The Ethics of Predatory Lending in the Housing Industry

The Ethics of Predatory Lending in the Housing Industry

The real estate industry is thriving with approximately sixty-eight percent of all Americans being homeowners. With low interest rates, 1st time home buyer down payment assistance programs, and government funded educational opportunities (i.e. the Home Ownership Center of Greater Cincinnati), the real estate and mortgage lending industries will continue to flourish. However, there are some unethical lending practices that are threatening the housing industry as a whole.

Those involved in the mortgage lending process have some duty to the borrower. They are expected to perform their specific duties in an ethical manner and have some form of direct or indirect contact with the client. Banks (Prime Market): Banks are lenders who generally handle all facets of the lending process through their own institution. They function differently from brokers in that they usually only service those clients with good credit ratings/scores of 700 or more. Mortgage Brokers (Sub-prime Market): According to HUD, the Department of Housing and Urban Development, mortgage brokers are involved in about sixty percent of all mortgage loan transactions. Brokers try to find the best loan for their clients by shopping their loan applications around to lenders who are willing to accept the clients credit package. Brokers generally service clients, known as B-C-D credit clients, with ratings/scores of 650 and below. In some instances, a major problem for borrowers is that a broker may work in the best interest of the lender as well. Furthermore, in some states they can act as brokers and lenders. Brokers can be considered dual agents. Brokers (1) originate loans using "table funding" provided by a pre-arranged buyer of the loan (2) originate loans using a line of credit from a bank/financial institution (3) originate loans using their own funds (4) bring the borrower and lender together in a transaction that they do not originate. Real Estate Agents: In most cases, Realtors refer borrowers to a lender or mortgage broker. They are paid a percentage of the sales price of a home. The seller pays a Realtors fee. Closing Agent: Closing agents perform property title searches and prepare documents for the actual closing of the sale of a home. Most closing agents are lawyers. The borrower pays for the closing agents fees. Mortgage Servicer: A servicer collects monthly mortgage payments and holds money in an escrow account to pay for property taxes and homeowners insurance. Mortgage Insurance Companies: Mortgage insurance companies are generally used if the borrowers down payment are less than twenty percent of the purchase price of the home. This is called PMI (Private Mortgage Insurance). The cost of private mortgage insurance is included in a buyer's monthly payment.

What is happening is that there are some unethical lending practices that are threatening the housing industry as a whole. The concern involves the practices of some sub-prime lenders. These practices are considered to be "predatory" on consumers. Sub-prime lenders offer home loans (Equity Loans & 1st Time Home Purchase Loans) to moderate to lower income families. These clients are considered to be high credit risk borrowers, also know as B-C-D credit clients. Interest rates and other loan terms generally cost more than those paid by clients served by prime lenders with better credit records (A credit clients). Sub-prime borrowers end up paying more simply because the risk of loan repayment is fundamentally higher than that of a prime market borrower.

These predatory practices include, but are not limited to:

* Extremely high interest rates, discount points, closing costs, and broker fees.

* Borrowers with inadequate income, receiving loans that they will default on.

* Flipping--occurs when someone makes a new loan to refinance an already existing loan.

* Debt consolidation in the form of an unaffordable home equity loan.

* Packing--the selling of additional products without borrowers informed consent (i.e. credit life insurance being implied as necessary to obtain a loan).

* Failure to report good payment on a borrower's credit report.

* Falsifying loan documents.

* Making loans to mentally incompetent parties.

* Mailing "live" loan checks to clients that do not request them.

Through the use of false promises and sneaky sales tactics, borrowers are convinced to sign a loan contract before they have had a chance to review the paperwork. If the borrower is allowed the chance to go over the fine details of the contract, a significant amount of the borrowers targeted by predatory lenders haven't been updated enough to really understand what they are signing. In most cases, sub-prime borrowers do not hire attorneys to represent them. They either don't have the cash flow to do so, or they are not made aware of the opportunity. An example of the predatory lending practice of high interest rate financing is as follows:

A $100,000 mortgage at 8% and zero points over a 30-year time period yields interest worth $164,155. Not all loans are available at 8% because not all borrowers have great credit. Now, let's say that 8% is the base rate for loans today but rates as high as 12% and zero points will be allowed. This means that a $100,000 loan over 30years would have a projected interest cost of $270,300. Any loan with a higher projected yield--including interest, points, loan discount fees, origination fees, and other payments to a lender will be defined as "predatory".

In some cases, predatory loans carry high up-front fees as well. These fees are added to a clients loan balance, decreasing the homeowner's equity. When a borrower has trouble re-paying the debt, they are often encouraged to refinance the current loan. This is attractive to the loan holder because they see this as a way out of foreclosure, when in actuality the refinancing of the current loan decreased their equity even more. The effect of this can eventually cause foreclosure.

Predatory loans are considered to be the new horror of the mortgage lending industry. Predatory lenders are in it for the money. There are a number of ways lenders make money in the predatory market. They can basically take advantage of a borrower by charging extremely high fees