LATEST PERSONAL LOAN NEWS Protecting Singapore Borrowers From Predatory Lending Practices
LATEST PERSONAL LOAN NEWS Protecting Singapore Borrowers From Predatory Lending Practices
Borrowers Be Informed! Know Your Rights. Do Not Get Trapped By Despicable Predatory Lending Practices. www.sgmoney.sg
Predatory lending comes in a number of different forms. In each instance, however, a financial institution takes unfair advantage of a consumer’s financial needs by charging high interest rates and other unconscionable fees and charges.
Predatory Mortgage Lending drains wealth from families, destroys the benefits of homeownership, and often leads to foreclosure. It is estimated that predatory mortgage lending costs Americans more than $9.1 billion each year.
Predatory mortgage lending involves a wide array of abusive practices. Here are brief descriptions of some of the most common.
- Excessive fees: Points and fees are costs not directly reflected in a mortgage’s interest rate. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees equaling less than 1% of the total loan amount are typical. On predatory loans, fees often total more than 5% of the loan amount.
- 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 is often effective for more than three years and/or costs the consumer more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.
- Kickbacks to brokers (yield spread premiums): When brokers deliver a loan with an inflated interest rate (i.e., higher than the interest rate the consumer qualifies for), the lender often pays a “yield spread premium” — a kickback for making the loan more costly to the borrower. This kickback goes directly in to the pockets of the broker and consequently incentivizes the broker to put consumers in higher interest rate loans.
- Loan flipping: A lender “flips” a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Every time a loan is refinanced the consumer has to pay out fees. These fees can amount to thousands of dollars. Flipping can quickly drain borrower equity and increase monthly payments — sometimes on homes that had previously been owned free of debt.
- Unnecessary products: Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
- Forced arbitration: Some loan contracts require “forced 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. Because the arbitrator is often looking for the repeat business of the mortgage lender there is an automatic bias. Consequently, forced arbitration makes it much less likely that a borrower will receive a fair and appropriate remedy when they have been wronged.
- 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.
Short-Term Predatory Lending
Payday Lending (sometimes called cash advance): is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. To qualify, borrowers need only personal identification, a checking account, and an income from a job or government benefits, like Social Security or disability payments.
Predatory lending is the unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly defines predatory lending as “imposing unfair and abusive loan terms on borrowers.” Though there are laws against many of the specific practices commonly identified as predatory, various federal agencies use the phrase as a catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing which is the unfair, deceptive, or fraudulent practices of lenders and servicing agents during the loan or mortgage servicing process, post loan origination.
One less contentious definition of the term is “the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.” Other types of lending sometimes also referred to as predatory include payday loans, certain types of credit cards, mainly subprime, or other forms of (again, often subprime) consumer debt, and overdraft loans, when the interest rates are considered unreasonably high. Although predatory lenders are most likely to target the less educated, the poor, racial minorities, and the elderly, victims of predatory lending are represented across all demographics.
Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower’s ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.
Abusive or unfair lending practices
There are many lending practices which have been called abusive and labeled with the term “predatory lending.” There is a great deal of dispute between lenders and consumer groups as to what exactly constitutes “unfair” or “predatory” practices, but the following are sometimes cited.
- Unjustified risk-based pricing. This is the practice of charging more (in the form of higher interest rates and fees) for extending credit to borrowers identified by the lender as posing a greater credit risk. The lending industry argues that risk-based pricing is a legitimate practice; since a greater percentage of loans made to less creditworthy borrowers can be expected to go into default, higher prices are necessary to obtain the same yield on the portfolio as a whole. Some consumer groups argue that higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk.
- Single-premium credit insurance. This is the purchase of insurance which will pay off the loan in case the homebuyer dies. It is more expensive than other forms of insurance because it does not involve any medical checkups, but customers almost always are not shown their choices, because usually the lender is not licensed to sell other forms of insurance. In addition, this insurance is usually financed into the loan which causes the loan to be more expensive, but at the same time encourages people to buy the insurance because they do not have to pay up front.
- Failure to present the loan price as negotiable. Many lenders will negotiate the price structure of the loan with borrowers. In some situations, borrowers can even negotiate an outright reduction in the interest rate or other charges on the loan.
- Consumer advocates argue that borrowers, especially unsophisticated borrowers, are not aware of their ability to negotiate and might even be under the mistaken impression that the lender is placing the borrower’s interests above its own. Thus, many borrowers do not take advantage of their ability to negotiate.
- Failure to clearly and accurately disclose terms and conditions, particularly in cases where an unsophisticated borrower is involved. Mortgage loans are complex transactions involving multiple parties and dozens of pages of legal documents. In the most egregious of predatory cases, lenders or brokers have not only misled borrowers but have also altered documents after they have been signed.
- Short-term loans with disproportionally high fees, such as payday loans, credit card late fees, checking account overdraft fees, and Tax Refund Anticipation Loans, where the fee paid for advancing the money for a short period of time works out to an annual interest rate significantly in excess of the market rate for high-risk loans. The originators of such loans dispute that the fees are interest.
