Abusive lending practices have been a part of the lending community from the very beginning of loan arrangements. The controversy reached a modern day peak during the subprime lending period leading up to the recession beginning in 2008. A decade later, there remain some concerns, exacerbated by Congress’s recent rollback of financial regulations contained in the Dodd-Frank Act.
To recap a little history – the Dodd-Frank Act was enacted in 2010 to protect consumers from future financial abuses, principally from lending institutions. The Act created the Consumer Financial Protection Bureau (CFPB) which then had jurisdiction over banks, auto loans, credit card interest rates, pay-day loans, student loans, etc. While imperfect in some ways, the CFPB did provide what many perceived as necessary oversight.
The banks railed against the legislation from the beginning and the recent repeal seems to have removed most, if not all, of the past regulations on the financial communities. Some believe that this rollback will make the nation more vulnerable to another financial crises in the near future. Time will determine if the financial markets can now control their own behavior.
In the meantime, there are a few areas of the lending process about which borrowers might be aware. Borrowers seem to focus on loan closing costs as an area wherein they feel vulnerable. Closing costs can be confusing and are almost always under-estimated. Consumers have long been encouraged to “negotiate” what appear to be substantial fees accompanying every loan transaction. Lenders, on the other hand, have less opportunity to exaggerate these fees than during “bad old days” of sub-prime lending.
Every borrower is required to receive a settlement cost booklet from the Department of Housing and Urban Development explaining closing costs. Few seem to peruse the booklet, often referred to as good reading for insomniacs – boring and hard to read information. Mostly, the booklet identifies that most lenders are prohibited from acquiring payment for any third party fee in excess of the actual charge. This means that appraisal, credit, title, escrow, etc. fees cannot be “marked up” to provide additional income to a lender. (see the tip sheet in this webpage section related to “closing costs”)
Not withstanding that fees are regulated, closing costs are substantial. Here are a few of the areas that may be most misunderstood.
Appraisals:
The cost can vary depending upon the type of loan and property. The fee is generally paid via the borrower’s credit card when the appraisal is ordered. The introduction of the Home Valuation Code of Conduct (HVCC) following the recession caused by the sub-prime lending practices resulted in an increase in the basic cost of appraisals. (see the tip sheet entitled “Appraisal Process Explained”).
Credit Reports:
With rare exception, every loan transaction eventually requires a three merge report providing credit history and scores from three repositories. A full report does affect the credit score minimally and can be avoided by the acquisition of a free report that will initially provide a sense of a borrower’s credit history.
Often, borrowers can acquire a sense of their credit history via the acquisition of a free credit report. The full report can then be accessed when the borrower is ready to proceed with a loan transaction. Check with your loan representative for how to acquire a free credit report.
All those fees:
The list of fees can be daunting and cause one to wonder if they are all legitimate. The list can include such things as underwriting fee, tax and flood certifications, document preparation, processing fee, notary and recordation fees. These are in addition to the more recognized escrow and title fees and impound deposits (wherein the taxes and insurance costs are included with the monthly mortgage payment – required for borrowers with less than 20% down payment). While in the past some padding of fees occurred today’s borrowers will discover that these seemingly endless costs are a necessary part of any loan acquisition.
Rebate Pricing:
This is a way in which a borrower may acquire assistance with paying closing costs. The borrower must accept a higher than current interest rate that results in the lender providing a rebate. In the past, these rebates were often undisclosed but are for the most part today used to assist in reducing borrower loan costs. This can be complicated and should be discussed fully with your loan officer.
The bottom line regarding fees is that they are numerous and usually more than anticipated. While borrowers may wish to “negotiate” the fees (as noted above) reputable lenders typically cannot do so. One might be suspicious of the lender who is readily willing and able to “waive a fee” . It may suggest that the fee was either unnecessary or inflated in the first place. Our best advice is to trust your instincts and function with a lender about whom you feel confident in their honesty and integrity.
Although abuses can still occur in the lending community they are now the atypical and not the norm. The concern is that with the deregulation of the oversight provisions we could easily return to the practices preceding the subprime caused recession. It is now clear that some past sub-prime borrowers made decisions that at the time seemed appropriate. Other borrowers were “sold” on the adjustable rate mortgages without fully understanding the risks involved. With that in mind, the introduction of new loan options that in some ways mirror those of the sub-prime era is disconcerting. In spite of rules or no rules, nothing will ever replace the borrower’s own diligence and knowledge in protecting him or herself from abusive lending practices.
ABUSIVE LENDING PRACTICES . . . A FINAL COMMENT!
The introduction of sub-prime loan products played an enormous role in home financing in past years. Such loans allowed numerous borrowers, who were ineligible for more standard type loans, to acquire home financing.
On the other hand, some lenders abused consumers with high cost financing, overcharging in both interest rates and loan fees while misleading some regarding the actual terms of the subprime loan. In spie of this, sub-prime lending grew in popularity as loan instruments became more and more flexible. It seemed that nearly everyone could acquire a home loan via the “stated income” or “no doc” type of loan. While borrowers were required to pay higher interest rates, accept pre-payment penalties and often were hit with higher fees, the enticement of being able to own a home overcame all reluctance to this type of loan.
The sub-prime debacle where borrowers regularly defaulted on this higher interest rate financing, accompanied by complaints that the terms of the loan made it impossible for them to perform resulted initially in a more restrictive lending qualifying atmosphere.
Lawmakers enacted legislation that “guaranteed” consumers meaningful and clearly understandable disclosures of loan agreements. Additionally, lenders were to be held accountable for extending credit to borrowers without determining the borrowers’ capability of repaying the loan on its original terms. The term for these new fully qualifying loans was QM for Qualified Mortgages.
While other provisions were promoted by the legislation, this requirement to determine the borrower’s ability to repay the loan was perhaps the most critical? We have returned to an old-fashioned criteria of requiring the borrower to prove their ability to pay the mortgage. In other words, a return to documentation of income along with a complete borrower profile that will require “qualifying” for a loan using long time agreed upon qualifying ratios . . . all seemingly a rational way to determine a borrower’s capacity to acquire a loan.
After the financial crash it was determined that it was a good thing to eliminate many of the niche or sub-prime loan options. Over 200 sub-prime lenders (and some conventional lenders) literally shut their doors in 2010 with more yet in 2011. But as qualification guidelines toughened there arose a fear that in the interest of “protecting” consumers, some borrowers would be denied the opportunity to obtain financing of any sort. While this seemed to be the case initially current lending practices have become more flexible allowing more borrowers to qualify to purchase.
It is in this atmosphere that some are concerned about the elimination of oversight and the resulting re-introduction of loans that look in many ways similar to the subprime loans that cause so much grief in the past.