Did you know that, except in a few unusual circumstances, lenders and bank loan officers do NOT owe you a duty to act in your best interest? Did you know that it is legal for them to offer you, and even recommend, a loan that you are not equipped to payback? Oftentimes, when people decide to take out a loan, they make the fatal mistake of assuming that a banker or loan officer’s job is to help them choose the best option. Not so! The banker’s job is to sell you a product, and since they work for the lender—not for you—they have incentives to sell you the product that provides the most benefit to the lender and to themselves.
What is Predatory Lending?
Just because a loan unfairly benefits the lender or has a negative result for the borrower does not make the loan illegal. Here are some common harmful practices that lenders use to sell home equity loans:
- Equity Stripping: The lender makes a loan based on the borrower’s home equity, regardless of the borrower’s ability to repay the loan. When the borrower inevitably defaults, the lender forecloses and the borrower loses their home.
- Loan Flipping: The lender offers unnecessary re-financing—often for a fee—with no apparent benefit to the borrower; this extends the duration of the loan, which benefits the lender.
- Insurance Packing: The lender charges the borrower for credit insurance and other services that the borrower did not want, need, or even necessarily agree to.
- Bait and Switch: The lender offers one set of terms when the borrower applies for the loan, but the borrower signs another set of terms—almost always something the borrower would not have agreed to.
- Pre-payment Penalties: The lender charges high fees if the borrower pays off the loan early or refinances the loan.
- Mortgage Servicing Abuses: The lender charges improper fees, like late fees not allowed under the law or mortgage contract, and doesn’t provide you with accurate or complete account statements and payoff figures, which makes it nearly impossible for the borrower to determine how much they have paid and how much they owe. This can cause the borrower to pay more than they actually owe.
- The “Home Improvement” Loan: Suppose a contractor offers to make improvements on the borrower’s home; when the borrower says they are interested but cannot afford it, the contractor arranges the financing through a lender they know. The borrower agrees and the contractor begins the work. Later, the borrower is asked to sign papers under pressure from the lender. If the borrower tries to ask questions, the contractor threatens to stop work on the house if the borrower doesn’t sign the loan, so of course, the borrower signs the loan. The borrower may later realize that what he signed is a home equity loan with a high-interest rate, fees, and points. The contractor, who is likely being paid by the lender, suddenly is not so interested in completing the work to the borrower’s satisfaction.
- Fraud: Concealing or misrepresenting the terms of the loan.
- Hidden Balloon Payment: An excessively high, undisclosed fee that is due at the end of life of the loan.
Are There Laws to Protect Me?
While some laws and regulations do exist to protect the borrower, they are complicated and limited in their reach. Here are some of the protections afforded by current law:
Protections from Abusive Lending Practices. The Home Owner Equal Protection Act (HOEPA) is a federal law that prohibits the use of balloon payments, prepayment penalties, and due-on-demand features. For certain high-cost loans, HOEPA also requires the lender to make additional disclosures, to conduct an analysis to determine the borrower’s ability to repay the loan, and to provide the borrower with loan counseling from a neutral third party. While this law goes a long way to prevent predatory lending, unfortunately, it only applies to certain purchase-money mortgages, refinances; closed-end home equity loans; and open-end credit plans.
Protections Against False or Misleading Statements. The Truth in Lending Act (TILA) was passed to ensure that borrowers are informed about the “true cost of credit.” Thus, the law requires lenders to disclose to consumers—in an easily understood manner—the amount of the loan, the annual percentage rate (APR), any finance charges (including applications fees, late charges, prepayment penalties), a payment schedule, and the total repayment amount over the life of the loan. TILA requires additional disclosures for consumer loans that are secured by the borrower’s principle residence when the interest rate exceeds 6.5%. TILA also creates specific rules for closed-end accounts (such as home or auto loans) and open-ended accounts (such as credit cards), but the law does not restrict the amount of interest the bank may charge or require the bank to extend credit. For consumers who are refinancing a residential mortgage, TILA gives the borrower the right to rescind—or cancel—the loan within three days without losing any money. Importantly, individuals are allowed to sue for TILA violations and if the individual prevails, the lender may be required to pay for the individual’s legal costs. Additionally, many states have laws that forbid fraudulent or deceptive business practices. These laws could give a borrower a cause of action if the lender made all of the required disclosures, but also made fraudulent statements or other misrepresentations that tricked the borrower into signing the loan.
