Archive Press Releases
LIST OF ABUSIVE SUBPRIME MORTGAGE
I. ORIGINATION OF THE LOAN
- Solicitations. Predatory mortgage lenders target lower income and
minority neighborhoods for extensive marketing. They advertise through television
commercials, direct mail, highly visible signs in neighborhoods, telephone and door to
door solicitations, and flyers stuffed in mailboxes. Many companies deceptively tailor
their solicitations to resemble social security or other government checks to prompt
homeowners to open the envelopes and otherwise deceive them about the transaction.
- Home Improvement Scams. Predatory mortgage lenders use local home
improvement companies essentially as mortgage brokers to solicit loan business. These
companies target homeowners and solicit them to execute home improvement contracts.
Sometimes they falsely claim that government subsidies are available to pay for the cost
of the home improvements. The company may originate a mortgage loan to finance the home
improvements and sell the mortgage to a predatory mortgage lender, or steer the homeowner
directly to the predatory lender for financing of the home improvements. The homeowners
are often grossly overcharged for the work, which the contractors often perform shoddily
and fail to complete as agreed. They sometimes damage the homeowner's personal property in
the process. In other cases, the contractor fails to obtain required permits, thereby
making sure that the work is not inspected for compliance with local codes, and that
shoddy work need not be corrected.
- Mortgage Broker's Fees and Kickbacks. Predatory mortgage lenders also
originate loans through local mortgage lenders who act as "bird dogs", or
finders for the lenders. These brokers represent to the homeowners that they are working
for them to help them obtain the best available loan, and the homeowners usually pay a
broker's fee. In fact, the brokers are working for predatory lenders, who pay brokers
kickbacks to refer borrowers for loans at higher interest rates than those for which the
borrower would otherwise qualify. On loan closing documents, the industry uses euphemisms
to describe these referral fees: yield spread premiums and service release fees. Also,
unbeknownst to the borrower, her interest rate is increased to cover the fee. The industry
calls this bonus upselling or par-plus premium pricing; we call it paying unlawful
- Steering to High Rate Lenders. Some banks and mortgage companies steer
customers to high rate lenders, even though those customers may have good credit and would
be eligible for a conventional loan from that bank or lender. Sometimes the customer is
turned or steered away even before completing a loan application. In other cases, the loan
application is wrongfully denied and the customer is referred to a high rate lender, who
is often an affiliate of the bank or mortgage company. Kickbacks or referral fees are paid
as an incentive to steer the customer to a higher rate loan.
- Making Unaffordable Loans. Some predatory mortgage lenders purposely
structure loans with monthly payments that they know the borrower cannot afford so that
when the homeowner is led inexorably to the point of default, she will return to the
lender to refinance the loan, and the lender can impose additional points and fees. Other
predatory mortgage lenders, called hard lenders, intentionally structure the loans with
payments the homeowner cannot afford in order to lead to foreclosure so that they may
acquire the house and the valuable equity in the house at a foreclosure sale.
- Falsified or Fraudulent Applications. Some lenders knowingly make loans
to unsophisticated homeowners who do not have sufficient income to repay the loan. Often,
such lenders wish to sell the loan to an investor, which requires that the borrower appear
to have sufficient income to repay the loan. Such lenders have the borrowers sign a blank
application form, and then insert false information on the form, claiming that the
borrower has employment income that she does not, so it appears that she can make the
- Adding Co-signers. This is done to create the false impression that the
borrower is able to pay off the loan, even though the lender is well aware that the
co-signer has no intention of contributing to the payments. Often, the lender requires the
homeowner to transfer half ownership of the house to the co-signer. The homeowner thereby
loses half the ownership of the home and is saddled with a loan she cannot afford to
- Incapacitated Homeowners. Some predatory lenders make loans to
homeowners who are clearly mentally incapacitated. They take advantage of the fact that
the homeowner does not understand the nature of the transaction or the papers that she
signs. Because of her incapacity, the homeowner does not understand that she has a
mortgage loan, does not make the payments, and is subject to foreclosure and subsequent
- Forgeries. Some predatory lenders forge loan documents. In an ABC
Prime Time Live news segment that aired April 23, 1997, a former employee of a high cost
mortgage lender reported that each of the lender's branch offices had a "designated
forger" whose job it was to forge documents. In such cases, the unwary homeowners are
stuck with loans they know nothing about.
- High Annual Interest Rates. Because the purpose of engaging in
predatory lending is to reap the benefit of high profits, these lenders always charge
extremely high interest rates. This drastically increases the cost of borrowing for
homeowners, even though the lenders' risk is minimal or non-existent. Predatory lenders
may charge rates of 19% to 25%, or three times the rates of 7% to 7.5% being charged for
- High Points. Legitimate lenders charge points to borrowers who wish to
buy down the interest rate on the loan. Predatory lenders charge high points, but offer no
corresponding reduction in the interest rate. These points are imposed through prepaid
finance charges (or points or origination fees), which are usually 5% to 10%, but may be
as much as 20%, of the loan. The borrower does not pay these points with cash at closing.
