Up to this point, the discussion of mortgage fraud has focused on methods that individuals use to illegally or unethically pocket millions of dollars. In these cases, lending institutions have been the primary victims of the fraud. However, the lenders are not always the victim when it comes to mortgage fraud. Indeed, lenders can be the predators and borrowers of the victims. Predatory lending is a widely used and contemptuous term for lenders that take advantage of the financially vulnerable, elderly, less educated, and desperate. The practice is found across the loan industry and is commonly heard in reference to payday loans, lease to own, credit cards, and other types of consumer debt. In real estate, predatory loans happen in almost every possible circumstance to almost every possible type of consumer, although they are most often associated with sub-prime mortgages, refinancing, and home equity lending. Many of these loans are legal according to the letter of the law, and lenders will argue that the high rates and charges are necessary to offset the risk of lending to individuals with poor credit. Nonetheless, predatory lending practices have come under greater scrutiny as foreclosure rates have continued to soar. With the majority of these foreclosures, sub-prime mortgage, and other predatory tactics certainly played a major role in the defaults.
Predatory lending is the source of considerable distress for besieged borrowers, but according to the FHA, these practices are actually threatening the economic and social fabric of the United States. While, as stated previously, many of these practices are legal, but many are also unethical and cause long-term damage and – most damagingly – long-term distrust for the real estate and mortgage industries.
Common Predatory Practices
Predatory practices cannot all be provided, as new and “better” situations occur. What follows is a list of only a few categories and a few examples of predatory practices.
Charging excessive interest or fees:
- Contractors or home improvement sales people that sell improvements and finance them at high-interest rates
- Packing huge fees into loans that strip equity and increase interest expenses, such as charging 8 percent in fees when the norm is 1 or 2 percent.
- Loan flipping that convinces homeowners to refinance over and over when there is no benefit to the borrower, but does strip equity.
- Charging fees for unnecessary or fictional products or services such as the bogus “Federal Housing Administration insurance against property defects.”
- Encouraging borrowers to take out loans that have balloon payments, which will force the borrower to refinance the loan at a higher interest rate and more excessive fees.
- Encouraging or committing fraud: Using false appraisals in order to sell properties for more than they are worth or,
- Persuading a client to lie about their income, expenses, or funds available for down payments on a loan application or,
- Changing the loan terms after the agreement or submit loan agreements that are blank contain false information or,
- Charging higher interest rates because of a person’s race, national origin, religion not based on credit scores
- Taking advantage of the desperate or uneducated.
- Pushing “cash-out” refinances to borrowers in desperate need of cash for medical emergencies, unemployment, or debt issues.
- Concealing in a contract’s fine print that the borrower cannot sue the lender for fraud.
- Intentionally loaning more money that the borrower is able to repay.
- Saying that refinancing is the best way to solve a borrower’s credit problems. It is not.
Encouraging loans that a negative amortization situation, which occurs when the monthly payment is less than full interest and does not pay any principal. The unpaid interest is added to the principal, and the balance owed increases. These practices not only endanger homeowners but have contributed to the high number of foreclosures that began occurring in 2006. With the rising numbers of foreclosures and complaints regarding these practices, there are sure to be amendments to the Home Ownership and Equity Protection Act (HOEPA) that will place restrictions on loan amounts. As with any law, however, there will always be ways to circumvent the rules.