What is Predatory Home Lending?
Predatory Lending is illegal. Here are some tips to avoid predatory lenders.
If I pledge my home as security for a consumer loan, what dangers do I face?
If you own a home it is likely to be your greatest single asset. Unfortunately, if you agree to a loan that is based on the equity which you have in your house, you are putting your most valuable asset at risk. You should be careful because certain abusive or exploitive lenders (Commonly called Predatory Lenders) target home owners (particularly the elderly, minorities, low income persons and those with poor credit ratings). Although there are many reputable lenders, the past few years have seen an increase in the "fringe credit market". Luckily, there is some protection under both federal and state law. First, Congress passed the "Truth in Lending Act" (TILA) in 1968. TILA can be found at 15 U.S.C. 1600 et. seq. It is implemented by the Federal Reserve Board's Regulation Z at 12 CFR, Part 226 and by the Federal Reserve Board's Official Staff Commentary to Regulations Z (OSC). In 1994, Congress passed the "Home Ownership and Equity Protection Act of 1994", which amended TILA to protect consumers who could fall prey to "high cost" lenders. These high-cost mortgages (referred to as Section 32 Mortgages by the Federal Reserve) require additional disclosures in mortgage transactions consummated after October 1, 1995. The Nevada Legislature passed AB 284 during its 2003 session which became effective October 1, 2003. It provides even stronger protections under state law. Both TILA and AB 284 are discussed below.
What are some common home equity scams?
According to the Federal Trade Commission (FTC), you should be aware of the following schemes:
Equity Stripping. A lender tells you that you can get a loan, even though you know your income is not enough to keep up the monthly payments. The lender is attracted by the high equity in your home. The lender may encourage you to "pad" your income on your application form to help get the loan approved. The lender doesn't care if you can't make your monthly payments. As soon you miss a payment, the lender will foreclose - taking your home and stripping you of the equity you spent years building.
Balloon Payments. You are behind in your mortgage and face foreclosure. Another lender offers to save you by financing your mortgage and lowering your monthly payments. Check the loan terms carefully because the payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end, the principal (i.e. the entire amount borrowed) is due in one lump sum, called a "balloon payment". If you can't make the balloon payment or refinance the debt, you face foreclosure again.
Loan Flipping. Suppose you had your mortgage for years but could use some extra money. A lender calls to talk about refinancing, and using the availability of extra cash as "bait", claims it is time that the equity in your home started "working" for you. You agree to refinance. If after a few payments, the lender calls to offer you a bigger loan for another purpose; say a vacation. If you accept, the lender refinances your original loan and then lends you additional money. In this practice, called "flipping", the lender charges you high points each time you refinance, and may increase your interest rate is well. If the loan has a prepayment penalty, you pay that each time you get a new loan. With each refinancing, you increase your debt and probably pay a high-price for some extra cash. After a while you are over your head and face losing your home.
The "Home Improvement" Loan. A contractor knocks on your door and offers to install new roof at a price that sounds reasonable. You say that you are interested but can't afford it. He says he can arrange financing through a lender he knows. You agree and he begins the work. At some point after he starts your are asked to sign some papers. The papers may be blank or the lender may rush you to sign before you have time to read what you've been given. The contractor threatens to leave the work on your house unfinished if you don't sign. You sign the papers and later realize that you have signed a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn't done right or hasn't been completed (or even started). The contractor has been paid by the lender and has little interest in doing the work to your satisfaction.
Credit Insurance Packing. Lenders use many tricks to get you to buy credit insurance that you do not need. At the closing, the lender gives you papers to sign that include charges for credit insurance or other "benefits" that you did not ask for and do not want. The lender hopes you don't notice and doesn't explain how much extra money the insurance costs. You may not ask questions or object because you are afraid that you might lose the loan if you do. The lender may say that insurance comes with the loan to fool you into believing that it comes at no extra cost. If you object, the lender may even tell you that if you want a loan without the insurance, the papers must be rewritten which could take extra time and cause the manager to reconsider whether to approve it. When you agree to buy the insurance, you're paying extra for the loan by purchasing a product you may not want or need.
Mortgage Servicing Abuses. After your mortgage is approved some lenders try to trick you into paying more than you owe. You may get a letter saying that your monthly payments will be higher than you expected. The lender says your payments include escrow taxes and insurance, even though you paid for them yourself with the lender's okay. In a later message, the lender says you are being charged late fees, even though your payments have been on time. You may receive a message saying that you failed to maintain required property insurance and the lender is buying more costly insurance at your expense. Unexplained legal fees are added to the amount you owe without an accurate or complete account of those charges. You ask for a payoff statement to refinance and receive one that is inaccurate or incomplete.
