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In recent
years, "predatory lending" has become a prevalent
term among regulators, legislators, consumer advocates,
and, consequently industry as well. What it means depends
on who is using the term, but generally it refers to
(when discussing the mortgage industry) abusive practices
in the making and brokering of mortgage loans. Consumer
advocates generally complain of various practices and
loan terms:
- "Flipping," which refers to refinancing
frequently to continually add additional closing costs
to the balance, thus using up the consumer's equity
- Balloon payment terms, which leave a borrower in
need for another refinance
Negative amortization, which also reduces equity over
time
- Mandatory arbitration clauses
- Prepayment penalties, which lock consumers into
their loans
- Lending without regard to repayment ability, that
is, based solely on the equity in the home
"Packing," which refers to loading ancillary
costs into the loan balance, e.g., credit insurance
premiums, especially when the premium is for the whole
term of the loan, but the loan is bound to be "flipped"
(see above)
- Excessive points and rates
- Various unfair or deceptive terms and practices.
Consumer advocates maintain that these
practices prey on vulnerable consumers, such as minorities,
elderly and persons with impaired credit. It is clear
that such abusive practices, as described, are wrong
and that reputable brokers and lenders, including members
of the Michigan Mortgage Brokers Association (MMBA),
do not engage in them. It is important, however, to
understand that when used for their intended purposes,
some of these items are beneficial to consumers. For
instance, a balloon payment, when applied as a means
of forcing a consumer to refinance repeatedly, is abusive.
When used as a means of obtaining a lower rate, however,
in circumstances where it is known the consumer will
want to refinance or sell in the future, a balloon term
can be beneficial. The public policy challenge lies
in finding a way to prevent abusive use of various terms
and practices without precluding their use in beneficial
ways.
The MMBA and it national association,
the National Association of Mortgage Brokers (NAMB),
believe in a two-pronged strategy for preventing abusive
lending practices. One element is self-regulation by
the industry. Several years ago, NAMB and MMBA participated
in the development of the Model Loan Origination Agreement,
which ensures that a loan applicant understands the
role of the mortgage broker and how the broker is compensated
for its services. NAMB and MMBA are pursuing the Best
Lending Practices (BLP) initiative, which envisions
a registry of loan originators that the industry can
use to police itself and eliminate bad actors from its
ranks. The second element is improved enforcement of
existing laws, which already prohibit the kinds of practices
decried by consumer advocates. Any additional prohibitions
that may be enacted would be ignored by abusers and
create more compliance burdens for legitimate brokers
and lenders.
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