Findings and recommendations from the
National Predatory Lending Task Force
By Michael D. Larson • Bankrate.com

The National Predatory Lending Task Force report is more than 100 pages long, but we've distilled its contents to make your life easier. Task force members basically highlighted four major lending abuses, goals for their elimination, and steps legislators and regulators could take to achieve those goals.

In summarized form, they're listed below. The full report can be found here.

Major problems:

• Lack of consumer understanding and disclosure -- Consumers don't understand the mortgage loan process and the paperwork they get now is too confusing for even educated borrowers to decipher.
• High-pressure sales tactics from mortgage officers who avoid lending restrictions by bending the rules -- Lenders, brokers, home improvement contractors and appraisers can push borrowers into taking out loans they don't understand. These professionals can avoid legal problems because the current laws have too many loopholes or aren't strong enough
• Use of abusive loan terms and conditions -- Lenders combine several provisions into their loans in such a way that they make a buck whether borrowers default or not. Some of the worst such predatory loans combine prepayment penalties, balloon payments, excessively high mortgage broker fees, credit life insurance and other provisions.
• Targeting of vulnerable neighborhoods and borrowers -- Subprime lenders and mortgage brokers venture into areas where banks and other prime lenders don't have branches or loan officers to sign up borrowers. These brokers do so because residents there tend to be elderly, low income or largely minority, and many are unfamiliar with the mortgage lending process.

Major goals:

• Increase borrower education and simplify the lending process.
• Close loopholes in existing laws and strengthen enforcement of them.
• Eliminate certain unconscionable loan terms and conditions.
• Expand the prime lending market so underserved consumers can get fair loans.

Proposed solutions:

• Throw federal support behind local programs designed to educate borrowers about mortgages and home equity loans. Have Congress pass legislation requiring lenders to give a list of certified homeownership counselors to borrowers whose loans fall under the Home Ownership and Equity Protection Act (HOEPA) and encourage them to visit one. Amend current law so that lenders must provide consumers with an accurate, overall loan price quote that includes interest rate, fees and closing costs early on in the lending process. Make lenders give consumers their settlement statement earlier. Force companies to disclose the borrower's credit score and an explanation of what it means, if requested.
  
  
• Increase penalties for failing to comply with real estate laws. Ban refinancing of a high-cost HOEPA loan for 18 months unless there is a tangible benefit, such as a lowering of the interest rate, to the borrower. Restrict fees that can be charged in the event of a refinance so the borrower doesn't pay too much. Tighten restrictions on loans a lender makes based on a borrower's collateral rather than the ability of that borrower to come up with the monthly payments. Improve Federal Reserve Board regulations so they prohibit openly fraudulent practices, including the forging of customer signatures and the falsifying of borrower incomes on loan applications. Boost mortgage broker disclosure on HOEPA loans by requiring brokers to explain what went into their loan-making decisions and what fees they earned. Help states standardize licensing and regulation of mortgage brokers, home improvement contractors and appraisers. Create a national database of those professionals, as well as complaints and actions taken against them. Amend the Fair Credit Reporting Act so mortgage lenders have to report their borrowers' payment histories to the credit bureaus. Expand HOEPA so protections apply to high-cost purchase mortgages, reverse mortgages and home equity lines of credit in addition to refinance loans. Lower the fee and rate thresholds that trigger HOEPA's additional borrower protections.
  
  
• Ban the sale of single-premium insurance, such as credit life or debt suspension insurance that pays off or suspends a mortgage if a borrower dies, loses a job, etc., to home loan applicants. Require borrowers to pay the premiums for such coverage in monthly installments rather than by rolling it into the mortgage principal at closing. Increase restrictions on prepayment penalties for HOEPA loans. Make clear to consumers that they have a choice -- agree to a prepayment penalty and get a lower rate or waive the penalty and opt for a higher one. Allow borrowers to pay off up to 20 percent of their loans annually without the prepayment penalty taking effect. Let borrowers who are moving, rather than refinancing, avoid the penalty altogether. Prevent balloon payments from applying for at least 15 years after closing. Prohibit clauses requiring arbitration, rather than litigation, for high-cost loan holders. Make it illegal to finance fees equal to 3 percent of the loan amount or more into a HOEPA loan's principal.
  
  
• Increase the amount of information the Fed collects from lenders under the Home Mortgage Disclosure Act. Make lenders collect data on fees, APR and loan-to-value ratio, too. Give the Department of Housing and Urban Development more power to get non-depository institutions, such as independent mortgage companies, to report HMDA information the same way banks do. Grant banks and thrifts Community Reinvestment Act credit for designing policies or products that refer subprime borrowers up to the institutions' prime lending divisions when they qualify for better loans. Strengthen Fed inspections of the lending affiliates of larger financial institutions.