- Servicing agent and securitization abuses. The mortgage servicing agent is the entity that receives the mortgage payment, maintains the payment records, provides borrowers with account statements, imposes late charges when the payment is late, and pursues delinquent borrowers. A securitization is a financial transaction in which assets, especially debt instruments, are pooled and securities representing interests in the pool are issued. Most loans are subject to being bundled and sold, and the rights to act as servicing agent sold, without the consent of the borrower. A federal statute requires notice to the borrower of a change in servicing agent, but does not protect the borrower from being held delinquent on the note for payments made to the servicing agent who fails to forward the payments to the owner of the note, especially if that servicing agent goes bankrupt, and borrowers who have made all payments on time can find themselves being foreclosed on and becoming unsecured creditors of the servicing agent. Foreclosures can sometimes be conducted without proper notice to the borrower. In some states (see Texas Rule of Civil Procedure 746), there is no defense against eviction, forcing the borrower to move and incur the expense of hiring a lawyer and finding another place to live while litigating the claim of the “new owner” to own the house, especially after it is resold one or more times. When the debtor demands, under the best evidence rule, that the current claimed note owner produce the original note with the debtor’s signature on it, the note owner typically is unable or unwilling to do so, and tries to establish his claim with an affidavit that it is the owner, without proving it is the “holder in due course”, the traditional standard for a debt claim, and the courts often allow them to do that. In the meantime, the note continues to be traded, its physical whereabouts difficult to discover.
OCC Advisory Letter AL 2003-2 describes predatory lending as including the following:
- Loan “flipping” – frequent refinancings that result in little or no economic benefit to the borrower and are undertaken with the primary or sole objective of generating additional loan fees, prepayment penalties, and fees from the financing of credit-related products;
- Refinancings of special subsidized mortgages that result in the loss of beneficial loan terms;
- “Packing” of excessive and sometimes “hidden” fees in the amount financed;
- Using loan terms or structures – such as negative amortization – to make it more difficult or impossible for borrowers to reduce or repay their indebtedness;
- Using balloon payments to conceal the true burden of the financing and to force borrowers into costly refinancing transactions or foreclosures;
- Targeting inappropriate or excessively expensive credit products to older borrowers, to persons who are not financially sophisticated or who may be otherwise vulnerable to abusive practices, and to persons who could qualify for mainstream credit products and terms;
- Inadequate disclosure of the true costs, risks and, where necessary, appropriateness to the borrower of loan transactions;
- The offering of single premium credit life insurance; and
- The use of mandatory arbitration clauses.
Predatory Lending towards minority groups
Many minority communities have been excluded from loans in the past, they are and have been more vulnerable to deception. Oftentimes, they are targeted because of these vulnerabilities. Organizations and agencies including ACORN, HUD, the American Civil Liberties Union, United for a Fair Economy and more prove that predatory are disproportionately made in poor and minority neighborhoods. Brokers and lenders preyed on these neighborhoods with the knowledge that these people were often denied for loans and the demand for loans were high. Lenders called these neighborhoods never-never land. This created the subprime predatory lending world.
Subprime lenders specialize in B, C, and D paper. Predatory lending is the practice of overcharging a borrower for rates and fees, average fee should be 1%, these lenders were charging borrowers over 5%.
Consumers without challenged credit loans should be underwritten with prime lenders. In 2004 69% of borrowers were from subprime lending. The 2007 mortgage drop and economy fail were from over lending.
Organizations such as AARP, Inner City Press, and ACORN have worked to stop what they describe as predatory lending. ACORN has targeted specific companies such as HSBC Finance, successfully forcing them to change their practices.
Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race. African Americans and other minorities are being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts. Even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender, though not necessarily a sub-prime loan. Subprime lenders spec
Other targeted groups
In addition, studies by leading consumer groups have concluded that women have become a key component to the subprime mortgage crunch. Professor Anita F. Hill wrote that a large percentage of first-time home buyers were women, and that loan officers took advantage of the lack of financial knowledge of many female loan applicants. Consumers believe that they are protected by consumer protection laws, when their lender is really operating wholly outside the laws. Refer to 15 U.S.C. 1601 and 12 C.F.R. 226.
Media investigations have disclosed that mortgage lenders used bait-and-switch salesmanship and fraud to take advantage of borrowers during the home-loan boom. In February 2005, for example, reporters Michael Hudson and Scott Reckard broke a story in the Los Angeles Times about “boiler room” sales tactics at Ameriquest Mortgage, the nation’s largest subprime lender. Hudson and Reckard cited interviews and court statements by 32 former Ameriquest employees who said the company had abused its customers and broken the law, “deceiving borrowers about the terms of their loans, forging documents, falsifying appraisals and fabricating borrowers’ income to qualify them for loans they couldn’t afford.” Ameriquest later agreed to pay a $325 million predatory lending settlement with state authorities across the nation.