Predatory lending remains a cancer in the American economy. There are still too many lenders in this country that prey on people and take advantage of them -- and take their money, despite the efforts of local, state and federal agencies.
The Office of the Comptroller of the Currency (OCC) recently issued residential real estate lending standards to prevent national banks from being involved in abusive, unfair or deceptive residential mortgage lending practices.
The guidelines, published Feb. 7 in the Federal Register, are extensive. Among the practices the comptroller's office intends to prohibit are:
Equity stripping: Where an unknowing borrower is required to repeatedly refinance over a short period of time. Each refinancing results in excessive costs to the borrower, such as high points, excessive closing fees and high interest rates. By the time the borrower goes through several such refinancing procedures, the equity in their house is eaten away. Ultimately, the predatory lender ends up foreclosing on the property and starts the cycle all over again.
Loan flipping: A variation of equity stripping. The lender requires the borrower to go through multiple refinancings under circumstances in which the terms of the new loan (and the cost of that loan) provide no tangible economic benefit to the borrower. Only the lender makes money on each refinancing
Encouragement of default: There are lenders that encourage a borrower to default on a current loan in order to get a new loan from the predator. That new loan will refinance all of the old loan, but at a much higher mortgage interest rate.
The OCC also addressed practices that it says are susceptible to abuse, predation, unfairness or deception. Examples include:
Financing single premium credit life, disability or unemployment insurance. In many cases, such insurance policies are extremely expensive and unnecessary. Borrowers do not have a chance to do any comparative shopping; the first they learn that they must obtain such insurance is at the settlement table. Further, requiring a borrower to finance the insurance premiums adds to an already excessive monthly mortgage payment.
Balloon payments: A borrower is allowed to make small monthly payments, but at the end of a fixed period of time, often only one year, the entire mortgage payment comes due, or "balloons." The borrower's only recourse is to refinance again.
Interest rate increases excessively upon default: Most lenders try to work with borrowers who are unable to make their mortgage payments. Ultimately, however, if an acceptable payment plan cannot be worked out, the lender will foreclose on the property. However, a predatory lender will often require that when a borrower is in default -- even for as much as one day -- the interest rate will increase significantly. That makes it even more difficult for a borrower to get back on track with mortgage payments.