“A Pale Green MermaidBlog”
Since the government is in transition and the banks are not necessarily acting in a fair manner educate yourself to protect yourself!
Seven Signs of Predatory Lending
Predatory mortgage lending involves a wide array of abusive practices. Here are brief descriptions of some of the most common.
- Excessive Fees
- Abusive Prepayment Penalties
- Kickbacks to Brokers (Yield Spread Premiums)
- Loan Flipping
- Unnecessary Products
- Mandatory Arbitration
- Steering & Targeting
Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.
Abusive prepayment penalties
Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all subprime mortgages carry a prepayment penalty — a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.
>> More about prepayment penalties…
Kickbacks to brokers (yield spread premiums)
When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays a “yield spread premium” — a kickback for making the loan more costly to the borrower.
>> More about yield spread premiums…
A lender “flips” a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments — sometimes on homes that had previously been owned free of debt.
Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
Some loan contracts require “mandatory arbitration,” meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.
>> More about mandatory arbitration…
Steering & Targeting
Predatory lenders may steer borrowers into subprime mortgages, even when the borrowers could qualify for a mainstream loan.Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.
According to a government study, over half (51%) of refinance mortgages in predominantly African-American neighborhoods are subprime loans, compared to only 9% of refinances in predominantly white neighborhoods.
Loan Closing Checklist From www.Seattle.gov
Before Signing Day
- Contact the Escrow Agent and request copies of your completed documents at least 1 day before your appointment to sign your loan papers.
- Visit a local housing counselor, attorney or a trusted family member or friend to review all documents. Make sure you understand all the terms of the loan.
- Check your Promissory Note:
- Is the interest rate correct?
- What is the term of the loan (30 years, 20 years or 15 years)?
- Is there a Prepayment Penalty? Is there a Balloon Payment? If you are unsure of the impact of these features, talk to a lawyer or non-profit housing agency.
- If your loan is an Adjustable Rate Mortgage (ARM), you should receive an ARM disclosure or Rider. Review this document. Make sure you understand how often your rate can increase, how much your payment can increase when the rate goes up, and what the maximum interest rate and the maximum monthly payment are.
- Review your HUD-1 Settlement Statement:
- Verify all fees. Be sure each fee on the HUD-1 also appears on the Good Faith Estimate. There should be no surprises at this late stage. If the fees are substantially different, do not sign any documents unless you agree with the new terms.
- If you are refinancing, what is the check amount you will receive? Is it the amount that you were expecting? All debts that you planned to pay off should be listed, along with the amounts that will be mailed to creditors.
- If a broker is involved, is he charging anything other than a broker fee? (For example, is he also charging a processing fee, an underwriting fee, or other kind of fee that you were unaware of?)
- Is there a yield spread premium (YSP)*? Be sure to ask your escrow agent even if you don’t see one. YSP’s sometimes are hard to spot on the HUD-1.
* Yield Spread Premiums are fees that lenders pay to mortgage brokers when they sell you a higher interest rate. Do you see a YSP on your HUD-1 settlement statement? If so, you may not be receiving the lowest interest rate that was available to you.
At the Signing Appointment
Check the figures on the Promissory Note and the HUD-1 that you are about to sign. Do they match the documents you received earlier from the Escrow Agent? If any terms are different, do not sign unless you agree with these new terms.
Before you leave your Signing Appointment
Be sure you receive copies of each of the following signed documents upon leaving the signing appointment:
- Deed of Trust
- Estimated HUD-1 Settlement Statement. (You should receive your final HUD-1 a day or two after your loan closes)
- Truth in Lending Disclosure
- Servicing Disclosure
- Insurance Disclosure (If you purchased any insurance products from the lender);
- *3-Day Right to Cancel (For refinance or equity loans only).
*Remember: You have 3 days to change your mind after you sign your loan documents for a refinance or equity loan. If you decide you do not want the loan within this 3-day “recission” period, you can simply walk away. Just give a signed copy of the “Notice to Cancel” to your lender. You can find this document among your closing papers.
Within 1 week of signing your loan documents, you should receive a final HUD-1 Settlement Statement in the mail. If you do not receive this information, contact your escrow agent immediately. This document is your official accounting of all monies paid into escrow and distributed.
Be sure to request a copy of the following items from your lender:
- Your credit report
- Your property appraisal
All these documents make up your Personal Loan File. Keep these together with all other items relating to your new loan in a safe place.