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Minnesota Predatory Lending Practices: Loan Origination

Predatory Mortgage Lending: Loan Origination

Buying or refinancing your home might be the most significant and complex economic undertakings of your life. An entire industry of real estate agents, brokers, lenders, and appraisers are lined up and ready to help you acquire a nice home and a fair loan.

Despite the general integrity of the industry, some mortgage lenders and professionals act in manners that do not meet legal standards. You should understand the predatory lending practices brokers and lenders engage in to become an educated consumer. Every year, misinformed homebuyers—often first-time purchasers—find themselves victims of predatory lending or loan fraud.

Balloon payments

Predatory lenders will often construct loans so payments are allocated primarily to interest. Borrowers owe a significant amount of principal and at the end of the loan term. The final payment balloons and can be equal to the remaining principal. Borrowers usually cannot come up with the money for the balloon payments. The borrowers will either lose the homes in foreclosure or be required to refinance at additional cost.

Closing Costs Schemes

Particular closing costs are inflated beyond market value to charge higher interest rates. Examples include credit reports for $100 and funding fees for $1000, which are several times the average costs.

Credit Insurance

Predatory mortgage lenders promote and sell credit insurance with loans. Insurance sold with loans can include credit life, credit disability, credit property, and involuntary unemployment insurance. Unscrupulous lenders will charge excessive premiums that are not reasonable in relation to the low payouts on losses. Credit insurance is often sold by a subsidiary insurance company of the lender.

Eliminating Low Interest Mortgages

Predatory lenders often insist that the new mortgage loans repay any present mortgages. Lenders add to the sum of the new mortgages by eliminating existing mortgages. Borrowers are left with much higher interest rates and principal amounts than necessary.

Exceeding Loan to Value (LTV)

Obtaining a loan in excess of the fair market value of the home can make refinancing and selling the home difficult, which makes the borrower more likely to be saddled with the loan for the entire term. A foreclosure sale will not cover a balance that exceeds the fair market value by 25 percent.

Excessive Recording Fees

State law requires that the documents of mortgage transactions be recorded at the local courthouse to be perfectly valid. Fees for county recording of documents are mandated by law. Predatory lenders will assess borrowers recording fees in amounts over those established by law.

Extreme Prepayment Penalties

Predatory lenders will assess excessive prepayment penalties in an attempt to secure the borrower into the predatory loan by making refinancing or selling painful to the pocketbook. The predatory lenders realize windfall profits in both the cases of prepayment and repayment. The first through unreasonable penalties and the second through unreasonable interest or fees.

False Applications

Predatory lenders will lend to borrowers without sufficient income to repay the loan. These lenders usually seek to sell the loans to investors. To sell the loan to a third party, the lender will either convince the borrower to falsify the loan application or to otherwise deceive the borrower into creating a fraudulent application. The lender must prove to the investor that the borrower has adequate income to repay the loan.

False Open End Loans

Many false open-end loans involve the predatory lender lending the entire amount of the imaginary credit line to the borrower at the outset of the loan instead of holding open a credit line that the borrower can use as needed. The loans often are not amortizing the interest, such that repayments are interest only. Interest only payments will never reduce the balance of the loan.

Flipping

Consecutive, repetitious refinancing of a loan where the balance of the existing loan is incorporated into a new loan rather than creating a distinct, new loan for the new amount. Flipping results in greater costs for the borrower. Since the current balance of the previous loan is incorporated into the subsequent loan, the repayment period is extended by each refinancing. More interest is paid because of flipping than if the borrower was permitted to repay each loan in turn.

Forging Cosigners

To create the false impression that the borrower is able to pay off the loan, 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 co-signer. The homeowner thereby loses half the ownership of the home and is saddled with a loan she cannot afford to repay.

Fraudulent Broker Fees

Predatory lenders will assess broker fees though the brokers in question were not involved in the transactions and performed no services for the borrowers.

Home Improvement Schemes

Predatory mortgage lenders misuse local home improvement companies as de facto mortgage brokers to peddle new loans. Contractors advertise to convince property owners that their homes need improvements. The companies might originate mortgages to fund the work and then sell the mortgages to predatory third-party mortgage lenders. The contractors may direct the homeowners to the predatory lenders in the first place. If the contractors and mortgage companies are in collusion, the homeowners may be unreasonably overcharged for the improvements. If the contractors are already in league with unscrupulous lenders, how likely is it that the work will be done well and as promised?

