Predatory Lending Threatens Dream of Ownership
Savvy Consumers Know Where to Turn for Information
BY GARY REIME
Special to the Business Journal
Home ownership symbolizes the American Dream.
For some, however, buying or refinancing a home has been a nightmare. The process can be intimidating, and consumers with limited real estate experience are vulnerable to abusive lending practices.
Commonly referred to as “predatory lending,” these abuses include purposeful actions taken by a lender to provide a loan without providing consumers with the information necessary to make a knowledgeable decision. The goal of these deceptive practices is profit for the loan originator or possible foreclosure on the property and profit from its resale.
Federal regulators define predatory lending as involving one or more of these elements: unaffordable loans based on the borrower’s assets rather than his or her ability to repay, inducing a borrower to repeatedly refinance his mortgage so that the lender can charge high fees or points, and engaging in fraud or deception to hide some of the costs of a loan.
Predatory lenders often target consumers that cannot qualify for conventional loans. For these people, ill-advised borrowing against their home to pay for expensive fee-padded loans with little positive benefit can lead to foreclosure.
Unchecked, predatory lending practices destroy consumer confidence and undermine the integrity of the industry. But here in San Diego, you can be assured that the industry is fighting back against predatory lending.
Despite sensational media coverage, the fact is that, due to the actions of a few dishonest operators, the entire mortgage broker industry has been painted negatively. The vast majority of mortgage brokers are totally committed to helping their clients qualify for and secure the very best possible home financing.
– Proposed Legislation
May Actually Harm Buyers
As is usually the case, politicians have responded to the stories regarding predatory lending by introducing proposals they claim will punish predatory lenders. The problem with many of these proposals, however, is that most of them actually punish consumers by eliminating financing options that many times are the only way first time homebuyers can get into a new home.
Moreover, while legislative solutions to predatory lending are well intended, they can provide consumers with a false sense of security. As stories of predatory lending continue to make headlines, it is more important than ever that consumers are aware of the fine print, especially when it comes to loan commissions and fees.
The problem is that current law does not treat all industry members equally. For example, commercial banks are not required to disclose the additional profit they make in originating a loan. Mortgage brokers, on the other hand, must disclose exactly what they have earned in return for helping their client find a loan.
The lesson for consumers is simple. Using a mortgage broker ensures people will have all of the information necessary to make a knowledgeable loan decision.
The real recipe for protecting consumers throughout the loan process includes consumer education and industry activism.
Because thousands of Californians seek the assistance of mortgage professionals every year, it is important that consumers know what to look for and which questions to ask when choosing a loan originator. The California Association of Mortgage Brokers has provided consumers with tips on protecting themselves from loan abuses.
The association recommends that consumers consider the following guidelines when purchasing or refinancing a home:
o Never sign a contract without knowing and understanding all terms of the loan. If the loan terms are not clear, ask the broker to take the time to explain the “fine print.”
o Never allow yourself to be pressured into a loan. First, make sure that you can afford the proposed monthly payments and that you understand, and are comfortable with, all loan terms.
o Do not agree to payments that you cannot comfortably make. Reputable mortgage originators strive to make consumers aware of and comfortable with their loan options. Remember, you have three days to cancel a refinance transaction for any reason if you are uncomfortable with the loan. This is called the three-day “Right-of-Rescission.”
o Never sign a blank form in a loan package, and be sure to get copies of all documents bearing your signature. Also, request a detailed accounting of all fees associated with the transaction and question any fees you do not understand.
o Make sure the loan officer is licensed to originate mortgage loans. Question potential brokers regarding their participation in continuing education courses and certifications, making sure your originator is up-to-date on all loan policies and applicable laws.
o Most importantly, shop around for a loan originator that you are comfortable with. CAMB offers free and confidential referral services so consumers can choose a member broker in their area. Consumers can take advantage of this online by going to (www.cambweb.org) or by phone at (800) 253-2262.
Reime is president of the California Association of Mortgage Brokers, San Diego chapter.