Signing Over Your Deed. If you face foreclosure you may feel desperate. Another "lender" may contact you with an offer to help you find new financing. Before he can help you, he asks that you deed your property over to him (claiming it is a temporary measure to prevent foreclosure). The refinancing that would save your home never comes through. Once the lender has the deed to your property, he starts to treat it as his own. He borrows against it or sells it for his benefit. He treats you as a tenant in your own home and your mortgage payment as rent. If your "rent" payments are late, you'll be evicted.
How can I protect myself against home equity scams?
To protect yourself against losing your home:
- agree to buy something on the spot because the lender says it might not be available later,
- agree to a home equity loan if you can't afford the monthly payments,
- sign any document that you haven't read or which has blank spaces,
- let anyone pressure you into signing anything,
- agree to a loan that includes credit insurance that you don't want,
- let promises of extra to cash or lower payments cloud your judgment,
- deed your property to anyone,
- sign loan paperwork before receiving the TILA disclosures (interest rates, monthly payments, etc.) and Real Estate Settlement Procedures Act, (RESPA) settlement sheet (details closing costs) and fully understand them).
- keep careful records
- challenge any charges you think are inaccurate,
- check the contractor's references and get more than one estimate,
- shop around for rates, charges, and estimates,
- ask if credit insurance is required as a condition of the loan,
- shop around for credit insurance if it is required,
- know your rescission rights (see below),
- seek advice from knowledgeable family members or others you trust,
- investigate the reputation of any prospective lender, and
- seek legal advice.
When can I cancel a home equity loan?
When you use your home as collateral for a loan, TILA gives you the right to cancel the credit transaction within three business days. This "right of rescission" gives you three extra days to reconsider whether you want to use your home to guarantee payment for a personal loan. It applies even if your home is a condominium, mobile home, or houseboat, as long it is as it is your principal residence.
The right applies to certain installment loans as well as to home equity credit lines (a form of revolving credit in which your home serves as collateral).
You also have the right to rescind when you could lose your home by operation of law. For example, if you sign a home repair contract and agree to repay the debt in over four installments, the repairman could file a lien against your home if you do not pay. Under those circumstances you also have the right to rescind within three days.
The right to rescind does not apply to all situations where your home is used as collateral for a loan. You do not have the right to rescind when:
- you apply for a loan to buy or build your home;
- you consolidate or refinance a loan already secured by your home with the same creditor, without borrowing additional funds; or
- a state agency is the creditor for the loan.
What does it mean to rescind a loan?
To rescind means you are canceling the deal, i.e., deciding that you do not want the loan or the service being financed. You can rescind within three days for any reason. You may find better credit terms or simply change your mind.
How can I rescind a credit transaction?
You have until midnight of the third business day after the transaction to rescind. Day One is the first day after all three of the following events occur:
- You sign the credit contract.
- Your receive a Truth in Lending disclosure form containing certain important (material) disclosures about the credit contract.. These disclosures explain the key terms of the credit being offered. They are:
- the Annual Percentage Rate (APR),
- the finance charge,
- the amount financed,
- the total of payments, and
- the payment schedule.
- You receive two copies of a notice explaining your right to rescind.
For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays. Regulation Z 226.2(a)(6). During the three-day period, your creditor should not take any action such as giving you the money from the loan or starting work on a home improvement contract.
If you decide to rescind, you must notify the creditor in writing that you are canceling the contract. You may use the form provided to you by the creditor, a letter, or telegram. Make sure that your written notice is delivered, mailed, or filed for telegraphic transmission before midnight of the third business day. Regulation Z 226.23(a). You cannot rescind by simply telephoning or visiting the creditor.
If you never received the disclosures or the notice of rescission from the creditor (nos. 2 & 3 above), you can cancel at any time during the first three years after you signed the credit contract or before you sell your home...whatever occurs first.
In 1995, however, Congress relaxed the requirements on lenders to be completely accurate in disclosing the amount of the finance charge, creating five categories of "tolerances". How much of an error which can be tolerated depends upon whether the consumer is suing for damages, exercising the extended right to rescind (up to 3 years), or facing foreclosure. See 15 U.S.C. 1605(f).
What happens if I rescind a loan?
Within 20 days after a creditor receives your notice of rescission, all money or property you paid as part of the transaction must be returned to you. The creditor must also release any security interest in your home.
If you received money or property (such as building materials) from the creditor, keep them until the creditor proves that your home is no longer be held as collateral and has returned any money you have already pay. (For example, the creditor may show you a release of a lien which was filed at your city or county clerk's office to prove that your house is no longer held as collateral). You must then offer to return the creditor's property or money. If the creditor does not reclaim it within 20 days, you may keep the property or money.
Can I waive my right to rescind?
