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Predatory Mortgage Lending

In recent years, more and more families have been able to achieve the American Dream of homeownership, but for many there have been serious costs involved. Abusive mortgage loans can push homeowners into foreclosure and reduce or end their ability to expand their wealth. Foreclosures rob people of their shelter and hurt whole neighborhoods and cities.

Predatory lending is most common in the “subprime” market, although not all “subprime” loans are predatory. But all subprime loans cost more and often come with monthly payments that increase over time. Consumers with weaker credit ratings usually get “subprime” mortgage loans. However, many of the families steered into high-cost subprime loans could qualify for more affordable, less risky financing. Also, lenders sell subprime loans to people of color more often than to whites.

Subprime mortgage loans result in foreclosure far more frequently than mainstream “prime” loans, ranging from 6 to 20 times higher in most states. The cost of getting a subprime mortgage can be much higher than getting a “prime” mortgage loan. For example:

Say you take our a $200,000 loan for 30 years. For the same house, you can pay $231,600 interest cost in the prime market, or $379,000 in the subprime market. You’ll save $148,000 by having a prime instead of a subprime mortgage loan!

Prime Interest rate is---6%
Monthly payment is---$1,200
Total interest cost is ---$231,600
Subprime Interest rate is---9%
Monthly payment is---$1,600
Total interest cost is---$379,000

What’s in the name?

Predatory mortgage loans occur in the “subprime market” and less often in the “prime” or mainstream market. “Subprime” borrowers are borrowers with weaker credit or no credit history. The lending industry also uses the term “nonprime” mortgage loans.

Who makes predatory mortgage loans?

Unscrupulous lenders, brokers, and appraisers.

What are mortgage abuses?

Excessive fees: “Points” and fees are costs not directly reflected in the interest rates. Because these costs can be paid by adding them to the mortgage loan amount, they are easy to disguise or downplay. On competitive mortgage loans, fees below one percent of the loan amount are typical. On predatory mortgage loans, fees totaling more than five percent are common.
Abusive prepayment penalties: If you have a subprime mortgage, you have a strong incentive to refinance as soon as your credit improves. But the majority of subprime mortgages carry a prepayment penalty – a fee for paying off a loan early. In the subprime market, families routinely pay a heavy price for improving their credit and qualifying for a better mortgage loan.
Kickbacks to brokers (yield-spread premiums): A “yield spread premium” is extra cash brokers receive from lenders for delivering loans with inflated interest rates (i.e., higher than the rate the lender is willing to accept). These kickbacks may explain why African-Americans and Latinos often get loans with higher interest rates compared to white borrowers with the same qualifications.
Loan “flipping”: A lender “flips” a mortgage loan by refinancing it to generate fee income without providing any benefit to the borrower. Flipping can quickly drain home equity and increase monthly payments – sometimes on homes that had previously been owned free of debt. Senior citizens who may own their homes outright may fall victim to flipping.
Loose qualifying standards: Predatory mortgage lenders often fail to consider a family’s ability to repay adjustable-rate mortgages (ARMs), including taxes and insurance, after the initial introductory period is over. Few lenders consider whether you and your family can make the maximum payment that could be due during the loan term. In some cases, lenders do not even require standard proof of income, making an already risky loan even more dangerous. In 2006, a surge of serious delinquencies on adjustable interest rate loans provided an early indication that many of you are struggling with these loans.
Mandatory arbitration: Some loan contracts require “mandatory arbitration,” meaning that you are not allowed to go court if the lender or broker cheated you or sold you a predatory loan.
Steering and targeting: Predatory lenders may steer you into subprime mortgages, even when your family could qualify for a mainstream mortgage. Steering often involves aggressive sales tactics and sometime outright discrimination. As early as 2000, government agencies found that African-American families living in upper-income neighborhoods were more likely to receive subprime loans than white families living in low income neighborhoods.

Are predatory mortgage loans legal?

Current federal law does not prohibit many widespread abuses in the subprime market. Fee-packed refinances, exorbitant prepayment penalties, and pricing practices that can lead to unfair discrimination are all legal by federal law. At the state level, thirty-one states have taken specific actions to prevent predatory lending in the subprime mortgage market. Research shows that the stronger state laws have been highly successful for consumers, providing better quality loans. Positive effects include:

A significant drop in abusive loans, with growing access to responsible subprime mortgages
Comparable or even lower interest rates
The spread of better lending practices nationwide

The subprime market is very dynamic and features an array of products with varying loan terms (e.g. 50-year-fixed, hybrid adjustable-rate, interest only, no document/low document etc). Due to the “innovations” of predators, loopholes in federal law and weak state laws cannot keep pace. The successful track records of state predatory mortgage lending laws can rein in new abusive tactics as they arise.

How can I avoid a predatory mortgage loan?

Predatory lenders promise loans that are “too good to be true” and pressure borrowers to take them on the spot.

Always shop around - download AFFIL's mortgage shopping guide (PDF) for help.
Ask questions.
If you don’t understand the loan terms, talk to someone you trust to look at the documents for you.
Understand if your loan rate will be fixed or adjustable. If adjustable, will you be able to afford the monthly payments when the rates go up?
Don’t trust ads promising “No Credit? No Problem!”
Ignore high-pressure sales tactics.
Remember that a low monthly payment isn’t always a “deal.” Look at the TOTAL cost of the loan.
Never sign a blank document or anything the lender promised to fill in later.
Remember the rule of thumb: If it seems too good to be true, it is!

What can you do if you have a predatory mortgage loan?

AFFIL can’t guarantee that help is on its way, but these are our best suggestions.

File a complaint: You should consider filing a complaint with your state consumer protection or banking department. This office may be part of your attorney general’s office or it may be located in your financial institutions department.
Contact your state legislator: You may also write to your state legislator and either urge the passage of a mortgage law if your state lacks one or ask that your state’s mortgage law be repealed or improved.
Contact your federal representatives: You may also write to your U.S. Congressperson or Senator. It is important that they know your story so they can decide whether changes in the federal laws on debit cards need to be made.
Find a lawyer: AFFIL is not a lawyer referral service and cannot refer you to a specific lawyer. If you want to talk with a lawyer who might help you with your debt problems, you can review the list of members of the National Association of Consumer Advocates (NACA). You can also contact your state bar association’s lawyer referral service.

What do we know about this industry?

There has been stupendous growth in subprime mortgage lending in the past decade. Only a decade ago, the subprime market was a small fraction of the home loan market. At year-end 2005, it had grown into a $665 billion business. In 2006 the subprime mortgage market had $1.2 trillion of mortgages outstanding. About one in every four home loans signed in 2005 was subprime.

How much do predatory mortgage loans cost consumers nationally?

In 2001, the Center for Responsible Lending estimated that predatory mortgage lending costs homeowners $9.1 billion each year. Predatory mortgage lending is also tied to huge increases in foreclosure rates. Foreclosures are devastating for families and are harmful for entire communities and the American economy.