Chances are, if you live in the U.S., you live in a state with strict laws about predatory lending and mortgage practices. Many states have stricter laws even than the federal government. One such state is Vermont. While borrowers in other states were signing dangerous mortgage documents and putting themselves in a financial hole, Vermont residents were more aware due to the strict mortgage laws in that state.
For instance, in Vermont, mortgage lenders have been required since the 1990s to warn customers when their mortgage rates were high relative to the market. And, this is a big and, mortgage brokers were held responsible if they had a high number of loan defaults. That could be one reason why Vermont has had one of the lowest foreclosure rates in the nation.
Vermont also outlaws prepayment penalties. Period. A lender cannot charge a borrower for paying off the loan early. Now that’s a good law. If other states followed suit and outlawed those penalties then there would be fewer foreclosure rates and homeowner mortgage issues.
In Texas, they’ve outlawed prepayment penalties and balloon payments. Again, laws that are stricter than federal lending guidelines.
What does all this mean to a loan modification attorney? It means that if you live in one of the states with stricter laws than the federal government on lending practices, you’ve got a whole new set of case law to get through. That case law is just as important when conducting your loan document review.
As an attorney working in the loan modification issue and helping homeowners achieve a fair and equitable loan settlement, you’ve got to be familiar with applicable local, state, and federal case law. As you know, many times precedent rules. But precedent is based on written law. And when it comes to written law, there are plenty of applicable Acts, Statutes, and other legislation to help you get the best settlement for your client.
- TILA - Truth in Lending Act. Passed in 1968. Designed to help protect consumers who fall victim to predatory lending practices and requires certain disclosures for any loan or mortgage company to issue to potential borrowers with stringent timelines.
- RESPA - Real Estate Settlement Procedures Act. Protects consumers of HUD financing and requires certain disclosures and prohibits kickbacks for loan services.
- HOEPA - Home Ownership And Equity Protection Act. Passed in 1994. Amends TILA. Requires further disclosures with stringent timelines when a consumer is applying for a high rate, high interest loan. Designed to protect consumers who borrow against their home equity.
- ECOA - Equal Credit Opportunity Act. Designed to protect minorities from discrimination practices in lending.
- Gramm-Leach-Bliley Act - Passed in 1999. Also known as Financial Services Modernization Act. Restricts information lending institutions can hold on its customers and strengthens consumer privacy.
- State And Local Laws - Many states and local governments have their own laws that are even stricter than federal law. If you practice law in those states then you should be familiar with applicable local laws and know how to use them to protect your clients.
If you are working on a loan settlement case then you’ll need evidence to act as negotiation leverage. The best tool to gain that leverage is a forensic loan audit.
When it comes to abusive loan practices, the mortgage industry isn’t light on hucksters and predatory lenders willing to step up and offer a full plate of borrower abuse. That’s not to say that every lender is a bad guy. But a savvy attorney needs to know how to spot a predator and how to defeat him.
Here are 8 abusive loan practices and what you can do to combat them.
- Excessive Fees - This is just downright illegal. If your client complains of excessive loan fees, you need to a document review to see just where those fees may have originated.
- Abusive Prepayment Penalties - Another illegal move on some types of loans are prepayment penalties. A big red flag.
- Kickbacks to Brokers (Yield Spread Premiums) - The law is very clear about this one. No kickbacks!
- Loan Flipping - Some states have some pretty hefty fines for loan flipping.
- Unnecessary Products - While this is a bit of a gray area, there are some definite red flags if a mortgage company offers products and services that aren’t necessary or wanted.
- Mandatory Arbitration - A borrower has a right to a fair hearing. If a mortgage company mandates arbitration through a company that is friendly to their interests, that’s abusive.
- Steering & Targeting - The practice of steering clients to a more expensive loan when they can qualify for a more reasonable one. Very abusive.
- Breach of Contract - This is one an obvious legal red flag. If it’s in writing and they don’t do it then they’ve violated the law.
There are obvious lender violations and then there are some that are more subtle. Still, a violation is a violation. If you want to fight and win against predatory lending, no matter what the violation, then you need to start with a forensic loan audit. Uncover the evidence first.