Rather, the points are always financed as part of the loan. This increases the amount
borrowed, which produces more actual interest to the lender.
- Balloon Payments. Predatory lenders frequently structure loans so that
the borrower's payments are applied primarily to interest, and at the end of the loan
period, the borrower still owes most or all of the principal amount borrowed. The last
payment balloons to an amount often equal to 85% or so of the principal. The homeowner
cannot afford to pay the balloon payment, and either loses the home through foreclosure or
is forced to refinance with the same or another lender for an additional term at
- Negative Amortization. This involves structuring the loan so that
interest is not amortized over the term. Instead, the monthly payment is insufficient to
pay off accrued interest and the principal balance therefore increases each month. At the
end of the loan term, the borrower may owe more than the amount originally borrowed. With
negative amortization, there will almost always be a balloon payment at the end of the
- Credit Insurance - Insurance Packing. Predatory mortgage lenders market
and sell credit insurance as part of their loans, often without the knowledge or consent
of the borrower. Typical insurance products sold in connection with loans include credit
life, credit disability, credit property, and involuntary unemployment insurance. Lenders
frequently charge exorbitant premiums, which are not justified based on the extremely low
actual loss payouts. Frequently, credit insurance is sold by an insurance company which is
either a subsidiary of the lender or which pays the lender substantial commissions.
Another way of charging excessive premiums is to over-insure borrowers by providing
insurance for the total indebtedness, including principal and interest, rather than merely
the principal amount of the loan. In short, credit insurance becomes a profit center for
the lender and provides little or no benefit to the borrower.
- Padding Closing Costs. In this scheme, certain costs are increased
above their market value as a way of charging higher interest rates. Examples include
charging document preparation fees of $350 or credit report fees of $150, which are many
times the actual cost.
- Inflated Appraisal Costs. In most mortgage loan transactions, the
lender requires an appraisal. Most appraisals include a detailed report of the condition
of the house, both interior and exterior, and prices of comparable homes in the area.
Others are "drive-by" appraisals, done by someone simply looking at the outside
of the house. The former naturally costs more than the latter. However, in some cases,
borrowers are charged for a detailed appraisal, when only a drive-by appraisal was done.
- Padded Recording Fees. Mortgage transactions usually require that
documents be recorded at the local courthouse, and state or local laws set the fees for
recording the documents. Predatory mortgage lenders often charge the borrowers a recording
fee in excess of the actual amount established by law.
- Bogus Broker Fees. In some cases, predatory lenders charge borrowers
broker fees when the borrower never met or knew of the broker. This is another way such
lenders increase the cost of the loan for their own benefit.
- Unbundling. This is another way of padding costs by breaking out and
itemizing charges that are duplicative or should be included under other charges. An
example is charging a loan origination fee, which should cover all costs of initiating the
loan, but then imposing separate, additional charges for underwriting and loan
- Excessive Prepayment Penalties. Predatory lenders often impose
exorbitant prepayment penalties. This is done in an effort to lock the borrower into the
predatory loan for as long as possible by making it difficult for her to refinance the
mortgage or sell the home. This practice provides back end interest for the lender if the
borrower does prepay the loan.
- Mandatory Arbitration Clauses. By inserting pre-dispute, mandatory,
binding arbitration clauses in contractual documents, some lenders attempt to obtain an
unfair advantage by relegating their borrowers to a forum perceived to be more favorable
to the lender. This perception exists because discovery is not a matter of right, but is
within the discretion of the arbitrator, the proceedings are private, arbitrators need not
give reasons for their decisions or follow the law, a decision in any one case will have
no precedential value, judicial review is extremely limited, and injunctive relief and
punitive damages are not available.
- Flipping. Flipping involves successive, repeated refinancing of the
loan by rolling the balance of the existing loan into a new loan for the new amount.
Flipping always results in higher costs to the borrower. Because the existing balance of
one loan is rolled into a new loan, the term of repayment is repeatedly extended through
refinancing. This results in more interest being paid than if the borrower had been
allowed to pay off each loan separately. A powerful example of the exorbitant costs of
flipping is the case of Bennett Roberts, who had eleven loans from a high cost mortgage
lender within a period of four years. See Wall Street Journal, April 23, 1997.
Mr. Roberts was charged in excess of $29,000 in fees and charges, including 10 points on
every financing, plus interest, to borrow less than $26,000. To paraphrase from the famous
Eagles' song, "Welcome to the Hotel California, you can check in but you can never
- Spurious Open End Mortgages. In order to avoid making required
disclosures to borrowers under the Truth in Lending Act, many lenders are making
"open-end" mortgage loans. Although the loans are called "open-end"
loans, in fact they are not. Instead of creating a line of credit from which the borrower
may withdraw cash when needed, the lender advances the full amount of the loan to the
borrower at the outset. The loans are non-amortizing, meaning that the payments are
interest only, so that the balance is never reduced.
- Paying Off Low Interest Mortgages. A predatory lender usually insists
that its mortgage loan pay off the borrower's existing low cost, purchase money mortgage.
