Predatory Lending Information

Predatory Lending: How It’s Destroying the American Dream

The American Dream is about to crumble for millions of Americans who signed up for adjustable rate mortgages they cannot afford. For many, the dream is like a bubble that’s already burst. Residential foreclosure activity in California surged to its highest level in more than 10 years this year, according to reports by real estate data service, Data Quick. That, of course is the result of slower home sales and flattening prices.

Refinancing is probably the only hope for millions of Americans to save their homes. But predatory lenders have made it extremely hard for the average American. These are lenders who circle like vultures around the heads of distressed homeowners, at first offering them attractive interest rates and no closing fees. But when the deal is done, the homeowner likely ends up being slapped with a larger monthly payment, closing fees, prepayment fees or some other surprise that wasn’t divulged to him or her by the lender.

What do predatory lenders typically do? They charge excessive fees, points and interest rates. They tend to use adjustable rate mortgages that increase irrespective of market conditions. They often use aggressive or deceptive ways to sell their loans often targeted at certain racial groups or struggling neighborhoods.

Typically, predatory lenders zero in on homeowners who have equity in their homes, but may be struggling to make payments or may be facing problems that lead to financial issues such as loss of a job, death of a spouse or health problems. Some lenders even send out their people to the neighborhoods to talk to neighbors and see who’s in trouble. In a nutshell, these predatory lenders often target seniors, people with low or limited income, single moms and minority groups.

Take the story of Patricia Montejano, a working mother and student at El Paso Community College in Texas, who had the most unpleasant encounter with predatory lenders two years ago. According to an article in The Prospector, a student publication, Montejano was delighted when she was handed over the keys to her new home and told that she would only have to make monthly payments of $400.

But her happiness was short-lived. Within two years, she learned that she had got a loan at an extremely high interest rate – 16 percent. She is now an employee for the Association of Community Organizations for Reform Now (ACORN) and educates the public about the problem of predatory lending.

Here are some of the classic warning signs or symptoms you need to watch for:

• Did your lender ask you to include false information on your loan application?
• Were you asked to leave parts of your application blank?
• Did you lender or broker change any of the information on the form?
• Did you not get all four disclosures: Good Faith Estimate, Special Information Booklet, Truth In Lending and HUD-1 Settlement Statement?
• Is your loan amount higher than your home value?
• Did you end up paying more in “unexpected costs”?
• Did you find after the settlement that your monthly payments were higher than you expected, based on the initial disclosures?

If you answered “yes” to most of these questions, then your lender was not being entirely honest with you and you were most likely a victim of predatory lending.

So, can consumers get legal remedies against these lenders? The answer, depending on individual cases, is yes. The answer lies in the Truth in Lending Act or TILA, a federal law enacted in 1968, to protect consumers in credit transactions. This law mandates clear disclosure of key terms of the lending arrangement and all costs. So, if the court finds that the lender has not clearly stated these important loan details, the borrower may be able to cancel the bad loan. This is known as “rescission,” which basically allows the borrower to void the bad loan and replace it with one that he or she can actually afford.

It should be noted that TILA does not regulate the charges that may be imposed for consumer credit. On the other hand, it requires a maximum interest rate to be stated in variable-rate loans secured by the borrower. Most importantly, TILA requires “disclosure” before credit is extended to the consumer. In some cases, such disclosure must be made even in periodic billing statements. Under Regulation Z of the Truth in Lending Act, disclosure must be made of the following credit terms:

• Finance Charge: This is an important aspect of the disclosure and refers to the amount that the lender charges for the loan or credit
• Annual percentage rate: This must be disclosed on an annual basis
• Amount Financed: This is the amount that the consumer has borrowed
• Payments: This includes the total number and amount of periodic payments over a certain number of years to be made by the borrower or homebuyer
• Total Sale Price: This refers to the total cost of the purchase on credit and that includes the down payment as well as the monthly payments.

These disclosures are required to be made in a clear and conspicuous manner and the consumer must be provided a copy of these documents where the disclosures appear. It is always advisable for the consumer or homebuyer to retain these documents in case a question about payments arises in the future.

A lender who violates these disclosure requirements or fails to comply with the Truth In Lending Act, may face substantial penalties. For example, such a lender may be sued for twice the amount of the total finance charge on the loan. This can be quite a large amount in the case of a home loan. The victim may also be awarded costs and attorney’s fees. Although in some cases, the consumer may be able to buy more time, lawsuits must generally be begun within a year of the violation.

