“Nationally and internationally, we must be on guard against predatory lending. It is nothing more than a scam, a crime, a lie.” Alphonso Jackson
It’s doubtful that anyone who has ever looked at the mortgage industry would disagree with the sentiments offered by HUD Secretary Jackson. Predatory loans are terrible, a scam and certainly a lie.
But oddly enough, predatory lending is not a crime.
For all the talk about predatory lending, and despite the assumption that such activities must be illegal on their face, the truth is different: There is no federal sanction against predatory lending.
According to attorney Benny Kass, a long-term real estate columnist for The Washington Post and an authority in his field, “there are no federal laws making predatory lending illegal.”
“Congress and the Fed keep claiming that they don’t understand it,’ says Kass. “Perhaps it’s like pornography: ‘I can’t define it but I know it when I see it.’”
Kass points out that the Home Ownership and Equity Protection Act (HOEPA) is a disclosure law, it requires that lenders provide additional notices for loans which charge interest rates, fees or both above a given level. However, HOEPA does not say that such high-cost loans are prohibited.
Also, Kass notes that while some subprime loans are predatory mortgages, most are not.
So what’s a predatory loan and isn’t it the same thing as mortgage fraud?
When it comes to federal law there’s a huge difference between “mortgage fraud” and “predatory” lending. As the Mortgage Bankers Association explains:
“It is critical to recognize the difference between mortgage fraud and predatory lending. Mortgage fraud, as understood by law enforcement and the real estate finance industry, is the ‘material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.’ A lending institution is deliberately deceived by another actor in the real estate purchase process — such as a borrower, broker, appraiser or one of its own employees — into funding a mortgage it would not otherwise have funded, had all the facts been known.”
What about predatory lending?
Predatory lending, says the MBA, “is a term used to describe a range of lending practices harmful to borrowers, including equity stripping and lending based solely on the foreclosure value of the property. Some of these practices can be fraudulent, but defining an exact set of predatory lending practices has been difficult.”
In other words, when a lender suffers then the problem is the well-defined crime of “mortgage fraud.” When a borrower is hurt by the acts of a lender or someone in the lending process then there are no federal standards to breach.
“It’s fair and appropriate that we protect lenders from acts of mortgage fraud,” says James J. Saccacio, chairman and chief executive officer of RealtyTrac, the leading online foreclosure marketplace. “At the same time, it is equally fair and appropriate that we also protect borrowers from predatory lending. Given the lending community’s persistent calls for an end to predatory lending, you have to wonder: Who benefits from the absence of effective federal laws against predatory lending? Reduced levels of predatory lending would result in fewer foreclosures and bankruptcies and that’s good for borrowers, lenders and mortgage investors.”
The FBI says in its 2006 Financial Crimes Report To The Public, that “the defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.”
In fiscal 2006 the FBI reports there were suspicious activity reports (SARS) indicating 35,617 possible mortgage fraud violations, 2,409 commercial loan fraud reports and as many as 21,203 false statement cases.
And the total number of possible predatory loan cases shown in the report? Zero.
The FBI is entirely right. There are no predatory lending crimes to list because unjustified interest levels, bloated origination fees and inflated servicing costs are not federal crimes, therefore there is nothing to measure.
If we can define mortgage fraud why is it that we cannot define predatory lending? Why can we protect lenders but not borrowers?
Predatory lending comes in many flavors, so we can’t just say it’s one thing or another. Instead, we have to look at predatory lending as a crime with a variety of possible components.
For instance, we could define “predatory lending” as any lien secured by real estate which includes one or more of the following characteristics:
Requires borrowers to pay interest rates, fees and/or charges not justified by marketplace economics in place at the time the lien was originated.
Is based on a loan application which is inappropriate for the borrower. For instance, the use of a stated-income loan application from an employed individual who has or can obtain pay stubs, W-2 forms and tax returns.
Is materially more expensive in terms of fees, charges and/or interest rates than alternative financing for which the borrower qualifies. For instance, financing a borrower who qualifies for an FHA loan with a higher-cost subprime mortgage.
Is marketed in a way which first, fails to fully disclose all material terms; second, includes content designed to mimic federal documents or envelopes; and/or third; includes a mock or facsimile “check” made out to a specific prospective borrower.
Includes any terms or provisions which are unfair, fraudulent or unconscionable.
Does not include, in a format established by federal regulators, contact information for the party servicing the loan as well as the initial loan owner.
Is marketed in whole or in part on the basis of fraud, exaggeration, misrepresentation or the concealment of a material fact.
Does not plainly and prominently disclose on the good faith estimate of closing costs the size of any yield spread premium paid directly or indirectly, in whole or in part, to a mortgage loan officer.
Allows servicing and collection fees and charges above cost when payments are late or not made. This provision would prevent so-called “predatory servicing” fees.
Allows interest rates to increase when payments are late or not made. This provision would end the classic predatory strategy of making loans with initial low rates to individuals who are unlikely to make prompt payments, and then increasing interest levels when a borrower is late.
Is underwritten without due diligence by the party originating the loan. This would force lenders to fully document loans.
Is originated by an individual or entity compensated for two or more real estate liens during any 12-month period to parties other than immediate family members. “Immediate family members” shall be defined to include an individual’s parents, grandparents, spouse, inlaws, siblings and/or children.
Looking at the list of predatory acts above, one can expect members of the lending community to object because such rules will increase their liability to borrowers and investors. But why is that unfair? If borrowers can have liabilities for mortgage fraud, why should lenders be exempt from any penalties or prohibitions related to predatory lending?
As the old expression goes, what’s good for the goose is good for the gander.
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.