ABUSIVE LENDING PRACTICES -
AN INTRODUCTION
There has been a continuous concern regarding
various abusive lending practices that were mostly associated with the past
sub-prime lending arena. The most recent controversy now brewing is over what
some believe to be widespread markups in homebuyers’ settlement fees.
Consumers were too often unaware of the actual
costs of settlement services. Lenders are required to provide each borrower a
booklet, prepared by the Department of Housing and Urban Development (HUD)
explaining settlement costs. Unfortunately, the booklet is not easy reading and
is often accompanied by a joke that it represents good reading for insomniacs.
Few borrowers actually peruse the booklet.
The law indicates that no person may receive
“any portion, split or percentage of any charge . . . other than for
services actually performed”. On the other hand, it does not specifically
indicate that settlement companies can not mark up various fees. In fact, the
third party fees (title, escrow, appraisal, etc.) have increased.
Consumers have long been encouraged to
“negotiate” what often appear to be substantial closing costs fees
that accompany every loan transaction. These past abuses only heightened
consumer concerns that they may be being disadvantaged.
So, let’s take a realistic look at how such
an abuse might occur. The most logical areas where markups might occur are:
·
appraisals: Depending
upon the type of loan and property, most basic appraisal fees will range from $425
to $550. The introduction of the Appraisal Management Company (AMC) process,
while proposed as a protection for the consumer, has too often resulted in higher
costs accompanied by lesser quality appraisals. (see appraisal tip sheet)
·
credit reports: Most
real estate transactions require only a “preview” three merge report
at a cost of approximately $20. Such a report provides the credit history and
scores from three credit repositories. If a borrower requires credit
corrections or changes, a “full factual” report may be required at
an approximate cost of $55. Many lenders no longer charge a fee for the initial
credit report.
·
Including non-existent
fees: The list of what are commonly called the “garbage fees” can
be daunting to many borrowers. The list includes such things as underwriting
fee, tax service and flood certification fee, document preparation fee,
processing fee, etc. While most fees are legitimate, some unscrupulous lenders
tack on such non-existent fees as a document review fee, a courier fee (when no
courier was used), etc. Unfortunately, there are a lot of garbage fees related
to every loan . . . ranging from a low of about $900 to sometimes as high as
$1,200 (not including the processing fee which can range from $450 to $650). While
it is prudent to question what might be perceived as excessively high costs,
fees have climbed and are a significant part of any loan.
·
Undisclosed Rebate
Pricing: A lender/mortgage broker acquires a “rebate” as a result
of a borrower accepting a higher than the base mortgage rate. For instance, if
the typical rate is 5.5% at a borrower’s cost of 1%, a borrower may
accept a higher rate, say 6.0% wherein the lender/mortgage broker receives a
rebate from the source lender. Typically, the rebate equals approximately the
1% origination fee amount that the borrower chose not to pay . . . hence, the
label of a “zero point cost loan” wherein the origination fee is
paid via the rebate. While this is perfectly legitimate and some borrowers
choose to do zero point financing, the abuse occurs when the amount of rebate
is significant or, worse, is undisclosed to the borrower. In the past, the borrower might have been
told that because of credit problems, lack of reserve funds, etc. that they didn’t
qualify for the best loan rates and were only eligible for the higher rate
financing with the lender/broker pocketing additional rebate. The new Good
Faith Estimate form was expected to resolve this past abuse. The form is
difficult for many borrowers to understand resulting too often in potential
exaggeration of costs. (see Good Faith Estimate tip sheet)
Unfortunately, there are borrowers
who, for various reasons, did not qualify for the best rates and were thrust
into the niche type loans with their accompanying higher interest and fees. In
these cases, the rates and fees were legitimate at the time and the borrower
was not being disadvantaged. It is these sub-prime loans that are now the
subject of close scrutiny as the number of foreclosures mount. While these loan
options were widely adopted by brokers, lender and investors during the past
years, it now appears that some borrowers may not have fully understood all the
aspects of their financing arrangement. It is another reminder that borrowers
must be confident that they are working with a reputable and honest mortgage
person.
As indicated previously, borrowers are repeatedly
encouraged to “negotiate” fees. There are some fees (as indicated
above) that are a part of every loan and must be paid. The borrower generally
ends up paying these either via cash (in a purchase transaction), via inclusion
of the fees in a refinance transaction or via rebate pricing (also mentioned
above). Reputable lenders are normally unable to “negotiate” these
fees as they have to be paid. On the other hand, lenders who are most ready to
“waive a fee” when confronted by a borrower, may have inflated
their fees in the first place. It is difficult to know. Our best advice is to
trust your instincts and function with a lender about whom you feel confident
in their honesty and integrity.
