Bank Fraud Victims


There are many different ways that banks, lenders and brokers can trick homeowners into giving up their homes.


There is a legal remedy to recover Truth In Lending Act violation fines, void the lenders security interest in the property and collect money damages


Find out more about how your Broker or Lender may have violated the Truth in Lending Act and other consumer protection laws...


Origination of the Loan


Solicitations. Predatory mortgage lenders target low and moderate income and minority neighborhoods for extensive marketing. They advertise through direct mail, telephone and door to door solicitations, flyers stuffed in mailboxes, and highly visible signs in these neighborhoods. They advertise on radio stations with a large minority audience and employ television commercials that feature celebrity athletes. Many companies deceptively tailor their solicitations to resemble Social Security or other government checks to prompt homeowners to open the envelopes and otherwise deceive them about the transaction.


Home Improvement Scams. Predatory mortgage lenders use local home improvement companies essentially as mortgage brokers to solicit loan business. These companies target homeowners and solicit them to execute home improvement contracts. The company may originate a mortgage loan to finance the home improvements and sell the mortgage to a predatory mortgage lender, or steer the homeowner directly to the predatory lender for financing of the home improvements. There are many scams involving home improvements.


Sometimes the contractor falsely claims that HUD will guarantee that the work will be done properly and/or that HUD will pay for the home improvements. In reality, HUD only guarantees to the holder of the mortgage that HUD will pay the mortgage if the homeowner defaults. HUD then pursues the homeowner for payment.


The homeowners are often grossly overcharged for the work, which the contractors often perform shoddy work and fail to complete as agreed. They sometimes damage the homeowner's personal property in the process. In other cases, the contractor fails to obtain required city or county permits, thereby making sure that local code officials do not inspect the work for compliance with local codes and do not require that the shoddy work be corrected.


Some predatory mortgage lenders issue payments to the home improvement contractor without ensuring that the work has been properly completed according to the terms of the contract. Some predatory mortgage lenders issue checks payable solely to the contractor, thereby bypassing the homeowner.


Some home improvement companies solicit home improvement contracts with the intent to have the work financed and immediately begin the work prior to the expiration of the homeowner's three-day right to cancel the transaction.


Some home improvement contractors have the homeowner sign a cash home improvement contract for an amount the homeowner cannot afford in a lump sum. When the contractor arranges financing with the predatory mortgage lender and the homeowner objects to the terms of the predatory loan, the contractor threatens to place a lien on the property and sue the homeowner unless the homeowner goes through with the financing.


Predatory mortgage lenders deny responsibility for the overpriced, shoddy and incomplete work, even though they previously arranged for these home improvement companies to solicit loan business for them, and sometimes referred the homeowner directly to the unscrupulous contractor.


Mortgage Broker's Fees and Kickbacks.

Predatory mortgage lenders also originate loans through local mortgage lenders who act as "bird dogs", or finders for the lenders. These brokers represent to the homeowners that they are working for them to help them obtain the best available loan, and the homeowners usually pay a broker's fee. In fact, the brokers are working for predatory lenders, who pay brokers kickbacks to refer borrowers to them. Mortgage brokers steer borrowers to the lender who will pay him or her the highest fee, not to the lender who will give the borrower the lowest interest rate and fees. Without the borrower's knowledge, the lender charges an interest rate higher than that for which the borrower would otherwise qualify in order to pass on to the borrower the cost of the kickback. On loan closing documents, the industry uses euphemisms or their abbreviations for these kickbacks: yield spread premiums (YSP) and service release fees (SRF). Paid Outside Closing (POC). The industry also calls this bonus upselling or par-plus premium pricing; we call it paying unlawful kickbacks.


Steering to High Rate Lenders. Banks and mortgage companies steer customers with less than perfect credit to high rate lenders, often a subsidiary or affiliate of the bank or mortgage company. Some banks and mortgage companies steer customers - especially minorities - who may have good credit and would be eligible for a conventional loan to high cost lenders. Sometimes the customer is steered away even before completing a loan application. Kickbacks or referral fees are paid as an incentive to steer the customer to a higher rate loan. This practice of steering these applicants to high rate lenders is called downstreaming. On the other hand, when people with good credit go to predatory mortgage lenders, the lender does not upstream the applicant to a bank or conventional mortgage company for a low cost mortgage loan.


Making Unaffordable Loans. Some predatory mortgage lenders purposely structure loans with monthly payments that they know the borrower cannot afford so that when the homeowner is led inevitably to the point of default, she will return to the lender to refinance the loan, and the lender can impose additional points and fees. Other predatory mortgage lenders, called hard lenders, intentionally structure the loans with payments the homeowner cannot afford in order to lead to foreclosure so that they may acquire the house and the valuable equity in the house at a foreclosure sale.


Falsified or Fraudulent Applications. Some predatory mortgage lenders knowingly make loans to unsophisticated homeowners who do not have sufficient income to repay the loan. Often such lenders plan to sell the loan on the secondary market, especially through a process of securitization. This process generally involves oversight and due diligence by the purchaser to ensure that each borrower appears to have sufficient income to repay the loan. Knowing that these loan files may be reviewed at a later date by subsequent purchasers, such lenders have the borrowers sign a blank application form and then insert false information on the form, claiming that the borrower has employment income that she does not, so it appears that she can make the payments.


