What is Predatory Lending?
The real estate bubble that just recently burst was fueled by many things. One factor was historically low interest rates. Another was a constant shifting of the risk mortgage companies managed to pull off when lending to buyers. There were a lot of ways this was done, and one of the buzzwords you often hear is “bundled mortgages.”
“Bundled mortgages” came into being when Lenders pooled the promissory notes, that is, the IOUs, of many mortgages together into one bond to sell in financial markets. These bonds had a theoretical value based on what everyone (all the mortgage borrowers) was supposed to pay back over time. These bonds were then sold to other banks, investment brokers, Fannie Mae, and Freddie Mac.
The ability to “share the risk,” in other words, sell a mortgage that would normally have a higher risk of default, to other banks and to the public at large, drove lending standards lower. The mere existence of “ninja” loans, i.e., loans made with No-Income-No-Job-no-Asset verification should have been a HUGE red flag to everyone. The rationalization at the height of the housing price bubble was that anyone could “flip” a house in a short time frame and make a lot of money. In fact, the housing market conditions supported the self-deceiving idea that anyone could sell any house at any time.
There never seemed to be any actual “risk” to writing mortgages.
Everyone in the mortgage-originating business was making a lot of money during the boom. The refinance segment of the business also boomed, with historically low interest rates driving this market.
Banks and mortgage brokers got more and more “creative” with payment options and types of loans to lend to more and more people…
As it turns out, banks and mortgage brokers actually broke existing laws as they squeezed more and more money out of “the market” during this frenzy. They offered loans with ridiculous penalties and terms. They offered adjustable mortgages to people who could afford payments under the initial interest rate, but had no hope at all of being able to afford the mortgage after the rate adjusted. They lent to people with too much outstanding debt. They wrote “interest only” loans that ensured the loan balance would be greater than the price of the house in three years. They levied penalties and changed terms at the last minute, at closings.
These practices gave rise to the term “predatory loan.” Predatory lending practices are and always have been illegal. Predatory loans bring about rapid financial crises for borrowers through penalties and increased payments, often causing families to lose their houses, or being forced into the expensive bankruptcy process.
I think I got a predatory loan… am I just out of luck?
No. If you got a “predatory loan,” you could actually have a strong case in United States Federal Court to get
- Your mortgage changed or modified by the Court, including possible lower interest rates,
- Penalty payments refunded,
- Legal fees for the lawsuit paid by the bank that broke the law,
- Any marks made against your credit rating by the mortgage lender removed, and
- possible punitive damages payments.
Again, this is only if you fell victim to “predatory lending practices,” which requires that your lender actually broke laws that applied to you at the time you closed on your loan.
How can you tell if you got a predatory loan?
There is a questionnaire later in this post. If you answer “Yes” to one or more of the questions, there is a possibility you got a predatory loan.
What can I do if I don’t have a predatory loan, but can’t afford my house any more?
Contact a local real estate agent immediately. Try to sell, even if it’s the last thing you want to do. Clean up your house and yard as best you can to get the highest offer possible given the current market conditions. Discuss “short sales” with your real estate agent. Keep paying all your other bills on time if you can. Bankruptcy is an expensive option out. Avoid it if you can.
What can you do about your predatory loan if you have one?
You can contact a forensic audit/accounting company that is extremely familiar with real estate law and the mortgage closing process and has contacted attorneys in your area about taking predatory loan cases on a contingency basis.
“I have a financial crisis right now. How do you expect me to pay a fee? How do expect me to pay a lawyer?”
If you have a predatory loan and enough of the documentation (mortgage paperwork, letters, saved emails, etc) and you have a very good case, there is temporary financial relief for you built in to the process. When a lawsuit is filed against your predatory lender, your attorney may also file a restraining order against your lender. This freezes your mortgage for the duration of the lawsuit process. This means you make no more payments until a settlement is reached with your lender, or you prevail in court. If you have been able to make payments until your interest rate adjusted or payments increased, you will probably not find this fee to be excessive at all. Your attorney’s fees are paid by the lender when you prevail, that is, win, in court. Your attorney has to file the right motions!
Does the lawyer taking the case on a contingency basis mean I don’t have any legal costs to sue?
No. Your attorney will probably require one initial retainer fee to offset the costs of all initial court filings. All of your additional legal costs will be paid by the highly probable settlement.
“Do I get my house for free if I win?”
No. A successful lawsuit against a predatory lender means that excessive penalties you have already been charged may be refunded, and interest rates and the terms of your mortgage are modified to be in line with standard mortgages most other people got.
How long does the whole process take?
This process could take anywhere from three months to 24 months, depending on the case load of the Court System.
Is this like other mortgage modification plans?
No. Absolutely not. This process is for people who have been given predatory loans in violation of real estate law. This involves filing a lawsuit in a United States Federal Court against your mortgage lender. New, more standard terms are negotiated with your mortgage lender directly, balances adjusted, penalties refunded, etc.
How is this different from filing for bankruptcy?
In a bankruptcy filing, your credit rating suffers, you lose your assets, and you pay your bankruptcy attorney’s fees. In this process, if you have a good case and you prevail, any negative marks against your credit rating made by your mortgage lender are cleaned up and removed, your attorney’s fees are paid by the lender, and you keep your house and other assets.
“..But I never got any mortgage paperwork!”
This is another matter altogether. If you can provide proof in the form of unanswered letters, phone calls, emails, you may have a strong case.
How can you tell if you got a predatory loan?
If one or more of the following statements is true, you may have a predatory loan:
- You refinanced in 2005 or later.
- Your home is worth less than you owe.
- The Interest Rate or Total Loan Amounts were changed at the last minute, resulting in you owing/paying more on your loan(s).
- You paid more than $5,000 in closing costs.
- You were not encouraged to read your closing documents and were just told where to sign.
- You signed closing documents without a loan officer or mortgage broker present to answer any questions.
- Your closing documents were not in your native language.
- You don’t speak English well and you were not provided a translator.
- Your loan has excessive prepayment penalties.
- Your loan charges a prepayment penalty if you refinance before the loan converts to a higher payment.
- You were asked to sign blank forms.
- You didn’t get copies of any/all of your closing documents.
- You were given a loan you can never repay.
- Some of your documents were falsified by your mortgage broker to show that you made more income than you really did earn.
- All of the terms of your loan were not fully explained to you.
- You paid $35 or more at closing than you were told you would have to pay.
- At closing, your interest rate was .125% or more higher than you were told it would be.
- You have a pick-a-payment loan.
- You have a Negative Amortization loan.
- You have, or did have an Adjustable Rate mortgage or an interest only loan.
- When you got the loan, your debt-to-income ratio was more than 55%.
- You were asked to pay more for your loan because the mortgage broker wanted to include unnecessary insurance or other products and financed them into your loan.
- Your loan requires ‘Mandatory Arbitration’ if you want to take your lender to court.
- If you were given a subprime mortgage even when you feel you could have qualified for a mainstream mortgage at a better interest rate.
- If you were promised that your payment included taxes and insurance and does not cover them.
- You supplied W-2s and tax forms but were still put in a “stated income” loan.
- If you had good credit but were put into a no-doc loan or were put into what you think is a subprime mortgage.
- You weren’t given preliminary closing documents at least 24 hours before your closing time.
- If you were promised anything and it didn’t happen or was different from what you were told.
- If you feel you were misled or cheated in any way.