Predatory Lending for Real Estate Professionals Erin Kemple

Predatory Lending for Real Estate Professionals Erin Kemple Connecticut Fair Housing Center

What is Predatory Lending? n Use of fraud, lies or other deceptive tactics to get borrowers into a loan they cannot afford. n Making loans to borrowers who cannot afford to pay them back. n All sub-prime loans are not predatory. n Some prime loans are predatory. 2

Why Do Lenders Give Predatory Loans? n Financial incentive structure q q Brokers are paid to originate loans, not to ensure they perform Lenders sell loans after origination so are not concerned about performance Servicers don’t originate loans so have no input into who gets a loan Private companies who buy loans do not always monitor underwriting policies 3

Why Do Borrowers Accept Predatory Loans? n n Ignorance—most borrowers do not know or understand the loans they are being offered Fear—homeowners in financial trouble may believe they have no other options Confusion—borrowers may believe they are being given one loan, when really they are given another Fraud—some lenders lie about loan terms 4

Who is likely to be targeted for a predatory loan? n n n Elderly and/or disabled homeowners Homeowners in financial trouble Lower-income households People of color, non-English speakers, new immigrants People with limited literacy People with limited financial literacy 5

How Will I Know if a Client has a Predatory Loan? n When buying a home q q Borrower shows or tells you about a loan offer with one of the suspect terms Lender asks you to do something fraudulent/illegal Borrower is turned down for one loan because price exceeds value but is approved by another lender You have had other clients get predatory loans from lender 6

How Will I Know if a Client has a Predatory Loan? n When selling a home q q Seller tells you he or she is in foreclosure* Seller wants a higher price than market will allow to cover loan balance* Asked to do a price comparison so homeowner can refinance* Seller tells you he or she is in bankruptcy* *Not always a sign of precatory lending 7

Indicators of Predatory Lending: Marketing n n n Lender or mortgage broker approached borrower first. Lender or mortgage broker used aggressive sales tactics (calling all the time to pressure the borrower). The Annual Percentage Rate as listed is high (9% is high right now. A even a little lower might be a problem if borrower has good credit). 8

Indicators of Predatory Lending: Marketing n n Lender or broker recommends paying off a low-rate mortgage (like a CHFA mortgage) with a high-rate mortgage. Lender suggests rolling credit card debt into mortgage debt. The amount borrowed is more than the value of the property (at the time of the loan). Lender or broker encouraged borrower to get a loan for more than needed to buy the house. 9

Indicators of Predatory Lending: The Application Process n The lender or mortgage broker or someone working for them puts false information on the application such as: q q False salary Stating borrower had more $ than she really did Stating borrower had fewer debts than he really did False or inflated rental income. 10

Indicators of Predatory Lending: The Application Process n Borrower’s signature was forged on the application or other mortgage documents. n Fake co-signers added to application. 11

Indicators of Predatory Lending: The Loan n Negative amortization (required monthly payments do not cover the interest due on the loan). n High appraisal costs. n Inflated appraisal (Did the property appraise at a value that is unexpectedly high for the neighborhood? ) 12

Indicators of Predatory Lending: The Loan n The loan has an adjustable rate (payment changes monthly, every six months, yearly). n Annual Percentage Rate as listed on the loan is high (8% or 9% is high right now. Even a little lower might be a problem if borrower has good credit). n Closing costs in excess of 5% of loan. n Balloon payments. 13

Indicators of Predatory Lending: The Loan n n Padded fees to record the loan with the town. Back-dating of Documents. Charging more than once for the same service. Requiring credit insurance. Making a loan that is based on the value of the property and not on what the borrower can afford. 14

Indicators of Predatory Lending: After Closing n n Debts that were supposed to be covered by the loan not paid off. Getting pressure to refinance again soon after the closing. Excessive late fees (including daily interest) and other servicing charges). Excessive prepayment penalties. 15

Indicators of Predatory Lending: After Closing n Home improvement scams q q Some predatory lenders are affiliated with home improvement companies Borrowers sign documents without understanding they are taking out a loan on their property Work is often shoddy or homeowner is overcharged Contractors not registered with the state 16

