The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. It requires lenders to give a good faith estimate (GFE) of all closing costs that borrowers must pay. It was designed to help borrowers from being forced to pay “hidden fees” at closing.
The Truth in Lending Act (TILA) requires lenders to disclose the terms of a loan, including the total amount of the loan, the annual interest rate, and the number, amount and due dates of all payments necessary to repay the loan. The TILA also requires additional disclosures and places many restrictions on mortgages.
The Fair Credit Reporting Act (FCRA) was designed to prevent inaccurate or obsolete information from entering or remaining on a credit report. The law requires credit bureaus to adopt reasonable procedures for gathering, maintaining and disseminating information.
The Equal Credit Opportunity Act (ECOA) was designed to ensure that all qualified people have access to credit and prohibits discrimination based on sex, marital status, age, race, national origin, or public assistance benefits received.
Finding and fighting Predatory Lending
Our team of forensic loan auditors are trained to find and expose predatory lending. Many types of loans are prime examples of predatory lending, not just Subprime mortgages. If YSP or other hidden fees weren't disclosed or you were steered into uneccessary products, you will want to read on.
Maybe you were charged high fees or hit with a surprise prepayment penalty?
Predatory lending is defined as intentionally placing consumers in loan products with significantly worse terms and/or higher costs than loans offered to similarly qualified consumers in the region for the primary purpose of enriching the originator and with little or no regard for the costs to the consumer.
Common Violations demonstrated by Predatory Lenders
1. EXCESSIVE FEES
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. In the case of predatory lending, fees totaling more than 5% of the loan amount are common.
2. 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 found in predatory lending is typically 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.
3. HIDDEN YSP A.K.A. 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.
4. LOAN FLIPPING aka CHURNING
A lender “flips”or "churns" a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. This form of predatory lending can quickly drain borrower equity and increase monthly payments, sometimes even on homes that were previously owned free of debt.
5. UNNECESSARY PRODUCTS
Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan. This is known as an "upsell" in the business and the original lender may receive cash kickbacks for this act, resulting in a RESPA violation.
6. MANDATORY ARBITRATION
Some loan contracts require “mandatory arbitration,” which means the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by abusive terms or other predatory lending practices. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of predatory lending.
7. 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 even outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.