact on their lives if the lender goes overboard on the charges and such.

George..... now you just gave it away. There are two choices.... H & R Block or Quicken Home Loans...

10:10pm • #9
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Jeff, it was almost that blatant. And yes, that is a pretty good guess.
10:15pm • #10
NOV
01
2006

Jeff,

Why not speak about the Outlandish Fee`s that B paper lenders charge.. How can you define this?

Some of these fee`s are larger than the commish that we receive.No wonder why you guys all drive a BMW!")
7:38am • #11
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Goerge... thanks.

Scott....  "What you talking about Willis."  I drive a horse & buggy. Seriously though... you are right to a certain degree. But some of us actually earned these so called "toys" as you would call them. Again, not everyone charges these higher pts or fees.

If you saw one of my comments in another blog. There are many times to where I make the same or less on a sub prime deal than I do on a conventional deal. My job is to make sure that I get it done and not just to charge higher fees. I see many lenders not even do a deal if it won't gross them $10,000. I know one gentleman that wouldn't allow his loan officers to bring in ANY deal with less then 4 pts total, front ot back....and that it had to gross $6,000 or more. This is unexceptable. This is predatory lending then.

Thanks for the comment.
7:52am • #12
297,841 Points 110 Featured Posts Outside Blog

Jeff:

We do disagree on this. The National Association of Mortgage Brokers wrote a Mortgage Loan Origination Agreement that clearly outlines that we are not acting as a fiduciary. 

Direct lenders are worse.  They do not offer the product mix that brokers offer and can not be working in their best interest.  Their only responsibility is to the lender.

The only was to establish a fiduciary relationship with a borrower is to have a set fee agreement in place. 

Read the language of both agreements.  The NAMB contract is akin to a Vegas taxi driver dropping off businessmen at a strip club  and being compensated by the club while charging a fare.

Aha!  A blog idea! 
7:55am • #13
297,841 Points 110 Featured Posts Outside Blog

Scott: 

How does the huge fee a lender charge get a mortgage broker a BMW? That statement is about as logical as a seller suggesting that the huge transfer taxes somehow line the pockets of a Realtor.

7:56am • #14
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Brian....  oh no...  we aren't the dynamic duo that agrees now?   ;o(   Let me rephrase this, I partially agree with you. I understand about the responsibility to the lender and such. I truly do, but can you justify making $50,000 off a client for the same amount of work on someone else who you just made $2,000 on??? Wouldn't this be predatory lending?  Yes it would. Why?  Because it's not consistent and can be ruled as targeting the homeowner. If they have more equity in their house. And this equity is going to be used to make more money off of them. That is one form of predatory lending. It has nothing to do with the fiduciary responsibility then. It comes down to targeting home owners; may it be the equity in their property, their race/ethnicity, age, or even gender. Again, this all constitutes predatory lending.

In regards to Scotts comment. Realtors blow steam thinking that all loan officers make more and that it's easier because we can charge more money. It goes both ways. Some realtors can make a lot of money on a $3,000,000 house. Especially if that client is only going to finance $500,000. Our commission is based on the loan amt, not the sales price.  Again... just perception which can be blinded by thoughts and opinions.  Brian... you should be use to that comment. Besides, Scott's been doing this for a long time. I am sure he was being sarcastic about this also. It's good to have some humor in these.
8:22am • #15
297,841 Points 110 Featured Posts Outside Blog

Jeff:  I agree with you.  Consistency in pricing is the key to any predatory lending defense.  I have a friend who consistently charges 4% of the loan amount as an origination fee combined with 2% rebate...ON EVERY DEAL.  Is he predatory?  Absolutely not.  His fees aren't excessive (as defined by Section 32) and his pricing policy is consistent.  I think he has just has a higher opinion than you or I do about his value as an originator.  Of course, he funds 20% of what you do so maybe he ought to review the "elasticity of demand" chapter in his economocs textbook.

Scott:  I know you're joking...so was I.  We both know the fallacy of our statements. 

 
9:10am • #16
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Angela.... thanks for the polite compliment. And I agree, hence the reason why I wrote this.

Brian... Yes, being consistent. HUD was always about this and went after lenders that had highs and lows in regards to their fees and regards to the ethinicity of the clients.....
8:57pm • #17
1,048,851 Points 397 Featured Posts Outside Blog Attended Rain Camp Called Shot Master
I have to agree that consistency is the key no matter what you charge. As Realtors we can charge whatever we want. And commissions vary quite a bit. But that's OK as long as the consumer knows they have options and that I am charging them the same thing I charge the next person. Good post Jeff.
9:11pm • #18
NOV
02
2006
738,077 Points 231 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Bryant..... I think that is one thing that is looked upon by HUD and auditors, but the average loan officer or lender forgets about this. And charge high when they can. And I have seen lenders close up shop because of law suits based on targeting....and it comes down to not being consistent. But more so, if they do this to a certain group. Target a certain age or race, this is when it's easier to prosecute.   Thanks
4:09pm • #19


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