04.01.07
MN AG’s Predatory Lending Report - A Request for Ethical Conduct.
Background:
Because prevailing mortgage rates have been low over the last several years, the desire for high interest rate mortgage securities is higher than ever. In the steady search for those higher yields, lenders are screaming for securities that contain high yields. This means the market is actively seeking subprime mortgages because they carry interest rates 1-2-3% higher than traditional loans and frequently carry a hefty prepayment penalty as a double-whammy.
Mortgage securities buyers say the lending standards on these “exotic” loans has become so negligent, that it is almost an invitation for borrowers and lenders to commit mortgage fraud and it would appear these subprime exotic loans are playing a significant a role with significant mortgage fraud, leading to skyrocketing delinquency rates.
The Attorney General Report
I suggest you read the Predatory Lending Report,
The study shows that “..the number of home foreclosures soared in 2005 and 2006 at a rate without precedent in the modern era.” The report goes on to say “The most important fact driving the problem of predatory lending is the extraordinary growth of subprime lending over the last decade.”
The proposed legislation that comes out of the report is no more than a request for ethical conduct and common sense. The old fashioned “do unto others Golden Rule.” It merely asks for Lenders to use prudent and appropriate lending practices in helping customers select a loan that is appropriate to their circumstances; and to disclose the potential outcome scenarios of the sub-prime loans. For example (similar to the Truth in Lending Law) is asks for “disclosing the maximum possible payment that could be due during the first seven years of the loan term,, which amount shall be calculated with reference to the maximum interest rate allowable under the loan, assuming no default…” Seems reasonable to me.
The report also suggests that a law be passed so that a loan officer could not use “churning,” which it defines as arranging for a refinance which provides NO BENEFIT TO THE BORROWER (but obviously provides benefit to the loan officer…)
Read the report, it would be good law for all of us in the mortgage and title industries, as well as the public.
Robert Franco said,
April 5, 2007 at 3:50 pm
Regarding:
“For example (similar to the Truth in Lending Law) is asks for “disclosing the maximum possible payment that could be due during the first seven years of the loan term,, which amount shall be calculated with reference to the maximum interest rate allowable under the loan, assuming no default…” Seems reasonable to me.”
I most certainly agree that this would be reasonable - in fact, I would say that it is prudent. However, I don’t think it would do much in practice. Subprime borrowers, in particular, do not care about their payment in the future. Most just want to get the loan; either they really want to buy that house that they can’t afford, or they desperately need to refinance to consolidate other debt that they cannot afford. You can explain what happens if the interest rate goes up, or what happens if they don’t make their payments, but all that they care about is “Can I get the loan?” and “How much are my payments NOW.”
In many cases, the payment on their new mortgage is irrelevant - no matter what ridiculous rate they are charged or how much they have in closing costs - it will be cheaper than the 6 maxed-out credit cards they currently have. Its a short-term solution to a long-term problem and they know that; so does their mortgage broker. However, their situation today leaves them with little choice and it will at least prolong the inevitable. And, predatory lenders know that - they understand that these people ONLY care about getting the loan and they will sign anything you put in front of them.
Jeanne said,
April 9, 2007 at 11:58 am
WHY DO PEOPLE GET INTO A FINANCIAL FIX?
Is it that they are not taught fiscal responsibility? I was brought up in a home where if you couldn’t afford to buy something and pay for it NOW, you didn’t buy it. Credit was for those impossible things to pay for - unexpected medical bills, car repairs, etc. as well as for a house and car payment. NOT for buying toothpaste at Target.
I was always upset that high schools teach English, History, etc. but so very little on day to day finances. Good grief! Almost all of us want the American Dream - a house of our own. Almost all of us have mortgages. It is the biggest payment we make each month. Why don’t parents and schools teach their kids about use of credit cards and how mortgages work. Financial problems are the leading reason for unhappy lives, including divorce. We are doing an enormous dis-service NOT to teach basics our Kids, both by education and example about good financial responsibility!
Robert Franco said,
April 9, 2007 at 2:41 pm
I think a part of the problem lies in the unwarranted extension of unsecured credit by the credit card companies. They seem to prey on college students with “special offers”. I remember when I was in the army; I couldn’t get a credit card, even with a steady pay-check. A friend of mine that was working part-time and a full-time college student was able to get a credit card with a $5,000 limit. The temptation is too great for a poor college student to rack up a load of debt that will forever be a problem.
Shortly after I began in the title business, I saw one subprime lender offering mortgages at a ridiculous rates to “help homeowners lower their monthly payments” by consolidating unsecured credit card debt into 30 year loans. At the closing they provided them with a credit card application. It was sickening to see them prey on desperate people then “help” them back into the same situation.
Jeanne said,
April 9, 2007 at 3:07 pm
I completely agree! One of the things the proposed predatory lending law focuses on is putting some responsibility for writing a knowingly bad loan for the consumer back on the lender. It would require the lender to VERIFY “reasonable ability to pay the loan ” It would bar lenders from avoiding legal responsibility for writing a bad loan. (Currently they can have the borrowers sign a waiver, so the lender has no fiduciary responsibility.)
The Law would also provide a penalty for a lender giving a “grossly unsuitable loan” While these things only seem like “the right thing to do,” it is obvious the system is inducing loan officers to do NOT what is in the interest of the public, but rather to do what is in the interest of the loan officer - pad his/her pocket.