Predatory Mortgage Lending As a Foreclosure Defense

"Predatory lending" happens when a lender uses deception, fraud, or manipulation to convince a borrower to take out a mortgage with abusive or unfair terms. Federal and state laws prohibit lenders from using predatory tactics.

Some examples of predatory lending include:

• charging a really high interest rate
• demanding excessive or unreasonable fees as part of the mortgage loan
• including unnecessary services as part of the mortgage loan
• making an asset-based loan
• providing a negative amortization loan
• loan flipping
• loan packing
• reverse redlining
• steering, and
• targeting.

If your lender used predatory or unfair mortgage lending practices when you took out your mortgage loan, you might be able to fight a foreclosure.

What Is Predatory Mortgage Lending?

Generally, predatory mortgage lending means any unscrupulous practice in which a lender takes advantage of a borrower. With a predatory loan, the lender imposes unfair and abusive terms on the borrower, like a higher interest rate than normal, excessive fees, or terms that strip the borrower's equity.

Basically, predatory lending is when a lender makes a loan to benefit the lender, not the borrower. Predatory lenders convince borrowers to get loans they don't need or can't afford.

What Tactics Do Predatory Lenders Use?

Predatory lenders typically use aggressive sales tactics and deception to get people to take out loans they can't repay.

Often, predatory lenders target vulnerable populations, such as minorities, older persons, and less-educated people.

What Are Signs of Predatory Lending?

A court will typically consider a mortgage loan to be "predatory" if the lender:

• uses pushy and deceptive sales tactics to get a vulnerable or unsophisticated borrower to agree to unfavorable terms
• charges a very high interest rate to a borrower who is likely to default
• includes undisclosed terms in the loan
• misrepresents the actual costs, risks, or appropriateness of the loan terms, or
• charges excessive fees or expenses like for appraisals, closing costs, and document preparation.

Borrowers who get predatory loans can end up in a cycle of debt and, eventually, go through a foreclosure when they can't repay the mortgage loan.

10 Examples of Predatory Mortgage Lending

Here are ten typical examples of predatory lending practices.

1. Unreasonable Interest Rates

Mortgage lenders review your credit scores when you apply for a loan. People with high credit scores get the best interest rates because, in theory, the higher your score, the less likely you'll default. People with low scores might be denied a loan, or the lender might charge a higher interest rate.

Before you apply for a mortgage loan, review your credit reports and scores. Then, research the current mortgage interest rates. That way, you'll know what sort of interest rate to expect. You should get quoted that rate or something better if you have excellent credit. If you have fair credit, you might be offered a slightly higher rate.

But if a lender gives you a much higher rate, that's a red flag.

2. Excessive Fees and Hidden Fees

Lenders charge various fees throughout the mortgage process, such as an appraisal fee, a credit report fee, a title search fee, and an application fee. Do some research to find out what these costs are on average. If your lender is charging significantly more, that might indicate that the loan is predatory.

Predatory lenders also sometimes try to hide certain fees in your loan's terms, like an illegal prepayment penalty or a balloon payment you can't afford.

• Prepayment penalties. Under federal law, the lender can't charge a prepayment penalty for a new mortgage in some circumstances. If your lender can charge a prepayment penalty, it can only do so for the first three years of your loan. And the amount of the penalty is capped at 2% of the loan balance within the first two years and 1% during the third year.
• Balloon payments. A "balloon payment" is a large final payment due at the end of a loan that pays off the amount the monthly payments didn't cover. If you're not able to refinance the loan when the balloon payment comes due, you'll have to pay it off or default. Sometimes, a predatory lender will offer to refinance the loan with another mortgage that has a higher interest rate than usual and excessive fees. Balloon payments aren't illegal per se, but they might be considered predatory under certain circumstances. Also, the lender must make specific disclosures when a loan has a balloon payment.

3. Unnecessary Services

A predatory lender might try to sell you unnecessary services, like an auto-club membership, which increases the cost of credit. If a lender says you have to get the added service, the lender is probably trying to take advantage of you.