Instead of lending the borrower the amount he actually needs, the lender increases the
amount of the new mortgage loan by also paying off the current mortgage. The homeowner is
stuck with a high interest rate mortgage and a principal amount that is much higher than
necessary. This is called overlending.
- Paying Off Forgivable Loans and Non-interest Loans. Many lower
income homebuyers obtain down payment assistance grants from state and local agencies.
These grants are included in the purchase money mortgage loan but are forgiven as long as
the homebuyer remains in the home for five or ten years. Other government programs allow
lower income and elderly homeowners to obtain grants for necessary home improvement work
to bring homes up to code standards. These grants are also made in the form of mortgage
loans which are forgiven as long as the homeowner remains in possession of the home for
five or ten years. Habitat for Humanity provides home purchase mortgage loans which no
interest is charged to low income homebuyers. When many subprime mortgage lenders make
loans to these homeowners, they insist that these forgivable loans be paid off (to
increase the amount borrowed) even though these loans would be forgiven in a matter of a
few short years. Housing activists in North Carolina have investigated cases where
subprime mortgage lenders have refinanced Habitat for Humanity homebuyers by paying off
their no interest Habitat mortgage loans. They offer "cash out" loans to entice
these homeowners to refinance their no interest loans.
- Shifting Unsecured Debt Into Mortgage. Mortgage lenders badger
homeowners with advertisements and solicitations that tout the "benefits" of
consolidating bills into a mortgage loan. The lender fails to inform the borrower that
consolidating unsecured debt into a mortgage loan secured by the home is a bad idea.
Paying off the unsecured debt, which necessarily increases closing costs, since they are
calculated on a percentage basis, increases the loan balance. Moreover, this practice
increases the monthly payments, and exacerbates the risk that the homeowner will lose the
- Making Loans In Excess of 100% Loan to Value (LTV). Some lenders are
making loans to homeowners in amounts that exceed the fair market value of the home. This
makes it very difficult for the homeowner to refinance the mortgage or to sell the house
to pay off the loan, thereby locking the homeowner into a high cost loan. Normally, if a
homeowner goes into default and the lender forecloses on a loan, the foreclosure sale
generates enough money to pay off the mortgage loan and the borrower is not subject to a
deficiency claim. However, where the loan is 125% LTV, a foreclosure sale may not generate
enough to pay off the loan, and the lender may pursue the borrower for the deficiency.
II. SERVICING OF THE LOAN
- Force Placed Insurance. Lenders require homeowners to carry homeowner's
insurance, with the lender named as a loss payee. Mortgage loan documents allow the lender
to force place insurance when the homeowner fails to maintain the insurance, and to add
the premium to the loan balance. Some predatory lenders force place insurance even when
the homeowner has insurance and has provided proof of insurance to the lender. The
premiums for the force placed insurance are frequently exorbitant. Often the insurance
carrier is a company affiliated with the lender, and the force placed insurance is padded
because it covers the lender for risks or losses in excess of what the lender may require
under the terms of the loan.
- Daily Interest When Payments Are Made After Due Date. Most
mortgage loans have grace periods, during which a borrower may make the monthly payment
after the due date without incurring a late charge. The late charge often is assessed as a
small percentage of the late payment. However, many lenders also charge daily interest
based on the outstanding principal balance. While it may be proper for a lender to charge
daily interest when the loan so provides, it is deceptive for a lender to charge a late
fee as well as daily interest when a borrower pays before the grace period expires.
III. COLLECTION OF THE LOAN
- Abusive Collection Practices. In order to maximize profits, predatory
lenders either set the monthly payments at a level the borrower can barely sustain or
structure the loan to trigger a default and a subsequent refinancing. Adding insult to
injury, the lenders use aggressive collection tactics to ensure that the stream of income
flows uninterrupted. The collection departments call homeowners at all hours of the day
and night, send late payment notices (in some cases, even when the lender has received
timely payment or even before the grace period expires), send telegrams, and even send
agents to hound homeowners, who are often elderly widows, into making payments. These
abusive collection tactics often involve threats to evict the homeowners immediately, even
though lenders know they must first foreclose and follow eviction procedures. The
resulting impact on homeowners, especially elderly homeowners, can be devastating.
- High Prepayment Penalties. See description above. When a a
borrower is in default and must pay the full balance due, predatory lenders will often
include the prepayment penalty in the calculation of the balance due.
- Flipping. See description above. When a borrower is in
default, predatory mortgage lenders often use this as an opportunity to flip the homeowner
into a new loan, thereby incurring additional high costs and fees.
- Foreclosure Abuses. These include persuading borrowers to sign deeds in
lieu of foreclosure, giving up all rights to protections afforded under the foreclosure
statute, sales of the home at below market value, sales without the opportunity to cure
the default, and inadequate notice which is either not sent or backdated. We have even
seen cases of "whispered foreclosures", in which persons conducting foreclosure
sales on courthouse steps have ducked around the corner to avoid bidders so that the
lender was assured he would not be out-bid. Finally, foreclosure deeds have been filed in
courthouse deed records without a public foreclosure sale.