Adding Inappropriate Cosigners. This is done to create the false impression that the borrower can afford the monthly payments, even though the lender is well aware that the cosigner has no intention of contributing to the payments. Often, the lender requires the homeowner to transfer half ownership of the house to the cosigner. The homeowner thereby loses half the ownership of the home and is saddled with a loan she cannot afford to repay.


Incapacitated Homeowners. Some predatory lenders make loans to homeowners who are clearly mentally incapacitated. They take advantage of the fact that the homeowner does not understand the nature of the transaction or the papers that she signs. Because of her incapacity, the homeowner does not understand that she has a mortgage loan, does not make the payments, and is subject to foreclosure and subsequent eviction.


Forgeries. Some predatory lenders forge loan documents. In an ABC Prime Time Live news segment that aired April 23, 1997, a former employee of a high cost mortgage lender reported that each of the lender's branch offices had a "designated forger" whose job it was to forge documents. Forgeries are used to refinance a customer into another high cost mortgage with the same lender, to show apparent approval for payouts to home improvement contractors when the work is shoddy and/or incomplete, and to show apparent approval for such charges as credit insurance premiums.


High Annual Interest Rates. Because the purpose of engaging in predatory lending is to reap the benefit of high profits, these lenders always charge extremely high interest rates. This drastically increases the cost of borrowing for homeowners, even though the lenders' risk is minimal or nonexistent. Predatory lenders may charge rates of 10% and more, substantially higher than the rates of 7% to 8% on conventional mortgages.


High Points. Legitimate lenders charge discount points to borrowers who wish to buy down the interest rate on the loan. Predatory lenders charge high points, but offer no corresponding reduction in the interest rate. These points are imposed through prepaid finance charges (or points or origination fees), which are usually 3% to 10%, but may be as much as 20%, of the loan. The borrower does not pay these points with cash at closing. Rather, the points are always financed as part of the loan. This increases the amount borrowed, which generates more actual interest to the lender.


Balloon Payments. Predatory lenders frequently structure loans so that the borrower's payments are applied primarily to interest, and at the end of the loan period the borrower still owes most or all of the principal amount borrowed. The last payment balloons to an amount often equal to 85% or so of the original principal amount of the loan. The homeowner cannot afford to pay the balloon payment, and either loses the home through foreclosure or is forced to refinance with the same or another lender for an additional term and additional points, fees, and closing costs.


Negative Amortization. This involves structuring the loan so that interest is not amortized over the term. Instead, the monthly payment is insufficient to pay off accrued interest and the outstanding loan balance therefore increases each month. At the end of the loan term, the borrower may owe more than the amount originally borrowed. With negative amortization, there will almost always be a balloon payment at the end of the loan.


Credit Insurance - Insurance Packing. Predatory mortgage lenders market and sell credit insurance as part of their loans, often without the knowledge or consent of the borrower. Typical insurance products sold in connection with loans include credit life, credit disability, credit property, and involuntary unemployment insurance, and debt cancellation and suspension agreements. Lenders frequently charge exorbitant premiums, which are not justified based on the extremely low actual loss payouts. Frequently, credit insurance is sold by an insurance company which is either a subsidiary of the lender or which pays the lender substantial commissions. They over-insure borrowers by providing insurance for the total indebtedness, including principal and interest, rather than merely the principal amount of the loan. They also under-insure borrowers by providing insurance for less than the outstanding principal balance and less than the full term of the loan. In short, credit insurance becomes a profit center for the lender and provides little or no benefit to the borrower.


Padding Closing Costs. In this scheme, certain costs are increased above their market value as a way of charging higher interest rates. Examples include charging document preparation fees of $350 or credit report fees of $300, which are many times the actual cost.


Inflated Appraisal Costs. In most mortgage loan transactions, the lender requires an appraisal. Most appraisals include a detailed report of the condition of the house, both interior and exterior, and prices of comparable homes in the area. Others are "drive-by" appraisals, done by someone simply looking at the outside of the house. The former naturally costs more than the latter. However, in some cases, borrowers are charged for a detailed appraisal, when only a drive-by appraisal was done.


Inflated Appraisals. In order to make large loans, predatory mortgage lenders arrange for appraisals that inflate the true value of the house. The homeowner is then stuck with the new mortgage, unable to sell the house or refinance in the future because the mortgage balance exceeds the true value of the home.


Padded Recording Fees. Mortgage transactions usually require that documents be recorded at the local courthouse, and state or local laws set the fees for recording the documents. Predatory mortgage lenders often charge the borrowers a recording fee in excess of the actual amount established by law.


Increased interest rate after default. Some predatory mortgage lenders make loans that allow the interest rate to increase if the borrower defaults on the loan, which makes it even more difficult for the homeowner to catch up the payments when they recover from a temporary financial loss.


Advance Payments from Loan Proceeds. Some predatory mortgage lenders make loans in which more than two monthly payments are consolidated and paid in advance from the loan proceeds. The payments can be used to mask a loan that is being made to a borrower who has no reasonable prospect of paying the loan. By creating this initial reserve of advance payments, the lender can use this reserve to keep the loan current for a period and make the loan appear justified. In addition, the lender's deducting these payments from the loan proceeds gives the lender free use of the borrower's money that the borrower is paying interest on.


Bogus Mortgage Broker Fees. In some cases, predatory lenders finance mortgage broker fees when the borrower never met or knew of the broker. This is another way such lenders increase the cost of the loan for their own benefit.


Continue: Origination of the Loan


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