Yes. If you have a financial emergency, you be unable to wait for three business days. For example, you may need to borrow money quickly to have a damaged roof or foundation repaired. You can waive your right to rescission if you have a "bona fide personal financial emergency". If so, you can have a loan processed to meet the emergency situation. You must give the creditor your own written statement (pre-printed forms do not count) describing the emergency and clearly stating that you are waiving your right to rescind. The waiver must be dated and signed by you, as well as anyone else who shares in the ownership of your home.
Consider this decision carefully. If you waive your right to rescind, you must go ahead with the deal.
Am I entitled to any extra protections under TILA if I receive a high cost home loan?
Yes. As noted above, in 1994, Congress passed the "Home Ownership and Equity Protection Act of 1994" which amended TILA to protect consumers who could fall prey to "high cost" lenders. These high-cost mortgages (referred to as Section 32 mortgages by the Federal Reserve Board) require additional disclosures in mortgage transactions consummated after 10-1-95. A failure to provide these disclosures gives a new basis to rescind a Section 32 mortgage loan. Regulation Z 226.23(a)(3) and 226.32 (c).
When must be additional disclosures in high-cost mortgages be given?
As noted above, traditional TILA disclosures must be given at the time the loan papers are signed. Borrowers then have an additional three business days to rescind if their homes are pledged as collateral. For high cost mortgage loans, the disclosures must be given three days earlier, i.e., three days prior to the signing of the loan documents.
What are the additional disclosures that must be made in high-cost mortgages?
Four additional disclosures are required. Regulation Z 226.32 (c). They are:
- The following statement must be included:
- "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you put into it, if you do not meet your obligations under the loan."
- The APR
- The dollar amount of the regular payment
- For variable rate loans, the creditor must say that the interest rate and monthly payment may increase and disclose the maximum possible monthly payment.
Are there any loan terms in high cost mortgages which are forbidden by TILA?
Yes. If any of the following prohibited loan terms appear in a high cost mortgage loan, you have a right to rescind:
- balloon payments, if the loan term is less than five years; 15 U.S.C.1639(e),
- advance payments, that is a payment schedule that consolidates more than 2 periodic payments and pays them in advance from loan proceeds;15 U.S.C.1639(g),
- negative amortization , which occurs when the borrower's payments are less than the interest accruing on the loan, thus causing the principal to grow over the course of the loan, instead of decreasing;15 U.S.C.1639(f),
- an interest rate which decreases after default; 15 U.S.C.1639(d)
- rebates which are calculated by method unfavorable to the consumer; 15 U.S.C.1639(d), and
- Prepayment penalties with certain exceptions; 15 U.S.C.1639(c).
Are there any acts or practices which TILA forbids by high rate mortgage lenders?
Yes. Regulation Z 226.32 (e) forbids certain acts and practices in connection with high rate mortgages. It isn't clear, however, whether any remedies, other than damages, are available to consumer. The forbidden acts and practices are:
- Engaging in a pattern or practice of extending credit to consumers based on the value of the consumer's equity ("equity skimming") where the consumer's income is insufficient to repay the loan.
- Paying a home improvement contract directly from the loan proceeds (the lender is permitted to issue a check payable jointly to the consumer and contractor or the consumer alone or to a third party escrow agent).
- Selling or assigning a high rate mortgage without furnishing the following statement to the purchaser/assignee:
"Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against creditor."
How does TILA define a high cost mortgage?
High cost mortgages fall into two categories. Neither category has a clear definition. The first category is based on the APR and is "high cost" if the APR exceeds certain established rates by more than 10%. Regulation Z, 226.32(a)(1)(i). The second category is based upon the "points and fees " charged to the borrower and is "high cost" where "points and fees" exceed the greater of $400 or 8% of the "total loan amount". Regulation Z, 226.32(b)(1).
What can I do if my TILA rights are violated?
If your TILA rights are violated, you may enforce them in either state or federal court. You have the following possibilities:
Suits for damages: you may file a civil lawsuit either as an individual or a class-action for damages if the lender has failed to provide you with proper TILA disclosures. 15 U.S.C.1640. You may also file a TILA counterclaim if you are sued on the debt. In an individual action you may recover any actual damages that you have suffered plus:
- an amount equal to twice the finance charge,
- for consumer lease violations, 25% of the total of monthly payments under the lease ( but not less than $100 nor more than $1000),or
- for individual actions related to credit transactions, not under an open end credit plan that is secured by real property or a dwelling, not less than $200 or more than $2,000.
- for failure to comply with the disclosure requirements related to high interest mortgages, an amount equal to the sum of all finance charges and fees paid by the consumer (unless the lender demonstrates that they are to comply is not material).
For class-action lawsuits there is no minimum recovery for each member. The total recovery to the class is limited to not more then $500,000 or 1% of the net worth of the creditor.