Protections Against Discriminatory Lending. The Equal Credit Opportunity Act (ECOA) makes it illegal for a lender to refuse to extend credit to an individual because of his or her race, color, religion, national origin, sex, marital status, or whether the person receives public assistance. The lender may not discourage a person from applying or impose different terms or conductions on these grounds. However, a lender can consider a person’s immigration status in deciding whether to extend credit. The ECOA also gives the individual the right to sue for violations and if the individual wins, the lender may have to pay the individual’s legal cost and attorney’s fees.
What Can You Do If You Think You Are a Victim of Predatory Lending?
If you think you’re the victim of predatory lending, you must act quickly. Make sure you save all of your loan documentation and contact an attorney as soon as possible. The experienced attorneys at Sanford Heisler Sharp may be able to help you.
However, we receive many phone calls from people who took out an adjustable-rate mortgage many years ago, and now, after several interest rate hikes, they cannot pay it back. Oftentimes, we cannot help these people for two reasons:
- First, the loan may not be illegal. If the paperwork you signed clearly explains that the interest rate is adjustable and the lender did not engage in any of the predatory acts listed above, you may not have a claim. Perhaps the terms of the loan are unfair and maybe it should be illegal, but unless it violates a law or regulation, you may not have a cause of action.
- Second, and more problematic, it may be too late. If you signed the loan more than a few years ago, there is a good chance that the statute of limitations—the time limit to bring a lawsuit—has expired. This is not always the case, but most of the lawsuits for predatory lending must be brought within 1 to 4 years, depending on the law violated.
If you are in this situation, do not despair. There are public entities, like the Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Deposit Insurance Corporation, and state regulators and attorneys general, that may be able to take actions that a private attorney cannot. If nothing else, you can also alert the federal and state regulators to help prevent others from falling into the same trap. There are also non-profit organizations that specialize in helping borrowers renegotiate their loans, preventing foreclosure, and repairing credit. Here are some good resources: https://credit.org/, https://www.cccssf.org/index.html, and https://www.nfcc.org/.
How Can You Avoid Predatory Lending?
Since it is difficult to win or even bring a lawsuit to hold a lender accountable for predatory lending, the best way to protect yourself is to guard yourself against falling prey in the first place:
- The Loan Officer is not your Friend: It is important to recognize that the loan officer is not your fiduciary. This means that they do not have to act in your best interest. Remember that they are a salesman trying to sell you a product that’s good for them and good for their employer.
- Do your research: Know what kind of loan you want or need and don’t let the lender change your mind. In conducting your research, use only reliable sources not driven by profit, like the state and federal regulators listed above, and the Center for Responsible Lending. Make sure you are looking at legitimate information and not just an article offering “helpful advice” that is really just an advertisement.
- Ask Questions: Make sure the lender explains everything you need to know. The lender is legally required to disclose the APR, payment terms, charges to open or use the account, any variable rate features, and give you a brochure describing the general features. Make sure you also ask about the credit limit, interest rate, up-front costs, continuing costs, repayment terms, and fees: application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation, and recording fees, and broker fees—note, these may be quoted as points, origination fees, or interest rate add-on.
- Don’t Be Afraid to Negotiate: If a fee seems too high, ask the lender to lower it. Shop for the best deal with multiple lenders and make sure you let each one know that you are actively shopping. Ask each one to meet or beat the terms of the other lenders.