Predatory Lending for Real Estate Professionals

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Predatory Lending for Real Estate Professionals

• Erin Kemple
• Connecticut Fair Housing Center

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What is Predatory Lending?

• Use of fraud, lies or other deceptive tactics to
  get borrowers into a loan they cannot afford.
• Making loans to borrowers who cannot afford to
  pay them back.
• All sub-prime loans are not predatory.
• Some prime loans are predatory.

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Why Do Lenders Give Predatory Loans?

• Financial incentive structure
• Brokers are paid to originate loans, not to
  ensure they perform
• Lenders sell loans after origination so are not
  concerned about performance
• Servicers dont originate loans so have no input
  into who gets a loan
• Private companies who buy loans do not always
  monitor underwriting policies

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Why Do Borrowers Accept Predatory Loans?

• Ignorancemost borrowers do not know or
  understand the loans they are being offered
• Fearhomeowners in financial trouble may believe
  they have no other options
• Confusionborrowers may believe they are being
  given one loan, when really they are given
  another
• Fraudsome lenders lie about loan terms

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Who is likely to be targeted for a predatory loan?

• Elderly and/or disabled homeowners
• Homeowners in financial trouble
• Lower-income households
• People of color, non-English speakers, new
  immigrants
• People with limited literacy
• People with limited financial literacy

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How Will I Know if a Client has a Predatory Loan?

• When buying a home
• Borrower shows or tells you about a loan offer
  with one of the suspect terms
• Lender asks you to do something
  fraudulent/illegal
• Borrower is turned down for one loan because
  price exceeds value but is approved by another
  lender
• You have had other clients get predatory loans
  from lender

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How Will I Know if a Client has a Predatory Loan?

• When selling a home
• Seller tells you he or she is in foreclosure
• Seller wants a higher price than market will
  allow to cover loan balance
• Asked to do a price comparison so homeowner can
  refinance
• Seller tells you he or she is in bankruptcy

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Indicators of Predatory Lending Marketing

• Lender or mortgage broker approached borrower
  first.
• Lender or mortgage broker used aggressive sales
  tactics (calling all the time to pressure the
  borrower).
• The Annual Percentage Rate as listed is high (9
  is high right now. A even a little lower might
  be a problem if borrower has good credit).

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Indicators of Predatory Lending Marketing

• Lender or broker recommends paying off a low-rate
  mortgage (like a CHFA mortgage) with a high-rate
  mortgage.
• Lender suggests rolling credit card debt into
  mortgage debt.
• The amount borrowed is more than the value of the
  property (at the time of the loan).
• Lender or broker encouraged borrower to get a
  loan for more than needed to buy the house.

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Indicators of Predatory Lending The Application
Process

• The lender or mortgage broker or someone working
  for them puts false information on the
  application such as
• False salary
• Stating borrower had more than she really did
• Stating borrower had fewer debts than he really
  did
• False or inflated rental income.

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Indicators of Predatory Lending The Application
Process

• Borrowers signature was forged on the
  application or other mortgage documents.
• Fake co-signers added to application.

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Indicators of Predatory Lending The Loan

• Negative amortization (required monthly payments
  do not cover the interest due on the loan).
• High appraisal costs.
• Inflated appraisal (Did the property appraise at
  a value that is unexpectedly high for the
  neighborhood?)

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Indicators of Predatory Lending The Loan

• The loan has an adjustable rate (payment changes
  monthly, every six months, yearly).
• Annual Percentage Rate as listed on the loan is
  high (8 or 9 is high right now. Even a little
  lower might be a problem if borrower has good
  credit).
• Closing costs in excess of 5 of loan.
• Balloon payments.

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Indicators of Predatory Lending The Loan

• Padded fees to record the loan with the town.
• Back-dating of Documents.
• Charging more than once for the same service.
• Requiring credit insurance.
• Making a loan that is based on the value of the
  property and not on what the borrower can afford.

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Indicators of Predatory Lending After Closing

• Debts that were supposed to be covered by the
  loan not paid off.
• Getting pressure to refinance again soon after
  the closing.
• Excessive late fees (including daily interest)
  and other servicing charges).
• Excessive prepayment penalties.

