Origination of the loan (continued)
Bank fraud and the many different ways that banks and lenders can trick homeowners into giving up their homes, and a legal remedy to recover TILA violation fines and possibly void the lenders security interest in the property.
Unbundling. This is another way of padding costs by breaking out and itemizing charges that are duplicative or should be included under other charges. An example is charging a loan origination fee (which should cover all costs of initiating the loan) and then imposing separate, additional charges for underwriting and loan preparation.
Prepayment Penalties and Fees. Predatory lenders often impose exorbitant prepayment penalties. This is done in an effort to lock the borrower into the predatory loan for as long as possible by making it difficult for her to refinance the mortgage or sell the home. For example, a homeowner has a high cost mortgage loan with a balance of $132,000 which she is unable to refinance at a lower rate because there is a $6,200 prepayment penalty due at the end of her fifth year paying this mortgage. Predatory mortgage lenders often charge a fee for informing the borrower or a lender of the balance due to pay off the existing mortgage loan. The loan documents almost never authorize such a fee. These practices provide back end interest for the lender if the borrower does prepay the loan.
Mandatory Arbitration Clauses. Pre-dispute, mandatory, binding arbitration clauses limit the rights of borrowers to seek relief through the judicial process for any and all claims and defenses the borrower may have against the mortgage lender, mortgage broker, or other party involved in the loan transaction. By inserting these clauses in the loan documents, some lenders attempt to obtain an unfair advantage by relegating their borrowers to a forum perceived to be more favorable to the lender. This perception exists because discovery is not a matter of right, but is within the discretion of the arbitrator; the proceedings are private; arbitrators need not give reasons for their decisions or follow the law; a decision in any one case will have no precedential value; judicial review is extremely limited; and injunctive relief and punitive damages are not available. Furthermore, the lender is not required to arbitrate claims it may have against the borrower. If the borrower defaults on the loan, the lender proceeds directly to foreclosure.
Flipping. Loan flipping happens when mortgage lenders and mortgage brokers aggressively try to persuade homeowners to refinance repeatedly when the new loan does not have a reasonable, tangible net benefit to the borrower considering all the circumstances, including the terms of both the new and refinanced loan, the cost of the new loan, and the borrower's circumstances. Reduction of monthly payments alone is not a tangible benefit to the borrower. Predatory mortgage lenders and brokers hook the borrower into refinancing by offering lower monthly payments and lower interest, refinancing out from under a balloon payment or variable rate mortgage, or by offering additional cash. Each time the borrower refinances the amount of the loan increases to include additional origination fees, points, and closing costs. Also, the term of the loan is extended. If the loan amount is increased and the term is extended, the borrower will pay much more interest than if the borrower had kept the original loan. If the borrower actually needs more money, it would be better if the lender made a second, separate loan for the additional amount needed. A powerful example of the exorbitant costs of flipping is the case of Bennett Roberts, who had eleven loans from a high cost mortgage lender within a period of four years. See Wall Street Journal, April 23, 1997. Mr. Roberts was charged in excess of $29,000 in fees and charges, including 10 points on every financing, plus interest, to borrow less than $26,000. The purpose of flipping is to keep the borrower in a constant state of indebtedness. To paraphrase from the famous Eagles' song, "Welcome to the Hotel California, you can check in but you can never check out."
Recommending Default in connection with a Refinance. Predatory mortgage lenders and brokers often recommend or encourage the borrower to stop making payments on their existing mortgage loan and other loans or debts because they will refinance "soon." However, the closing on the refinance is delayed and sometimes never happens. If the refinancing occurs, the borrower feels compelled to go through with the closing despite the high interest rate, points, and fees and other abusive features of the loan because the other creditors are demanding payment on their loans, possibly threatening foreclosure or other legal action. Also, the new lender charges an interest rate higher than originally promised, and justifies the higher rate by telling the borrower that their credit records now show no or slow payments on their bills.
Modification or Deferral Fees. Some predatory mortgage lenders charge borrowers a fee or other charge to modify, renew, extend or amend a mortgage loan or to defer any payment due under the terms of the mortgage loan, even though the contract does not authorize such a fee.
Spurious Open End Mortgages. In order to avoid making required disclosures to borrowers under the Truth in Lending Act, many lenders are making "open-end" mortgage loans. Although the loans are called "open-end" loans, in fact they are not. Instead of creating a line of credit from which the borrower may withdraw cash when needed, the lender advances the full amount of the loan to the borrower at the outset. The loans are non-amortizing, meaning that the payments are interest only, so that the balance is never reduced.
Paying Off Low Interest Mortgages. A predatory lender usually insists that its mortgage loan pay off the borrower's existing low cost, purchase money mortgage. Instead of lending the borrower only the amount he actually needs in a second, separate loan, the lender makes a new loan paying off the current mortgage. The homeowner loses the benefit of the lower interest rate and ends up with a higher interest rate and a principal amount that is much higher than necessary.
Paying Off Forgivable Loans and No-interest Loans. Many low income homebuyers obtain down payment assistance grants from state and local agencies. These grants are made in the form of second mortgages that are forgiven as long as the homebuyer remains in the home for five or ten years. Other government programs allow low income and elderly homeowners to obtain grants for necessary home improvement work to bring homes up to code standards. These grants are also made in the form of mortgage loans that are forgiven as long as the homeowner remains in possession of the home for five or ten years. When many predatory mortgage lenders make loans to these homeowners, they insist that these forgivable loans be paid off (to increase the amount borrowed) even though these loans would be forgiven in a matter of a few short years. Habitat for Humanity provides home purchase mortgage loans on which no interest is charged to low income homebuyers. Predatory mortgage lenders have targeted Habitat for Humanity homebuyers in Georgia and North Carolina for high cost mortgage loans, offering "cash out" loans to entice them and then requiring them to paying off their no interest Habitat mortgage loans.
Shifting Unsecured Debt Into Mortgage. Mortgage lenders badger homeowners with advertisements and solicitations that tout the "benefits" of consolidating bills into a mortgage loan. The lender fails to inform the borrower that consolidating unsecured debt such as credit cards and medical bills into a mortgage loan secured by the home is a bad idea. If a person defaults on an unsecured debt, they do not lose their home. If a homeowner rolls their unsecured debt into their mortgage loan and default on their mortgage payments, they can lose their home. Furthermore, since unsecured debt generally is paid off between three and five years, shifting unsecured debt into a mortgage loan extends the payoff period to 15 to 30 years. Paying off unsecured debt with a mortgage loan also necessarily increases closing costs because they are often calculated on a percentage basis, thereby increasing the loan balance. Whereas the old total monthly household debt payments may in some cases be less than the monthly payments on the new mortgage loan, the monthly mortgage payments are often more than the previous mortgage payments, thus exacerbating the risk that the homeowner will lose the home to foreclosure.
Making Loans in Excess of 100% Loan to Value (LTV). Some lenders are making loans to homeowners in amounts that exceed the fair market value of the home. This makes it very difficult for the homeowner to refinance the mortgage or to sell the house to pay off the loan, thereby locking the homeowner into a high cost loan. Normally, if a homeowner goes into default and the lender forecloses on a loan, the foreclosure sale generates enough money to pay off the mortgage loan and the borrower is not subject to a deficiency claim. However, where the loan is 125% LTV, a foreclosure sale may not generate enough to pay off the loan, and the lender may pursue the borrower for the deficiency.
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