In an attempt to deter and/or prohibit unfair or
abusive markups in fees (absent additional services having been rendered) new
regulations were enacted via a new Good Faith reporting form (mentioned above).
Too often, when steps are taken to correct the kind of abuse that certainly did
occur, the actions taken represent an over-reaction and initially results in
confusion for everyone. This initially occurred with the new form but has now
seemed to settle. Never-the-less, those who are willing to skirt the law often
find other ways to do so while those lender/mortgage brokers who have always
functioned with integrity face additional disclosure rules. Unfortunately,
nothing will ever take the place of a borrower’s own diligence and
knowledge in protecting him or herself from an abusive lender.
Web Page/Abusive Lending New
The following is the latest information regarding lenders under
review for abusive lending practices
ABUSIVE
LENDING PRACTICES . . .
REMAIN UNDER REVIEW!
The introduction of sub-prime loan products played
an enormous role in home financing in past years. Such loans allowed numerous
borrowers, who were ineligible for more standard type loans, to acquire home
financing.
On the other hand, some lenders abused consumers
with high cost financing, overcharging in both interest rates and loan fees. To
make matters worse, some lenders seem to have preyed upon the most vulnerable
groups, the elderly, the low income and minorities. It is not too long ago when
some lenders literally went door to door encouraging home owners to
over-encumber their homes with equity financing known as 125% loans. The
"pitch" promoted converting credit debt to home debt. In other words,
home owners were "sold" the presumed benefits of acquiring a home
equity loan to pay off credit debt. The promise to borrowers was that by
transferring the credit debt to home debt would permit the borrower to take an
interest tax deduction for the equity financing. Unfortunately, many borrowers
were uninformed that the interest on borrowed money that exceeded the 100%
value of the property was not tax deductible. While there was a savings on the
interest rate (often reducing the 18 to 21% interest on credit cards to a more
desirable 6 to 8% home loan interest rate.) the new debt was secured by the
borrower's home and a default on the payments could result in the borrower's
loss of his/her home. Plus the reduction in their equity placed some homeowners
in jeopardy when home values declined.
Sub-prime lending grew in popularity as loan instruments became more and more
flexible. It seemed that nearly everyone could acquire a home loan via the
“stated income” or “no doc” type of loan. While
borrowers were required to pay higher interest rates, accept pre-payment
penalties and often were hit with higher fees, the enticement of being able to
own a home overcame all reluctance to this type of loan. The current sub-prime
debacle where borrowers are regularly defaulting on this higher interest rate
financing, accompanied by complaints that the terms of the loan made it
impossible for them to perform has resulted in a more restrictive lending qualifying
atmosphere.
More recently, lawmakers have proposed legislation
that will "guarantee” consumers meaningful and clearly
understandable disclosures of loan agreements". Additionally, lenders will
be held accountable for extending credit to borrowers without determining the
borrowers' capability of repaying the loan on its original terms". While
other provisions are promoted by the legislation, this requirement to determine
the borrower's ability to repay the loan raises the most concern. There is
still no agreed upon criteria with which to make this determination. There is a
fear that anytime that a borrower defaults on a loan, they will simply claim
that they were misinformed or that the original loan terms made it
"impossible" for them to repay. Bottom line, we have returned to an
old-fashioned criteria of requiring the borrower to prove their ability to pay
the mortgage. In other words, a return to documentation of income along with a
complete borrower profile that will require “qualifying” for a loan
using long time agreed upon
qualifying ratios . . . all seemingly a rational way to determine a
borrower’s capacity to acquire a loan.
But, it was a good thing to eliminate many of the niche
or sub-prime loan options. Over 200 sub-prime lenders (and some conventional
lenders) literally shut their doors in 2010 with more to follow in 2011. Unfortunately,
the qualifying criteria has become almost too severe causing complaints among
lenders and borrowers. Many now joke that we have moved from a position of
anyone able to “fog a mirror” was qualified to a situation where
capable buyers sometimes struggle with the more stringent qualifying
guidelines. Thus, the fear is that in the interest of "protecting"
consumers, some borrowers will be denied the opportunity to obtain financing of
any sort. Only time will tell!
Niche Financing
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