Rescission rights. You may also sue or counterclaim to enforce your right to rescind a loan transaction secured by your home. 15 U.S.C. 1635 & 1640 (a)(3). You also have the right to enforce your rescission rights in the context of state court foreclosure proceedings. 15 U.S.C. 1635(I). The allowed tolerance for an inaccurately disclosed finance charge raised as a basis for rescission in foreclosure proceedings is only $35.00 [much higher tolerances are allowed to consumer files and affirmative action. 15 U.S.C. 1605 (f)].
Attorneys fees and court costs. If you are successful in a suit for either damages and/or enforcement of rescission rights the court should require that the lender pay your attorneys fees and court costs.
Suits by state Attorney Generals. A state Attorney General may also sue to enforce the requirements under 15 U.S.C. 1639 regarding high rate mortgages.
What can lenders due to keep from paying me damages once they have violated TILA?
Even if a lender fails to accurately make all disclosures required by TILA, a lender may avoid liability. First the lender is allowed to correct errors within sixty days after discovering them, unless you have already filed a lawsuit or notified the lender in writing of the error. 15 U.S.C.§1640 (b). Next the lender may avoid liability by showing that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid the error. Such mistakes as miscalculations, clerical errors, computer malfunctions, printing errors, etc. may be held to be bona fide good faith errors. 15 U.S.C. 1640(b).
If the lender has made multiple errors in the same transaction, you may recover damages for only one error. 15 U.S.C. 1640 (g). You must generally bring your lawsuit within one year of the occurrence of the TILA violation. 15 U.S.C.1640 (e).
What additional protections do I have under State law?
Nevada law now provides you several additional protections.
NRS 205.372 makes “mortgage lending fraud” a felony. Loosely speaking, “mortgage lending fraud” occurs when someone, with the intent to defraud, misrepresents or hides a material fact in a mortgage transaction or takes advantage of another doing so. It also includes conspiracy to do so and knowingly filing documents containing such misinformation. Suspected “mortgage lending fraud” can be reported to the Attorney General’s office.
Under NRS 598D It is now an "unfair lending practice" for a lender to:
- require a borrower, as a condition of obtaining or maintaining a home loan secured by home property to provide property insurance on improvements to the home property in an amount that exceeds the reasonable replacement value of the improvements.
- knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower [based], including, without limitation, a low-document home loan, no-document home loan or stated-document home loan solely upon the equity of the borrower in the home property and without, without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the home loan from other assets, including, without limitation, income. (see "Equity Stripping" discussed above)
- finance a prepayment fee or penalty in connection with the refinancing by the original borrower of a home loan owned by the lender or an affiliate of the lender (see "Loan Flipping" discussed above).
- finance, directly or indirectly, in connection with a home loan, any credit insurance (see "Credit Insurance Packing discussed above).
What are low-document, no-document or stated-document home loans?
They are home loans whose terms allow a borrower to establish his ability to repay the home as follows:
- “low-document home loan”
- limited verification of his income and other assets; or
- a deed transferring some or all of the interest of the borrower in the home property to the creditor.
- “no-document home loan” - without providing any verification of income/ other assets.
- “stated-document home loan” - only his own statement of verification of his income and other assets.
What can I do if I am a victim of "Unfair Lending Practices"?
A lender who willfully engages in an unfair lending practice described in this section is guilty of a misdemeanor, so you can report the lender to the police, the District Attorney or the State Attorney Generals office.
You can also sue the lender. If you can prove the lender has "willfully" engaged in an unfair lending practice you may recover three times the amount of your actual damages, costs and reasonable attorney's fees. You also have a defense against the unpaid obligation of the home loan to the extent of any damages awarded by a court and the court may cure any existing default of your home loan and cancel any pending foreclosure sale, trustee's sale or other sale to enforce the loan.
What Protections do I have if my lender tries to forclose on my high-cost mortgage?
Typically, foreclosures in Nevada take place without a court proceeding. If you have one of the high cost (Section 32) mortgages under Section 152 of the Home Ownership nad Equity Protection Act of 1994, 15 U.S.C. Section 1602(aa), and REgulations Z at 12 C.F.R. 226.32 as discussed above, NRS 107.085 requires a notice 60 days prior to the foreclosure on high-cost loans as follows:
YOU ARE IN DANGER OF LOSING YOUR HOME! Your home loan is being foreclosed. In 60 days your home will be sold and you will be forced to move. For help call: Consumer Credit Counseling, The Attorney General, The Division of Financial Institutions, Legal Services, Your Lender, or the Nevada Fair Housing Center.
If you recive such a notice, you should immediately ask one of the above named organizations to review your loan to determine if an unfair lending practice has occurred. If you file suit claiming an unfair lending practice, the foreclosure sale must be postponed until at least 30 days following the date your complaint is filed with the court.
Should I contact an Attorney if I believe that my TILA or state law rights have been violated?
Yes. The Truth In Lending Act and state law are both highly technical. It is best to seek the assistance of an attorney.