Here are some informational resources on predatory lending:

U.S. Department of Housing and Urban Development (HUD)
California Department of Consumer Affairs
Better Business Bureau
Association of Community Organizations for Reform Now
National Economic Development and Law Center
Mortgage Bankers Association of America California Predatory Lending Lawyers

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Predatory Lending Lawsuits And
The Notice of Right to Cancel

The term “predatory lending” includes a variety of fraudulent home mortgage lending practices. Often times, predatory lenders attempt to pressure the consumer to take on a home loan which the consumer simply cannot afford. Through the use of false promises and deceptive sales tactics, borrowers are baited into signing loan contracts which are not in their best interest.

Predatory loans are bad for borrowers because they often carry high up-front fees that are added to the loan balance, which results in decreasing the homeowner’s equity. In addition, predatory loans almost never take into consideration the borrower’s actual ability to make the scheduled payments. This can lead to financial ruin for many borrowers who end up incurring late charges, delinquency reports and ultimately face foreclosure as a result of the mortgage fraud.

The borrower who has been defrauded will usually have a horror story to tell about the mortgage broker who mislead or even flat out lied to them about the key rates and terms of their home loan. Usually this involves the broker’s misrepresentations about the interest rates or the broker’s failure to disclose a high pre-payment penalty. Many clients were assured they were getting a fixed interest rate loan, only to find out after the loan closed that they were given an adjustable rate mortgage, or worse yet, a negative amortization loan.

The best legal recourse for a borrower who has fell prey to predatory lending tactics is to seek rescission of the bad loan. Rescission voids the predatory loan, which is later replaced with one the borrower can afford. In addition, the rescission remedy usually results in a drastically reduced principal owed by the borrower because all of the interest and fees paid by the borrower are given back following rescission. Also, a borrower’s attorney fees are to be paid by the lender as part of the rescission remedy.

The rescission remedy is a powerful way to obtain justice for the borrower who has fallen victim to a predatory loan. The Truth In Lending Act, or TILA, is the federal law which allows a borrower to obtain rescission if in fact the borrower’s federal rights have been violated. While there are several violations of TILA which will entitle a borrower to the rescission remedy, the most effective and straightforward way to obtain rescission is when the borrower has evidence that the lender did not comply with TILA’s “Notice of Right to Cancel” provision.

The “Notice of Right to Cancel” is one of the most vital disclosure documents which must be provided to the borrower at closing. The Notice discloses all the pertinent information the borrower needs to unwind or cancel the loan transaction should the borrower be unable to consummate the loan transaction. It can be thought of as a federal “cooling off period”. TILA mandates that all lenders confirm that the Right to Cancel notice is properly provided to the borrower with all of the essential information the borrower needs to exercise the right to cancel.

TILA’s Right to Cancel requirements are very specific and were designed to protect the consumer. Each borrower must receive two copies of the Notice of Right to Cancel at closing. The notice must clearly inform the consumer of their right to rescind the transaction and must also explain how to exercise the right. In addition, the notice must also disclose the exact date on which the rescission period expires. Congress felt so strongly when they enacted TILA, that even a minor technical violation with the Notice will provide the borrower an additional 3 years within which to exercise the right to cancel the predatory loan.

While it is usually someone such as a notary that fills in the vital information on the Right to Cancel notice, the lender has a duty to review the final loan documents to ensure that the borrower was provided with accurate information. Many times lenders fail to review the loan documents. If the lender does not ensure that the borrower was provided with an effective notice, the borrower then has the powerful right to rescind the loan for up to 3 years after the closing. This rescission remedy was intended to even the playing field, since rescission can not be obtained from the dishonest mortgage broker whose misrepresentations were made verbally and were not recorded in any documents.

If a borrower was not given a copy of the loan documents at the signing, then the borrower was never even provided with a Right to Cancel notice and rescission is available. The borrower who is concerned should look through their loan documents to see if they were provided with a Notice of Right to Cancel and if so, look to see if the dates were filled in correctly to disclose the three day right to cancel. If the borrower was provided with a notice that did not contain the correct expiration date for rescission, that borrower is likely the victim of a predatory loan and rescission is an available remedy.

A defective Notice of Right to Cancel is by no means the only way to prove a predatory lending case, but it is definitely one that provides the client with the best remedy. Rescission often allows the borrower to keep their home and owe less on it because of the injustice which has been committed. A borrower who feels they have been the victim of predatory lending tactics should contact an attorney to discuss their legal rights and remedies.