4. Asset-Based Lending

Asset-based lending happens when the lender makes a loan based on the borrower's equity in a property rather than on the borrower's income and ability to repay the loan. The lender assumes the borrower will default, and then the lender will be able to foreclose. This predatory lending practice is also known as "equity stripping."

5. Negative Amortization

With a negative amortization loan, the borrower makes monthly payments in an amount less than what's needed to cover the principal and interest due. So, the loan balance increases over time, even though you're making payments.

6. Loan Flipping

The lender encourages the borrower to refinance an existing loan into a new one, which generates fees for the lender but doesn't benefit the borrower.

7. Loan Packing

The lender adds unnecessary products to the loan, like credit insurance, which pays the loan off if the borrower dies. Predatory lenders often tell borrowers that they must buy these products to qualify for a loan, even though it isn't true.

8. Reverse Redlining

The lender targets residents within a particular area, usually a low-income neighborhood, for unfair loans. ("Redlining" happens when a lender singles out a community for loan denials based on race and ethnicity.)

9. Steering

The lender pushes borrowers into taking out risky, high-cost loans, even when they have good credit and should qualify for low-cost, conventional loans.

10. Targeting

The lender targets specific borrowers—often elderly, low-income, and minority borrowers—for abusive loan products.

Laws Prohibiting Predatory Mortgage Lending

In some circumstances, it's possible to stop a foreclosure by raising claims related to the loan's origination. The mortgage or deed of trust might not be valid or legally enforceable due to unfair lending practices, like fraud, or violations of federal or state law. Or the terms of the loan might be unconscionable.

You might be able to rescind the mortgage transaction or be entitled to damages (money) or a setoff against the amount you owe on the loan.

Federal Laws Prohibiting Predatory Mortgage Lending

Various federal laws protect borrowers against predatory lending practices.

• Truth in Lending Act. The Truth in Lending Act (TILA) requires lenders to disclose the terms and costs associated with a mortgage loan.
• Home Ownership and Equity Protection Act. The Home Ownership and Equity Protection Act (HOEPA), an amendment to TILA, also protects homeowners from predatory lenders. "High-cost" loans are subject to additional disclosure requirements and restrictions.
• Equal Credit Opportunity Act. The Equal Credit Opportunity Act (ECOA) prohibits creditors and lenders from denying loan applications or charging higher costs, like a greater interest rate or more fees, for discriminatory reasons.

State Laws Prohibiting Predatory Mortgage Lending

Many states also have anti-predatory lending laws that restrict the terms or provisions of certain loans.

State unfair and deceptive practices acts (UDAP) statutes, which generally prohibit unfair or deceptive business practices, might also be useful in challenging a foreclosure.

How to Avoid Predatory Mortgage Lending

Here are a few tips to avoid becoming the victim of a predatory mortgage lender:

• Beware of lenders that promise you loan approval, regardless of your credit history.
• Before you apply for a loan, get a copy of your credit report, so you have an idea of the types of loans you qualify for.
• Consumers with a good credit history should be eligible for a low-cost loan. If you have good credit, but the lender pressures you to take out a loan with excessive points (fees to reduce the interest rate) or a really high interest rate, for example, the loan is probably predatory.
• Don't sign any paperwork until you fully understand all the loan's terms and calculate how much you'll have to pay. If the loan terms don't make sense to you, get a lawyer or HUD-approved housing counselor to help you review them.
• If the interest rate or fees for certain items seem unusually high, question the lender about them.
• Shop around and compare the interest rates and fees from different lenders.
• Refuse any additional unnecessary products, like credit insurance.
• Don't sign any documents that have blank spaces. The lender might fill them in later, entering a rate or term you didn't approve.
• Check the Consumer Financial Protection Bureau's complaint database and the Better Business Bureau for complaints about the mortgage company before you sign any paperwork.

Talk to a Lawyer

Again, a lender's misconduct at loan origination can, in some cases, be a defense to foreclosure or the basis for a damages claim.

The laws surrounding unfair lending practices are complicated. If you think you were a victim of predatory lending and are facing a foreclosure, consider talking to a foreclosure defense lawyer.

A foreclosure defense attorney can advise you about relevant predatory lending laws, tell you what you can do in your particular situation, and let you know if you have any other potentially valid defenses to a foreclosure.