Predatory Lending Practices

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Predatory Lending Practices

• Lila Dantas
• Ashley Trankle

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Presentation Structure

• Defining Predatory Lending
• Subprime vs. Predatory
• Types of Predatory Lending
• Equity stripping
• Rate-risk disparities
• Excessive foreclosures and other issues
• Predatory Lending in states
• Legislation and recent action
• Other options and Resources
• References and Glossary

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What is predatory lending?

• Consciously offering high interest loans with
  unusually high fees and hidden costs included in
  the contract, to individuals who qualify for
  lower interest loans as defined by their credit
  rating.

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Subprime vs. Predatory Subprime

• Subprime lending is the practice of charging
  high-risk customers a high interest rate.
• It is ethical, considering the additional risk.

• Predatory lending relies on deceiving innocent
  and vulnerable customers.
• It is unethical, yet legal (pending legislation
  in certain states)

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Percentage of Prime vs Subprime Lending
Note Percentage to Latinos was equal for both
Subprime and Prime.
Source Subprime Refinance Loans. ACORN.org
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Percentage of Refinance Loans from Subprime
Lenders
Source Subprime Refinance Loans. ACORN.org
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Types of Predatory Lending

• Equity stripping charging borrowers exorbitant
  fees
• Rate-risk disparities charging borrowers a
  higher rate of interest than credit history
  justifies
• Excessive foreclosures stemming from ignoring
  the borrowers ability to repay

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Equity stripping

• Exorbitant fees
• any fees greater than 5 of the loan amount plus
  any fees not resulting in net tangible benefits
  in a refinancing transaction.

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Equity stripping

• Credit life insurance
• An insurance product paid for by the borrower
  that repays the lender should the borrower die or
  become disabled.
• However, life insurance accomplishes the same
  task without incurring the excessive costs.

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Equity stripping

• Prepayment penalties
• Hidden deferred fees that strip equity from about
  half of subprime borrowers when they refinance
  later.
• 80 of subprime loans have penalties compared to
  2 of conventional loans

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Rate-risk disparities

• Steering
• a borrower is placed in a loan with higher rates
  and/or fees than the borrower qualifies
• Kickbacks
• service charges and/or compensation of brokers

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Excessive foreclosures

• Equity stripping and steering cause foreclosures
  and the loss of a familys home.
• Increased rates of foreclosures destroy entire
  communities

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Other Issues

• Credit Scoring
• Education
• Secondary Market
• Deception

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Legislation

• The Community Reinvestment Act allows consumers
  to hold banks responsible for their unethical
  behavior in lending practices.
• Slow to develop because of the rapid growth of
  the industry.
• North Carolina was the first state to enact
  anti-predatory lending laws.
• Opponents argue new regulations will cause a
  reduction in lending

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Predatory Lending in North Carolina

• No balloon payments allowed.
• No Call Provisions.
• No negative amortization allowed.
• No increase in interest rates upon default.
• No required advance payments allowed.
• No modification or deferral fees allowed.

• Limited general prepayment penalty allowed.
• Lender must receive certificate that borrower has
  received financial counseling.
• Lender must believe that the borrower can repay.

Source Firm of Lotstein Buckman, LLP
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Home Ownership and Equity Protection Act of 1994

• The act bans high interest, high fee loans that
  result from
• Balloon payments
• Negative amortization
• Default rate pre-default rate
• Calculating rebates using any other method than
  actuarial
• Most prepayment penalties

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The Feds response

• As of December 2001
• The interest rate trigger was decreased to 8
  points above Treasury Securities
• Barred loan flipping
• Lender must prove borrowers ability to repay

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What else can be done?

• Requiring full-disclosure of brokers
  compensation
• Licensing of brokers and dealers
• Provisions prohibiting equity stripping and
  locking borrowers into bad loans
• EDUCATE

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Help and Resources

• Federal Housing Administration
• (Fannie Mac, etc.)
• Community Reinvestment Act
• (hold banks accountable!)
• Housing and Urban Development
• Community groups
• www.self-help.org
• Housing assistance council

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THE END
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References

• 1. Bradley, Jeanette and Peter Skillern.
  Predatory Lending Banks trick poor into
  expensive loans. http//www.dollarsandsense.org/2
  000/0100/bradley.html
• 2. Comparison of the North Carolina Predatory
  Lending Law (SB 1149), New York Proposed
  Regulations Addressing Predatory Lending Issues,
  and TILA Section 32 Loans. Firm of Lotstein
  Buckman, LLP August 1999. http//www.mbaa.org/st
  ate_update/lib/compare102099.html
• 3. Fleishman, Sandra. Fed Acts to Curb Predatory
  Lending Practices. Washington Post. 12/31/01. Pg
  A8.
• 4. Hill, John. Lending laws in N.C. under a
  microscope. California Department of
  Corporations. 9/10/01.
• 5. Latest housing issues addressed. National
  Housing Conference. www.nhc.org/predlending.htm
• 6. Murray, Teresa. Borrowers Beware. The Plain
  Dealer. http//www.predatorylendingsucks.com/speci
  al_report_2.html

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References

• 7. Newspaper Report Legislative Progress on
  anti-Predatory Lending Legislation.
  http//www.freddiemac.com/news/analysis/pred_index
  .html
• 8. Predatory Lending. Primary Residential
  Mortgage Inc. http//www.branchpartner.com/?c16.1
  0.predatory_lending
• 9. Staten, Michael Ph.D. and Gregory
  Elliehausen, Ph.D. The Impact of The Federal
  Reserve Boards Proposed Revisions to HOEPA.
  Georgetown University. July 2001.
• 10.Stein, Eric. Quantifying the Economic Cost of
  Predatory Lending. Coalition for Responsible
  Lending. 7/25/01
• 11.Subprime Refinance Loans. Assoc. of
  Community Organizations for Reform Now.
  http//www.acorn.org/acorn10/predatorylending/
  plrepotrs/summary.htm
• 12.What is Predatory Lending?
  http//www.tellcitibank.org/predatorylending.htm

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Glossary

• Balloon Payments the final payment of a loan
  larger than the previous monthly payments the
  final balance of the loan.
• Collateral Assets pledged as security for a loan
  in the case of default.
• Credit rating an estimate of the amount of
  credit that can be extended to a borrower without
  undue risk.
• Credit scoring process by which borrower
  information, such as income, credit history, and
  job history are entered into a program and the
  risk of default is calculated.

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Glossary

• Default failure to meet obligations of an
  agreement
• Foreclosure the legal process initiated by a
  creditor to repossess the collateral for a loan
  that is in default.
• Lien a legal claim on an asset that is used to
  secure a loan and which must be paid when the
  property is sold.
• Loan Flipping refinancing a loan with a larger
  loan designed to both pay off the previous loan
  and finance the cost of the new.
• Mortgage a loan to finance a real estate
  purchase, with the asset as collateral.
• Refinancing paying off an existing loan with the
  process of a new loan.