Indicators of Predatory Lending: After Closing n Flipping/churning q q q Refinancing without any benefit to the homeowner Usually occurs quickly after original loan is taken out Based on fraudulent appraisals or falsified loan documents 17

What Does this Have to Do With Me? n If real estate agent is guilty of an act which is dishonest, fraudulent or improper or violates any licensing law, CREC can q q q n n Temporarily suspend Permanently revoke and/or Fine person up to $2, 000* Real estate agents may not receive a fee, commission or other form of referral fee for referring a borrower to any mortgage broker, lender or any person affiliated with such lender or broker. * But, agents may suggest several lenders as long as no particular lender is endorsed *Con. Gen. Stat. 20 -320

What Does this Have To Do With Me? n Agents may be asked to: q q q Provide information such as listings and comparable sales to an appraiser—legal Alter or exclude parts of a P&S agreement provided to a lender or title company—illegal Enhance or “lose” verifications of income or employment history—illegal 19

What Does this Have to Do With Me? n If real estate agent sends buyer to a lender and lender is predatory q q Real estate agent could be implicated in the scheme May hurt business in the long run 20

What Can I Do to Help? n Let borrowers/homeowners know: q q q They can choose from a variety of lenders All lenders and all loan products are not the same Borrowers should not sign: n n Blank documents Documents containing blanks Documents they do not understand Urge borrowers to get educated q q Housing counselors Flyers and pamphlets ( www. realtor. org ) 21

What Can I Do to Help? n If a homeowner is delinquent: q q q n Call the loan servicer Call the Connecticut Fair Housing Center to get access to free legal services Call a housing counselor If a homeowner is in foreclosure: q q q Get legal help from CFHC or a private attorney Do not refinance without getting advice from a lawyer or housing counselor Do not ignore legal papers 22

What is Being Done to Stop Predatory Lending: n Proposed federal statutes q q n Would change lending policies for federally chartered banks and depository institutions Stalled in both the House and the Senate Proposed Connecticut statutes q q Would change lending policies for state chartered banks and mortgage lenders who are not federally regulated Currently being discussed in the Legislature 23

What is Being Done to Stop Predatory Lending? n If passed, Connecticut legislation* would: n n n n Ban pre-payment penalties Require mandatory escrow of taxes and insurance Require lenders to evaluate a borrower’s ability to repay the loan during the life of the loan Require counseling before refinancing a governmentsubsidized loan Allow borrowers to cure defaults at least once every 12 months Prohibit refinancing without a tangible net benefit to the borrower Give borrowers a private right of action *Proposed legislation applies to sub-prime loans only 24

Predatory Lending: Where to Find Help n Connecticut Fair Housing Center – (888) 247 -4401 n HUD-approved Housing Counselors - (800) 5694287 n HOPE NOW – 1 -888 -995 -HOPE (4673) n CT Foreclosure Hotline - (877) 472 -8313. n Infoline 211 25

Predatory Lending: Where to Find Help n Legal Assistance Resource Center of Connecticut About Foreclosure - A Home Owner's Guide (http: //www. larcc. org/pamphlets/housing/about_foreclosure. htm) n Statewide Legal Services Phone: (860) 344 -0380 (Central Connecticut & Middletown area) 1 -800 -453 -3320 (All other regions) n Connecticut Department of Social Services (DSS) Foreclosure Prevention Program http: //www. ct. gov/dss/cwp/view. asp? a=2353&q=305234&pp=12&n=1 DSS administers a statewide housing mediation program, which includes a Rent Bank to pay the back rent or mortgage of families in imminent danger of being evicted. Community Mediation operates this program in the greater New Haven area and also serves as the program's lead agency, providing training and technical assistance to other agencies and DSS. Contact through 211 Infoline. n Connecticut Housing Finance Authority(CHFA) Phone: (860) 721 -9501 E-mail: info@chfa. org 26

The Connecticut Fair Housing Center Presented by: Erin Kemple, Esq. Executive Director 221 Main Street Hartford, CT 06106 (860)247 -4400 www. ctfairhousing. org