110th CONGRESS, LEGISLATIVE ISSUES A - Z
PREDATORY LENDING
ISSUE: Predatory lending refers to high-rate, high-fee home equity and first mortgage products that are intentionally structured in a manner that is deceptive and disadvantageous to borrowers. Predatory lending often involves non-sustainable loans, and frequent refinances without regard to the consumer’s ability to repay.
Some creditors may extend credit knowing that the consumer cannot afford the scheduled monthly payments or a large balloon payment due at the end of the relatively short loan term. This practice guarantees that the loan will have to be refinanced within a short time and thereby initiates a cycle of successive refinancing that either erode the borrower’s equity and credit or in the worst cases, simply delay inevitable default while increasing the borrower’s debt.
Predatory lenders often target the elderly, minorities and the disabled who have accumulated a large amount of equity in their homes. These consumers are often on fixed incomes and usually do not have the ability to repay such high-costs loans. Consequently, some consumers find themselves facing foreclosure on homes they have been loyally paying off for years and in which they have achieved high equity.
Types of predatory lending practices include:
“Flipping”: Loan flipping generally refers to repeated refinancing of a mortgage loan within a short period of time with little or no tangible net benefit to the borrower. Loan flipping typically occurs when a borrower is unable to meet scheduled payments, or repeatedly consolidates other unsecured debts into a new, home-secured loan at the urging of a lender. Lenders who flip loans tend to charge high origination fees with each successive refinancing, and may charge these fees based on the entire amount of the new loan, not on just the incremental amount (if any) added to the loan principal through the refinancing. In addition, each refinancing may trigger prepayment penalties, which could be financed as part of the total loan amount, adding to the borrower’s debt burden.
Property flipping primarily affects the Fair Housing Administration (FHA) single-family program and refers to the process in which recently acquired property is resold for a considerable profit with an artificially inflated value. This should not be confused with legitimate investors who purchase homes with an investor loan, rehabilitate the property and resell for a profit. The predatory lending aspect includes fraudulent abuse of FHA loans, in which the purchaser states that he or she intends to inhabit the property in both the loan application documents and the resale or purchase agreement.
"Balloon Payment": A scheduled final payment that is more than twice as large as the average of earlier scheduled monthly payments. Oftentimes, the borrower cannot handle the final balloon payment and is forced into refinancing at a higher rate with additional closing costs, which can also trigger prepayment and/or late fee penalties.
"Packing": The practice of selling unnecessary and overpriced products or unrelated goods or services in conjunction with a high-cost home loan. For instance, a lender may “pack” a loan with unnecessary insurance premiums, sometimes selling a premium for an amount that is higher than the actual loan, and/or selling premiums to borrowers whom have no beneficiaries.
"Reverse Redlining": Specifically targeting and aggressively soliciting homeowners in predominantly lower-income and minority communities who may lack sufficient access to mainstream sources of credit. People that are “house rich but cash poor,” usually the elderly, are targeted. Elderly homeowners are likely to have built up significant equity in their homes, the values of which may have appreciated substantially over time. Some elderly homeowners living on fixed incomes need cash for medical and other expenses, but lack an adequate understanding of the complexities of financial transactions, the usual cost of home repairs, or their own credit-worthiness. Some elderly are widows who may have little or no experience with finances prior to the death of a spouse. In addition, some elderly borrowers suffer from medical problems, diminished faculties, and isolation that impair their ability to understand loan terms and/or make them especially vulnerable to aggressive sales tactics. Frequently unable to perform household repairs, some elderly appear to be specifically targeted by predatory lenders engaged in home improvement scams. Because of these particular vulnerabilities, predatory lenders may charge these homeowners rates that do not correspond to their levels of risk, or convince them to take out loans that are larger than necessary or inappropriate for their needs.
CUNA POSITION: CUNA has developed a set of guidelines to be used to measure the support of legislation that addresses predatory lending as bills are introduced. CUNA would support a federal preemption only if all guidelines are met. (Anti-Predatory Lending Law Guidelines & Comparison)
OPPOSING VIEWS: There is contention among Members of Congress, financial trade and consumer groups about the inclusion of a federal pre-emption in any predatory lending bill.
IMPACT ON CREDIT UNIONS: Though credit unions oppose predatory lending practices and seek to provide a safe and affordable alternative to individuals within their field of membership, it is important to maintain the distinction between predatory lending and subprime lending. Subprime lending involves loans to persons who do not qualify for a financial institution’s “prime” rate – because of a poor credit history, former bankruptcy filing or simply the lack of credit history. A prime rate is usually the lowest rate of interest a financial institution offers to its best customers for short term unsecured loans.
Subprime loans are offered to consumers at a higher rate of interest, which offsets the higher risk of lending to consumers with poor credit histories. Fair subprime loans are not structured in a deceptive or disadvantageous manner, but rather is a necessary tool giving borrowers with a poor credit history the ability to build (or rebuild) their credit.
STATUS/OUTLOOK: House Financial Services Chairman Barney Frank (MA-4) is expected to introduce legislation this fall addressing the subprime mortgage market and/or predatory lending. CUNA will monitor any further developments in this area. In addition to the anticipated Rep. Frank bill, other Senators and Representatives have introduced legislation addressing the current mortgage crisis.
S.1222, the STOP FRAUD Act, was introduced by Sen. Barack Obama (IL) on April 25, 2007. Referred to the Senate Banking, Housing, and Urban Affairs Committee.
H.R. 2061, the Predatory Mortgage Lending Practices Reduction Act, was introduced by Rep. Stephanie Tubbs-Jones (OH-11) on April 26, 2007. Referred to the House Committee on Financial Services.
H.R. 3012, the Fair Mortgage Practices Act of 2007, was introduced by Rep. Spencer Bachus (AL-6) on July 12, 2007. Referred to the House Committees on Financial Services and Judiciary.
H.R. 3081, the Fairness for Homeowners Act of 2007, was introduced by Rep. Keith Ellison (MN-5) on July 18, 2007. Referred to the House Committee on Financial Services.
CONTACT: Allen Chew, (202) 508-6796, achew@cuna.coop.
Related Documents:
December 3, 2007: Letter to Senator Dick Durbin regarding Mortgage Bankruptcy Legislation
Anti-Predatory Lending Law Guidelines & Comparison