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Indicators of Predatory Lending After Closing

• Home improvement scams
• Some predatory lenders are affiliated with home
  improvement companies
• Borrowers sign documents without understanding
  they are taking out a loan on their property
• Work is often shoddy or homeowner is overcharged
• Contractors not registered with the state

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Indicators of Predatory Lending After Closing

• Flipping/churning
• Refinancing without any benefit to the homeowner
• Usually occurs quickly after original loan is
  taken out
• Based on fraudulent appraisals or falsified loan
  documents

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What Does this Have to Do With Me?

• If real estate agent is guilty of an act which is
  dishonest, fraudulent or improper or violates any
  licensing law, CREC can
• Temporarily suspend
• Permanently revoke and/or
• Fine person up to 2,000
• Real estate agents may not receive a fee,
  commission or other form of referral fee for
  referring a borrower to any mortgage broker,
  lender or any person affiliated with such lender
  or broker.
• But, agents may suggest several lenders as long
  as no particular lender is endorsed

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What Does this Have To Do With Me?

• Agents may be asked to
• Provide information such as listings and
  comparable sales to an appraiserlegal
• Alter or exclude parts of a PS agreement
  provided to a lender or title companyillegal
• Enhance or lose verifications of income or
  employment historyillegal

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What Does this Have to Do With Me?

• If real estate agent sends buyer to a lender and
  lender is predatory
• Real estate agent could be implicated in the
  scheme
• May hurt business in the long run

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What Can I Do to Help?

• Let borrowers/homeowners know
• They can choose from a variety of lenders
• All lenders and all loan products are not the
  same
• Borrowers should not sign
• Blank documents
• Documents containing blanks
• Documents they do not understand
• Urge borrowers to get educated
• Housing counselors
• Flyers and pamphlets ( www.realtor.org )

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What Can I Do to Help?

• If a homeowner is delinquent
• Call the loan servicer
• Call the Connecticut Fair Housing Center to get
  access to free legal services
• Call a housing counselor
• If a homeowner is in foreclosure
• Get legal help from CFHC or a private attorney
• Do not refinance without getting advice from a
  lawyer or housing counselor
• Do not ignore legal papers

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What is Being Done to Stop Predatory Lending

• Proposed federal statutes
• Would change lending policies for federally
  chartered banks and depository institutions
• Stalled in both the House and the Senate
• Proposed Connecticut statutes
• Would change lending policies for state chartered
  banks and mortgage lenders who are not federally
  regulated
• Currently being discussed in the Legislature

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What is Being Done to Stop Predatory Lending?

• If passed, Connecticut legislation would
• Ban pre-payment penalties
• Require mandatory escrow of taxes and insurance
• Require lenders to evaluate a borrowers ability
  to repay the loan during the life of the loan
• Require counseling before refinancing a
  government-subsidized loan
• Allow borrowers to cure defaults at least once
  every 12 months
• Prohibit refinancing without a tangible net
  benefit to the borrower
• Give borrowers a private right of action

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Predatory Lending Where to Find Help

• Connecticut Fair Housing Center [phone]
• HUD-approved Housing Counselors - [phone]
• HOPE NOW 1-888-995-HOPE (4673)
• CT Foreclosure Hotline - [phone].
• Infoline 211

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Predatory Lending Where to Find Help

• Legal Assistance Resource Center of
  ConnecticutAbout Foreclosure - A Home Owner's
  Guide (http//www.larcc.org/pamphlets/housing/abo
  ut_foreclosure.htm)
• Statewide Legal ServicesPhone [phone]
  (Central Connecticut Middletown area)
            1-800-453-3320 (All other regions)
• Connecticut Department of Social Services (DSS)
  Foreclosure Prevention Programhttp//www.ct.gov/d
  ss/cwp/view.asp?a2353q305234pp12n1
• DSS administers a statewide housing mediation
  program, which includes a Rent Bank to pay the
  back rent or mortgage of families in imminent
  danger of being evicted.  Community
  Mediation operates this program in the greater
  New Haven area and also serves as the program's
  lead agency, providing training and technical
  assistance to other agencies and DSS.  Contact
  through 211 Infoline.
•  
• Connecticut Housing Finance Authority(CHFA) 
  Phone [phone]E-mail  info_at_chfa.org
•  

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The Connecticut Fair Housing Center

• Presented by
• Erin Kemple, Esq.
• Executive Director
• 221 Main Street
• Hartford, CT 06106
• [phone]
• www.ctfairhousing.org