Predatory lending practices abound throughout the mortgage industry. General trends in predatory lending are privileged or knowledgeable parties deliberately taking advantage of less sophisticated borrowers. In some cases, predatory lending occurs due to deliberate disregard for lending laws. In others, predatory lending occurs because the mortgage origination staff is not properly educated. Here are common scenarios for predatory lending that I have found and have provided litigation support to help homeowners sue over.
- Borrower is not given information necessary to understand their financing, or
is not given the proper time to consider it. This is one of the most common signs of predatory lending. A homeowner is not given complete initial disclosures and is often not given any disclosures at all. Many times the borrower is told at closing to accept the loan and refinance at a later date. Often borrowers are not given a proper rescission time after closing to consider the terms they signed. - Lender does not properly disclose terms, or discloses conflicting terms. Many times there is a miscommunication of some sort between the loan originator and document drawing department, with terms on some forms like the Truth-in-Lending form not matching terms in other locations, such as the Note or Deed of Trust. This is fairly common.
- Lender does not make a reasonable effort to determine borrower can repay the loan, or ignores information in their possession, specifically showing that the borrower could not repay loan. Federal law requires federally regulated financial institutions to not lend based on realized foreclosure value, and to make a reasonable inquiry into a borrower’s ability to repay the loan. Many lenders ignored this and many specifically targeted borrowers who they knew would not be able to repay the loan.
- Failure to disclose hidden defects or special knowledge about a transaction. Many times someone is in the know about something bad in the transaction and deliberately fails to disclose it. I have seen lot developers sell lots with known soft soil and other conditions covered up with top soil. I have seen lenders transfer failing construction loans with inadequate reserves to finish construction to new borrowers. I have seen a lot of undisclosed property flips. I have also recognized a lot of appraisal fraud where houses appraise and are sold for far more than market value. Most of the time this happens multiple parties conspire together to hide the defect. I have also seen the occassional instance of a home being sold with black mold, extreem rotting, or other conditions which make it inhabitable covered up.
- Failure to properly service a loan. I have seen several cases where lenders deliberately fail to service a loan according to the mortgage terms. They change payment dates and create escrow shortages or double payment requirements for the sole purpose of creating a dependent trapped borrower. This highly profitable ‘oldie but goodie’ goes back to the dawn of time.
Loan servicer contributing or encouraging mortgage default. I have seen several cases where a loan servicer told borrowers to stop making payments. In one case a loan servicer told a borrower to cancel an existing modification program in order to try for the Making Homes Affordable program. The borrower did so. The servicer then declined the Making Homes Affordable program due to the investor ‘not giving them the authority to do a Making Homes Affordable Modification’. The servicer then foreclosed and refused to allow the borrower to go back to his original modification.- Failure to follow construction and other exotic loan terms or use proper due diligence. Many lenders have huge losses in their construction loan portfolio due to relying on others to watch the loan and make sure the project finished as designed. Many lenders attempted to cover up inadequate due diligence by allowing additional draws to a borrower which they could not afford and were not prequalified to refinance out.
- Failure to use a duty of care or common sense in underwriting or mortgage design. Some lenders in the past had 1% delinquency two years after their loans. Others had 60% delinquency after two years. The difference was that some lenders failed to use common sense in underwriting loans or gave out mortgages designed to fail. This is one of the drawbacks to having investment firms on Wall Street instead of mortgage professionals design mortgage guidelines.
- Fraudulent completion of a loan application or steering in completion of the loan application by loan originator. I am not just talking about stated income here. I have seen jobs, rental histories, and assets all made up or steered by loan originators.
- Monopolized transactions. I have seen several transactions where a lot developer requires a specific builder, title company, escrow company, lender, and lender’s appraiser to sell properties at inflated values and to hide ‘gifts’ and other things of value given in exchange for the purchase, like cars and boats to give the illusion that a housing tract sells at a higher price than it really is. Everyone is typically working together in this fraud against the new home buyer. Many mortgages start underwater, leaving home buyers without the ability to refinace out of adjusting ARMs or the ability to sell.
- Unlicensed activity from lenders, originators, title and escrow companies, and real estate agents. This of
ten combines with other causes of predatory lending. - Undisclosed fees. Around 1 in 4 files I audit have some sort of undisclosed or improperly disclosed fee. Mortgage Broker improperly disclosed fees are fairly common.
- Incomplete paperwork given to borrower at closing and to sign. I lost track of the amount of times a title or escrow company would record addendums to the recorded deed of trust or other mortgage documents without the borrower ever seeing them. This is very common!
