Predatory Lending Facts and Resources

Asset-Based Lending
A lender provides financing to a homeowner based on the homeowner’s equity and without regard to the borrower’s ability to realistically repay the loan. The lender determines that there is equity enough to cover any loss that might incur in the event of a default.

Mortgage Flipping
Repeatedly refinancing loans with no tangible benefit to the consumer. Equity is stripped from the homeowner with each refinance by charging high closing costs and prepayment penalties.

Packing
The borrower gets a loan that has charges for services the consumer does not request or need. Packing most often involves the forced purchase of insurance, such as credit life insurance or unemployment insurance.

“Foreclosure Rescue”
A home is purchased from a homeowner who is facing foreclosure, usually in exchange for the balance of loan. The home is sold back to the homeowner at market value or higher. The lender uses a lease-purchase arrangement with payment rates the homeowner can’t afford.

Property Flipping
Rapid resale of a property at a higher than market value using a phony appraisal. This may include a second mortgage payable to the seller and forged or false loan documents.

Balloon Mortgage
A balloon mortgage has payments based on a 30-year amortization schedule with the unpaid principle balance due in a lump sum at a specified time, generally five to seven years. Borrowers believe they have applied for a low- rate loan with low monthly payments. They learn at closing that it is a short-term balloon loan that will need to refinanced within a few years.

Regulation Z explains that lenders must comply with the consumer credit parts of the law.
Regulation Z applies to offers or extensions of consumer credit if four conditions are met:
1. The credit is offered to consumers.
2. Credit is offered on a regular basis.
3. The credit is subject to a finance charge (i.e. interest) or must be paid in more than four installments according to a written agreement.
4. The credit is primarily for personal, family or household purposes.
If credit is extended to business, commercial or agricultural purposes, Regulation Z does not apply.

Home Mortgages

One of the biggest lending transactions any individual is likely to enter is borrowing to purchase a home. These transactions have become more complicated in recent years. Historically, someone trying to buy a home had very few options. Often, only a traditional thirty year loan was available. Now, loans of various duration and interest rate variations are available to every home buyer. The Federal Reserve Board and the Federal Home Loan Bank Board have published a book entitled “Consumer Handbook on Adjustable Rate Mortgages ” to help consumers understand the purpose and uses of adjustable rate mortgage loans. Regulation Z requires that creditors offering adjustable rate mortgage loans make a special disclosure booklet available to consumers.

Disclosure

Disclosure is generally required before credit is extended. In certain cases, it must also be made in periodic billing statements. The term “closed end credit transaction” is defined by exclusion. That is, it includes any credit arrangement (either a consumer loan or credit sale) that does not fall within the definition of an “open end credit transaction”. Open end credit includes credit arrangements like revolving credit cards, where the “borrower” (that is the credit card holder) is not required to pay off the principal amount by any particular point in time. Rather, the borrower is simply charged interest periodically and is usually required only to make some minimum payment.

Under Regulation Z, disclosure must be made of the following important credit terms:

Finance Charge – This is perhaps the most important disclosure made. This is the amount charged to the consumer for the credit.
Annual Percentage Rate – This is the measure of the cost of the credit which must be disclosed on a yearly basis. The method for calculating this rate is determined the underlying transaction.
Amount Financed – This the amount that is being borrowed in a consumer loan transaction, or the amount of the sale price in a credit sale.
Total of Payments – This includes the total amount of the periodic payments by the borrower/buyer.
Total Sales Price – This is the total cost of the purchase on credit, including the down payment and periodic payments.
Evidence of compliance with the Truth In Lending requirements must be retained for at least two years after the date of disclosure. Disclosures must be clear and conspicuous and must appear on a document that the consumer may keep.

Other Features of the Truth in Lending Act