Watch out for bad-loan signals
Chicago real estate attorney Tom
Polinski recalls a recent closing where the buyers found out that
their lock had expired four days earlier and their interest rate
would be 1.5 percent higher.
"We were at the closing table and they didn't
want to walk away. Had they done that, they would have been in breach
of contract and the seller would have had to decide if he wanted
to sue them for specific performance because he, in turn, was buying
another house. You always get that domino effect. It would have
been a mess," he says.
With little recourse, the buyers settled for a $750
reduction in fees and closed, vowing to refi at the earliest opportunity.
"I see a lot of it," Polinski admits. "I
can't tell you the last time I went to a closing where the buyer
has known a reasonable time in advance, even 24 hours or more, what
their bottom-line closing costs were going to be. The lenders are
notoriously slow in getting those figures to the closing so we have
to try to estimate what the buyer is going to need. And estimate
on the high side, because if it's short, they won't let you close."
Preying on the powerless
Predatory lending practices are most visible
in the subprime market, which serves lower-income individuals with
Respectable subprime lenders serve an important social
function by offering credit on fair terms to individuals who otherwise
might never be able to build home equity. Predatory lenders, however,
are a scourge on these same neighborhoods, taking advantage of elderly,
less-educated and non-English-speaking individuals by offering egregious
loan terms that would drain equity and eventually lead to foreclosure
on their homes.
Norma Garcia, senior attorney for the nonprofit Consumers
Union, has been fighting for more than a decade to stop predatory
lenders from preying on the powerless. In her March testimony before
the House Committee on Financial Services, Garcia expressed concern
at the tremendous growth of the subprime market in general and subprime
refis in particular.
Nationally, subprime originations increased from less
than 5 percent ($35 billion) in 1994 to nearly 13 percent ($160
billion) in 1999. The predatory hot spots, Texas and California,
were even worse: Texas subprime refis grew from 6 percent of all
refis in 1997 to 33 percent in 2000, California subprime lending
grew from 4 percent in 1993 to 20 percent in 2000.
"Not all subprime loans are predatory,"
Garcia points out, "but virtually every predatory loan we have
seen is a subprime loan."
That's because shady lenders, like predators everywhere,
tend to target the easiest prey, people with poor credit who have
few other options. But Garcia notes that individuals with spotless
credit also fall victim to bad loans.
"Loans that are good subprime loans might in
another sense be predatory for someone who has good credit. We see
this a lot among the elderly and in communities of color -- people
with perfectly good credit who don't have a sense of what's happening
out there in the lending world," she says.
Garcia says that to simply spout "buyer beware"
"There are definitely people who are ripping
others off. To the extent that there are individuals who are being
placed in loans with interest rates and fixed fees that are much
higher compared to that person's credit-risk profile, that should
be a crime," she says.
"Some states require lenders to put borrowers
into the best loans for which that buyer may qualify. We would love
to have that be extended to all loans, but it isn't and there is
a lot of resistance and pushback from the lending lobby to protect
against new laws aimed at regulating the industry."
California is currently in the midst of a test case
to see if a weaker state anti-predator statute should supersede
a tougher ordinance passed by the City of Oakland that fills in
the gaps left by the state law. Garcia has similar concerns about
any minimum industry standards that could one day be forthcoming
at the federal level.
"We can see that minimum standards might be a
good thing, but we don't want to prevent states that have serious
problems from closing the gap," she says.
Firing the 'bad actors'
The mortgage industry has dug in its heels against
government regulation at any level that would restrict access to
A.W. Pickel, president of the National Association
of Mortgage Brokers, says a few "bad actors" shouldn't
spoil it for an industry that is committed to providing as many
financing options to as many customers as possible. In addition
to calling for more pre- and post-license training, NAMB has put
forth its own solution to the predator problem.
"We promote the ability to do a national registry
that would basically keep bad guys out of the business," he
says. "For instance, we now actually register every loan officer.
Unfortunately, we don't register loan officers inside a bank. So
you could have a bad actor who would be working for a licensed broker
or mortgage broker but then they go to a bank and they don't have
to be licensed."
Although Pickel admits he would never use an online
lender, he defends their right to peddle their products. The problem,
he says, is not the shady deals, but the public's inability to accept
what mortgage brokers take for granted: If it seems too good to
be true, it probably is.
"What amazes me is that people don't use their
common sense. Somehow people think that this person who is giving
them 5 percent is telling the truth when everybody else in town
doesn't have it. You ought to call guys in your local community
and check their references. Even in your own community, you want
them to put it in writing. You want them to stand by their word."
Jay MacDonald is a contributing editor
based in Mississippi.