ILLINOIS COALITION AGAINST PREDATORY HOME LOANS
A PROJECT OF THE NTIC
810 NORTH MILWAUKEE AVENUE
CHICAGO, ILLINOIS 60622
Predatory Lending Practices
Historically, predatory lenders have targeted redlined neighborhoods, especially the elderly, minority and women who are homeowners. Recently, predatory lenders have expanded their targeting to include working-class and middle-class neighborhoods as well as rural homeowners.
Here are the top 10 abusive lending practices:
STEERING. Charging high, subprime interest rates (9 to 20 percent) on borrowers who have good enough credit to qualify for prime-rate loans (currently less than 6 percent on a 30-year mortgage).
HIGH FEES. Inflated origination and broker fees; inflated and “junk fees.”
EQUITY STRIPPING: Making a loan based on the equity the borrower has in the home, without regard to the borrower’s ability to repay the loan.
BAIT & SWITCH: A lender offers one set of loan terms when the borrower applies, but pressure the borrower to accept worse terms at the closing of the loan.
HOME IMPROVEMENT SCAM: A home improvement contractor arranges the mortgage loan for repairs, often charging the borrower for incomplete or shoddy work.
BALLOON LOAN: A loan that includes an unreasonably high payment due at the end of or during the loan’s term. The balloon payment is often hidden and almost the size of the original loan. These loans are structured to force foreclosure or refinancing.
LOAN FLIPPING: Frequent, unnecessary refinancing of a loan with no benefit to the borrower.
PACKING: Including overpriced insurance, such as credit life, disability and unemployment insurance. The lender finances the insurance as part of the loan, instead of charging periodic premiums outside of the loan.
PREPAYMENT PENALTIES: Huge fees charged when a borrower pays off the loan early or refinances into another loan. Prepayment penalties are designed to lock borrower into high-interest loans.
ADJUSTABLE RATE MORTGAGES (ARMS) ARMS that only adjust up, increasing a borrower’s interest rate and monthly payment as often as every six months.
WHAT IS PREDATORY LENDING?
Predatory mortgage lending occurs when a mortgage company or broker pushed unjustifiably expensive refinance or home equity loans on homeowners.
Typically, the purpose of these loans is to finance home improvements or to consolidate debts.
WHO IS ENGAGING IN PREDATORY LENDING?
A new class of mortgage lenders knows as subprime mortgage lenders — or B, C, D, lenders — are responsible for the vast majority of predatory lending throughout the country. Many of these lenders are independent mortgage companies, other are affiliated with banks.
Subprime lenders supposedly provide loans to borrowers with less than perfect credit. Subprime lenders claim that the increased risk of these borrowers requires them to charge higher interest rates and additional fees. The potential for profit among subprime lenders has fueled an explosion of widespread and abusive predatory practices.
WHAT ARE THE PREDATORY PRACTICES?
Too many subprime lenders use predatory lending practices. One of the most destructive practices is usury — charging unconscionably high interest rates and fees that are not justified by the risk. Another highly destructive practice is called equity-stripping — where the lender makes a loan based on the equity the borrower has in the home, without regard to the borrower’s ability to repay the loan. Loans with these characteristics set up the homeowner for failure, allow the lender to reap huge profits, and protect lenders from loss by using the home as collateral for the loan.
WHO DO PREDATORY LENDERS TARGET?
Predatory lenders target homeowners who are “cash-poor” but “equity-rich.” Historically, predatory lenders have targeted redlined neighborhoods, especially the elderly, minorities, and women. Recently, predatory lenders have expanded aggressive marketing efforts to include middle-class & working class homeowners, as well as suburban & rural homeowners.
WHAT IMPACT ARE PREDATORY LENDERS HAVING ON FAMILIES AND COMMUNITIES?
NTIC recently published “Preying on Neighborhoods: Subprime Mortgage Lenders and Chicagoland Foreclosures,” detailing the explosion of foreclosures caused by subprime lenders over the past five years. In 1998, subprime lenders completed 1,417 foreclosures, 36 percent of all foreclosures in Cook, DuPage, and Will counties. In 1993, subprime lenders accounted for less than 2 percent of the same area’s foreclosures. This explosion of subprime foreclosures does not reflect a comparable rise interest he sub primeshare of the mortgage market. Subprime lenders made 2.6 percent of the loans in 1993 and 24.3 percent of the loans in 1997.
WHY IS PREDATORY LENDING EXPLODING IN ILLINOIS (AND AROUND THE COUNTRY)?
Predatory subprime lending in Illinois is exploding, as are the resulting foreclosures, because many of the practices used by subprime lenders are legal. Charging unconscionable points and fees, “flipping”loans, and even making loans based on equity rather than the borrower’s ability to repay are legal under federal and state law. Many of the deceptive practices employed by these lenders are illegal under Illinois law, but are not enforced by the Office of Banks and Real Estate, the regulatory agency.
WHAT ARE THE ILLINOIS ANTI-PREDATORY LENDING REGULATIONS?
On May 17, 2001, Former Illinois Governor George Ryan and the two state regulators, the Office of Banks and Real Estate and the Department of Financial Institutions, introduced regulations that are modeled after the Chicago anti-predatory lending ordinance. In the regulations, adding simple premium credit insurance to a home loan was prohibited. The regulations define predatory lenders as those who make high-cost loans and use one or more of the regulatory practices below:
The State of Illinois will review loans if they meet one of these two triggers:
1). APR Trigger: 1st lien loans with 6 percent APR plus the yield on Treasury securities of similar term (11.4 percent rate as of February, 2002). Or, home equity loans (junior mortgages) with 8 percent APR plus the yield on Treasury securities of similar term.
2). Fee trigger: Loans with the greater of 5 percent of the loan amount or $800 in fees; Fees that include payments to brokers; and, Fees that include the premium of any single-premium credit insurance.
For more information, contact:
The National Training and Information Center 312-243-3035