Incapacitated Homeowners

One of the more detestable predatory lending practices is loans to incapacitated persons. Lenders choose victims who do not comprehend the transactions or the documents that they sign. The incapacitated homeowner may not recognize that he is liable for a mortgage, then fails to make payments, and is foreclosed and eviction.

Kickbacks

Predatory mortgage lenders have been known to originate loans using local mortgage brokers or banks that act as finders for the lenders. The local brokers misrepresent themselves to the homeowners, saying that the brokers represent the owners to facilitate them in finding the highest quality loans available. The prospective borrowers almost always pay fees to the brokers. Instead of working for the homeowners, the brokers are employed by predatory lenders who pay brokers kickbacks for referrals for loans at high interest rates. The lending industry describes their illegal fees using euphemisms that deceive borrowers.

No Amortization

The loan is structured such that the interest is not amortized over the repayment period. The periodic payment is not enough to cover the accumulated interest and the principal increases each month. The borrower might be indebted more than the sum initially borrowed. The last payment will usually be a balloon payment.

Over Insuring

Predatory lenders can profit by over-insuring loans (insuring both interest and principal instead of only principal). In doing so, the lender or its insurance company will charge excessive premiums and provide slight or no benefit to the borrower.

Rolling Unsecured Debt into Home Loans

While there may be benefits of rolling unsecured debt, such as credit card debt, into a mortgage, the risks and pitfalls make doing so generally an unattractive choice in the end. Incorporating credit card debt into a mortgage will increase the principal loan amount, the closing costs, and the monthly payments, which increase the risk that the borrower will default and lose the home.

Solicitation

Predatory mortgage lenders tend to hit low income and minority neighborhoods with extensive marketing campaigns. Lenders advertise using commercials, direct mailings, and billboards. Some companies create deceptive advertisements to mimic Social Security benefits or various other state or federal assistance to induce homeowners to believe the advertisements are authorized or produced by the government.

Unaffordable Loans

Predatory mortgage lenders will deliberately structure loans with monthly payments that the borrower cannot cover to lead the borrower into default. Often, the borrower will return to the same lender to refinance the original loan. The lender has now trapped the borrower and is able to finagle extra fees and points. Predatory mortgage lenders will also purposely structure loans with payments the borrowers cannot repay to cause foreclosure to obtain the property and the homeowner’s equity.

Unbundling

The predatory lender provides unbundled services while charging duplicative fees. The itemized charges should be incorporated within other charges.

Unreasonable Annual Interest Rates

Predatory lenders almost always lend at unreasonable interest rates of 20 percent or higher, or which can be more than double the rates honest lenders charged for conventional mortgages. This drastically increases the cost of borrowing for homeowners, even though the lenders’ risk is minimal or non-existent.

Unreasonable Appraisal Costs

Lenders generally require that homes be appraised before the lenders will finalize loans. Appraisals should include comprehensive reports on the state of the homes—inside and out—and appraisals of similar houses in the same locality. Appraisals can also be simple exterior inspections. Comprehensive inspections are going to cost more than cursory inspections. The scam is charging the buyer for a comprehensive appraisal but providing either a simple appraisal or a forged appraisal.

Unreasonable Points

Reasonable lenders assess points to borrowers who want to buy down the interest rate on the loan. Predatory lenders assess a lot of points without the corresponding decrease in interest rate. Points can be included via prepaid finance charges, which may be 5 or 10 percent, but as much as 20 percent, of the loan. The borrower does not pay these points with cash at closing, but instead the points are financed using the mortgage, which increases the amount borrowed and produces more interest (profit) over the life of the loan.

If you believe you have been the target of a predatory lending scheme, contact or call Minnesota attorney Patrick Oden at 651.210.9409 for a free consultation. If your case is taken on contingency, then you will not have to pay attorneys fees. In many cases, the predatory mortgage lender can be required to pay attorneys fees. If your case is not taken on contingency, and the mortgage lender is made to pay attorneys fees, then you will be reimbursed for the attorneys fees that you have already paid. In all cases, you will have to pay costs—though costs can sometimes also be reimbursed by the predatory lender.

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