Fair Lending Act: Stopping Predatory Lending

New changes in Florida have been enacted to crack down on predatory lenders. Predatory lending is a pejorative term used to describe practices of some lenders, appraisers, mortgage brokers and home improvement contractors. There are no legal definitions in the United States of predatory lending, though there are laws against many of the specific practices commonly identified as predatory, and various federal agencies use the term as a catch-all term for many specific illegal activities in the loan industry. One less contentious definition of the term is “the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.” Other types of lending sometimes also referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high.

These lenders target those who can least afford to lose money, and they are consumers who are already in dire financial straits. Predatory lenders offer easy access to money. Unfortunately they incorporate high-pressure sales tactics, set inflated interest rates, charge outrageous fees, demand unaffordable repayment terms, and invoke harassing collection tactics to achieve their goals. Homeowners can be tricked into taking out a loan that they cannot afford to repay and, therefore, risk losing their home to foreclosure. To combat predatory lending, the Florida Fair Lending Act, effective October 2, 2002, specifically prohibits predatory tactics on high cost home loans, including:

  • Charging prepayment penalties for longer than three years
  • Increased interest on loans going into default
  • Balloon payments on loans that mature in less than 10 years
  • Extending credit regardless of a borrower’s ability to pay
  • Making direct payments to home improvement contractors
  • Calling a loan due even though the borrower has complied with the terms of the loan
  • Refinancing a loan during the first 18 months, unless there is a benefit to the borrower
  • Offering to originate a loan at the borrower’s home without a prearranged appointment
  • Charging late fees that exceed five percent of the payment

The new law also specifically requires lenders to disclose certain facts about the loan at least three days prior to closing the deal, including:

  • A mortgage will be placed on the borrower’s home, and they could lose the home in the event of foreclosure
  • Interest rates and terms can vary, depending on the lender or broker
  • Borrowers should consider consulting a HUD approved credit counseling agency or a financial advisor regarding financing of their home
  • Debt consolidation can be a useful tool if the borrower does not take on additional short-term debts
  • Loan applicants do not have to accept the loan, even though they have filled out an application
  • Changes in loan terms will require another three-day disclosure period. However, predatory lending also involves a wide array of abusive practices not listed above. Below are brief descriptions of some of the most common
  • Bait and Switch Schemes: The lender may promise one type of loan or interest rate but, without good reason, gives you a different one. Sometimes a higher (and unaffordable) interest rate doesn’t kick in until months after you have begun to pay on your loan
  • Equity Stripping: The lender encourages you to borrow heavily from the equity in your home (the amount you own free and clear of your mortgage) as an easy way to get additional money, consolidated debtor fund home repairs, knowing that the fees and payments are so high you may not be able to make them. You dramatically reduce your equity and, in the worst case, the lender forecloses on the loan, takes possession of your home, and strips you of the equity
  • Loan Flipping: The lender encourages you to get additional cash by refinancing your mortgage again and again. This tactic significantly increases your debt because fees (often exorbitant) are tacked on to each loan transaction, and you may pay a higher interest rate than with your original loan. You become saddled with higher payments, higher debt, and the risk of losing your home
  • Loan Packing: The lender adds charges into the loan contract for overpriced items or items you don’t need or didn’t use, often totaling thousands of dollars. Examples: The lender may pressure you into buying insurance you don’t need or trick you into paying for phony services
  • Home Improvement Scams: A contractor talks you into costly or unnecessary repairs, steers you to a high-cost mortgage lender to finance the job, and arranges for the loan proceeds to be sent directly to the contractor. All too often, the contractor performs shoddy or incomplete work, and the homeowner is stuck paying off a long-term loan where the house is at risk. Mortgage Servicing Scams: After getting the loan, you’re told you owe additional money for bogus taxes, insurance, legal fees or late fees. Or, if you try to pay off the loan, the lender provides inaccurate information that causes you to pay too much or discourages you from refinancing with another lender
  • Excessive Fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common
  • Abusive Prepayment Penalties: Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all subprime mortgages carry a prepayment penalty — a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length
  • Kickbacks to Brokers (yield spread premiums): When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays a “yield spread premium” — a kickback for making the loan more costly to the borrower
  • Mandatory Arbitration: Some loan contracts require “mandatory arbitration,” meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing
  • Steering and Targeting: Predatory lenders may steer borrowers into subprime mortgages, even when the borrowers could qualify for a mainstream loan.

Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms. Remember, if a deal to buy, repair or refinance a house sounds too good to be true, it usually is!

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