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WHENYOUSHOPFORAMORTGAGE,
“DOYOURHOMEWORK”
November 2006
Item # 126-135
How to Avoid
PredatoryLending
Shopping fora Mortgage?
DOYOUR
HOMEWORKFIRST
Shopping fora Mortgage?
DOYOUR
HOMEWORKFIRST
National Association of REALTORS®
500 New Jersey Avenue, NW
Washington, DC 20001
Center for Responsible Lending
910 17th Street NW, Suite 500
Washington, DC 20006
The National Association of REALTORS®,
“The Voice for Real Estate,” is America’s largest trade
association, representing more than 1.3 million members
involved in all aspects of the residential and commercial
real estate industries. For more information, please visit
www.REALTOR.org.
The Center for Responsible Lending is a nonprofit,
nonpartisan research and policy organization dedicated to
protecting homeownership and family wealth by working
to eliminate abusive financial practices. CRL is affiliated
with Self-Help, one of the nation’s largest community
development financial institutions. Please visit our website
at www.ResponsibleLending.org.
This brochure was inspired by a brochure called “Help Your Clients
Avoid Predatory Loans,” which was jointly issued by the Dayton Area
Board of REALTORS®and the Miami Valley Fair Housing Center, Inc.
The National Association of REALTORS®and the Center for Responsible
Lending wish to thank them for authorizing us to use their brochure.
ADDITIONAL RESOURCES
The National Association of REALTORS®(NAR):
For information on NAR’s Housing Opportunity Program,
gotowww.REALTOR.org/HousingOpportunity.
The Center for Responsible Lending (CRL):
For information about predatory mortgage lending practices,
including “The Seven Signs of Predatory Lending,” go to
www.ResponsibleLending.org.
Other brochures to help consumers shop for the best
mortgage:
•NAR and CRL have issued two other brochures:
••“Specialty (Non-Traditional) Mortgages: What Are
theRisks and Advantages?”
••“Traditional Mortgages: Understanding Your Options”
•NAR and the Federal Housing Administration of the U.S.
Department of Housing and Urban Development have
issued a brochure on “FHA Insured Mortgages.” FHA
mortgages provide a safe and affordable option for
homebuyers.
You may view, download, and order these brochures. Go to:
http://www.realtor.org/housopp.nsf/pages/mortgages?
OpenDocument.
Fannie Mae: “For Home Buyers & Homeowners”
at www.FannieMae.com.
Freddie Mac: “Buying and Owning a Home”
at www.FreddieMac.com.
Ginnie Mae:
For a simple calculator to help homebuyers estimate how
much they can afford to spend, read “How Much Home
Can You Afford?”at www.GinnieMae.gov.
HUD Housing Counselors:
For a list of counseling agencies, by state, approved by the
Department of Housing and Urban Development (HUD),
go to www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credit-reporting agencies:
•Equifax 800.685.1111 www.equifax.com.
•Experian 888.397.3742 www.experian.com.
•TransUnion 800.916.8800 www.transunion.com.
Go to www.annualcreditreport.comto ask for a free copy
ofyour credit report, once a year, or call 877.322.8228.
Seealso, www.FTC.gov.
“Looking for the Best Mortgage”is a brochure on how to
shop, compare, and negotiate the best deal on a home loan.
The brochure is a joint effort of 11 federal agencies,
including the Federal Trade Commission (FTC), the Federal
Reserve Board, HUD, and the Department of Justice.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Consumer Handbook on Adjustable Rate Mortgages
(the CHARM booklet)issued by the Federal Reserve
Board(FRB) and the Office of Thrift Supervision (OTS).
http://www.FederalReserve.gov. At the FRB site, click
on“publications and education resources” and then on
“consumer information brochures.”
POSSIBLE WARNING SIGNS OF A
PREDATORY LOAN
•Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
•Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs
can be financed as part of the loan, they are easy to
disguise or downplay. On competitive loans, fees are
negotiable. It is common for home buyers to pay only one
percent of the loan amount for prime loans. By contrast, a
typical predatory loan may cost five percent or more.
•Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after a short introductory
period are seldom appropriate for families who already
have had problems repaying other loans. Home buyers also
should avoid a large single “balloon” payment (a lump sum
due at the end of the loan’s term).
•Closing delays. The lender deliberately delays closing so
the commitment on a reasonably-priced loan expires.
•Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
•Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
•No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
•Unethical document management. An ethical lender or
broker will always require you to sign key loan papers, and
they will never ask you to sign a document dated before
the date you sign it.
SHOP FOR THE LOWEST-COST LOAN
REALTORS®develop relationships of trust with the families
they serve, and can help you avoid predatory loans by
encouraging careful shopping. Ask these important questions:
•What is my credit score? Can I have a copy of my
credit report?
•What is the best interest rate today? Do I qualify?
•Is the loan’s interest rate fixed or adjustable?
•What is the term (length) of the loan?
•What are the total loan fees?
