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Texas Response to Predatory Lending Practices

 

Practices Commonly Pointed Out as Predatory

Practice

Description

Texas Response

Equity Stripping

A predatory lender targets an individual with a great deal of equity in their home. The lender then loans a borrower more than the borrower can financially handle, knowing the borrower is likely to default. The lender can then foreclose on the home, stripping the homeowner of all equity earned.1

Home Equity Constitutional Protections:

  • Restricts the amount of equity that can secure the loan to 80% providing some equity remains with the homeowner

  • Restricts a borrower to one home equity loan per year limiting refinance fees and protecting the borrower’s equity

Texas Finance Code Protections for Second Mortgages:

  • Ensures lenders evaluate a borrower’s ability to repay before a loan is made ensuring that a lender’s lending decision is not based solely upon a borrower’s equity

Flipping

A predatory lender refinances a borrower’s loans repeatedly within a short period of time. Each time the loan is refinanced, or flipped, the borrower is charged high fees, sometimes including prepayment penalties.2

Home Equity Constitutional Protections:

  • Restricts a borrower to one home equity loan per year limiting refinance fees and protecting the borrower’s equity

Texas Finance Code Protections:

  • Restricts lenders from contracting for prepayment penalties on loans with interest rates of 12% or greater to refinance a loan

Packing

The lender packs excessive fees, including unnecessary insurance coverage, other up-front charges, and additional junk fees (escrow waiver fees, fax fees, copy charges, etc.) into the loan agreement without the borrower’s understanding.3 Often the fees far exceed what would be expected or justified based upon economic grounds.4

Home Equity Constitutional Protections:

  • Restricts a lender to 3% in fees limiting the ability of lenders to charge for certain reimbursable costs

Texas Finance Code Protections for Second Mortgages:

  • Limits lenders from collecting fees that are not reasonable or authorized

Insurance Packing

A predatory lender may add unwanted extras to the loan without the borrower’s full knowledge. The most common product added to loans is credit life or disability insurance. In mortgage loans, the cost of credit insurance can be high. On a $28,000 loan, the cost of credit insurance can exceed $4,000. The $4,000 premium is added to the loan and financed over the life of the loan. The lender earns more interest on the loan and also earns a commission for selling the insurance.5

Texas Finance Code Protections for Home Loans:

  • Limits lenders from contracting for insurance where the premium is prepaid in a single installment, without providing a monthly premium alternative where the amount of the insurance is not included in the loan

Balloon Payments

A predatory lender reduces the monthly payment on a home loan by having the borrower pay off only the accrued interest each month. This kind of financing will result in a huge balloon payment at the end of the repayment term, usually ranging from 10 to 15 years. The borrower often believes they are paying down the loan and is completely unaware of the balloon payment due at the end of the term. The borrower may owe as much at the end of the term as they originally borrowed. Elderly borrowers are often unable to refinance the loan, making foreclosure inevitable.6

Home Equity Constitutional Protections:

  • Prohibits lenders from contracting for balloon payments

Texas Finance Code Protections for Second Mortgages:

  • Prohibits lenders from contracting for balloon payments

Aggressive Marketing

Predatory lenders will offer bill consolidation equity loans encouraging consumers to pay off credit card, retail, and motor vehicle debt by consolidating them all into one home loan, promising lower monthly payments. While lower monthly payments do result from this transaction, the consumer trades short-term debt for long-term. Instead of paying off their bills in three to four years, it will now take them 15 to 30 years to pay. The consumer will also pay much more in interest over the life of the loan.7

Home Equity Constitutional Protections:

  • Requires lenders to provide certain disclosures to borrowers warning that failure to repay the loan could result in losing the home

Texas Finance Code Protections:

  • Requires lenders to provide a disclosure to a borrower warning that the loan could be considered a “high cost home loan” and directing the borrower to locations where counseling can be obtained

Fraud and Abuse

In many cases, lenders utilized fraud and abuse to prey on certain groups—the elderly, minorities, and individuals with lower incomes and less education—with deceptive or high-pressure sales tactics.8

Home Equity Constitutional Protections:

  • Requires lenders to provide certain disclosures to borrowers warning that failure to repay the loan could result in losing the home

Texas Finance Code Protections for Home Loans with Interest Rates of 12% or Greater:

  • Requires lenders to provide a disclosure to a borrower warning that the loan could be considered a “high cost home loan” and directing the borrower to locations where counseling can be obtained

Deceptive Trade Practices Act Protections:

  • Restricts lender advertising and sales to ensure that the borrower is not mislead by misrepresentations and false claims

1 Predatory Mortgage Lending, North Carolina Department of Justice, 1999, 2000, State of North Carolina, p1.

2 Curbing Predatory Home Mortgage Lending, Department of Housing and Urban Development, June 2000, p2.

3 Predatory Mortgage Lending, North Carolina Department of Justice, 1999, 2000, State of North Carolina, p1.

4 Curbing Predatory Home Mortgage Lending, Department of Housing and Urban Development, June 2000, p2.

5 Predatory Mortgage Lending, North Carolina Department of Justice, 1999-2000, State of North Carolina, p2.

6 Ibid, p1.

7 Ibid, pp1-2.

8 Curbing Predatory Home Mortgage Lending, Department of Housing and Urban Development, June 2000, p2.

 

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