•What is the total monthly payment? Does this include
property taxes and insurance? If not, how much will I
need each month for taxes and insurance?
•Is there an application fee? If so, what is it, and how
much is refundable if I don’t qualify?
•Are there any prepayment penalties? If so, what are they
and how long do they last?
IF THE LOAN IS AN ADJUSTABLE RATE
MORTGAGE (ARM), ASK:
•What is the initial rate?
•How long will that rate stay in effect?
•How is the adjusted interest rate determined? (Generally,
aspecified amount—the “margin”—is added to a current
published rate—the “index.”)
•How often can the rate change?
•How much can the rate go up each year and over the life
of the loan? What is the maximum monthly payment you
could be required to pay? Would you be able to afford it?
•Does the loan set a minimum interest rate?
•Do the monthly payments gradually decrease the amount
you owe even if interest rates increase? (With some loans,
the amount you still owe can increase rather than decrease
each month—called “negative amortization.”)
•Does the interest rate increase if your payments are late?
•Could you qualify for a loan with the maximum interest
rate permitted under the mortgage? If not, do you
anticipate earning more in the future so you will be able to
afford the higher payment?
•Can the adjustable rate mortgage loan be converted
(changed) to a fixed rate without refinancing into a new
loan? Is there a charge to convert?
OTHER SOLUTIONS REALTORS® AND
HOME BUYERS CAN USE TO AVOID
PREDATORY LENDERS
•Check out lenders with the Better Business Bureau,
government websites, or other consumer groups. How long
has the lender been in business? Have consumers filed many
complaints? Does the lender belong to a trade association
with ethics requirements for its members?
•Refuse to participate in transactions that may be fraudulent.
•Share predatory lending “horror” stories with regulators,
other consumers, REALTORS®, counseling groups, housing
professionals, and the media.
•Make contracts subject to the homebuyer receiving approval
from a lender for a fair and affordable loan.
•Avoid unnecessary contract extensions that could cause the
lender’s loan commitment to lapse.
•Get educated on the value of your home by asking your
REALTOR®for a comparative market analysis.
•Review the HUD-1 closing statement beforeclosing. Upon
request, home buyers have the right to see this information
24 hours before the loan closing.
•Report possible violations to appropriate federal, state and
local officials.
BEWARE OF PREDATORY LOANS!
For most families, buying a home is the biggest and smartest
purchase they ever make. One of the keys to success is getting
an affordable home loan with fair terms and reasonable costs.
Unfortunately, home buyers need to be aware that some loans
are not in their best interest. When loans hurt instead of help,
they can quickly lead to foreclosure and even bankruptcy.
There is no single definition of predatory lending, because the
term covers a wide range of abusive practices. Some practices
may be predatory for one borrower but not for another,
because everyone’s circumstances are different. Predatory
lenders often take advantage of first-time homebuyers and
others who may be vulnerable to high-pressure sales tactics.
This brochure will help consumers learn about the risks of
predatory loans and how to avoid them. REALTORS®can
provide information about predatory lending, refer clients
toreputable housing counseling organizations, and encourage
families to make informed decisions about how to finance
their homes.
Responsible lenders play a vital role in helping families achieve
homeownership, but consumers need to make sure they are not
dealing with a predatory lender. Some unscrupulous lenders are
only interested in taking as much money as possible, and are
not concerned about whether loans are affordable, sustainable,
and truly helpful to home buyers and homeowners.
WHAT ARE SOME OF THE PROBLEMS
CONNECTED TO PREDATORY LENDING?
Nearly all predatory lending occurs in the “subprime market,”
where loans are sold to people with less than ideal credit
histories, such as a short work history, high debt, and a record
of late payments on credit cards or other debt. Subprime loans
have played an important role in helping millions of consumers
achieve homeownership, but, unfortunately, some lenders abuse
their role and take unfair advantage of vulnerable borrowers.
Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often
charge extremely high interest and fees that are added into
the total amount of the loan the borrower must repay. These
lenders charge what they can get away with, not a fair
amount based on the credit history of the borrower.
Broken promises/“bait and switch.”Sometimes home
buyers are offered a new loan or a refinance of an existing loan
that seems to meet all of their needs only to find that interest
rates and fees have changed when they get to the closing table.
Agreeing to last-minute changes can cost thousands of dollars
and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans
are popular in today’s market, but many that seem to be
affordable are likely to have steep cost increases in the
future. Avoid “payment shock” by considering whether
youcan pay for the loan both now and in the future.
Loan “flipping.”Too many homeowners are persuaded to
refinance their mortgage, sometimes repeatedly, when there
is no real benefit. Even when a family receives some cash
from a refinance, the gains should be weighed against the
costs of excessive fees and a higher loan amount. Often a
borrower has other options, such as obtaining a second
mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could
qualify for a much more affordable home loan. Predatory
lenders use aggressive sales tactics to steer families into
unnecessarily expensive loan products.
Remember the old saying:
“If it sounds
too good
to betrue, it
probably is!”