Predatory lending affecting federal mortgage program

Predatory lending involves abusive lending practices that leave borrowers financially vulnerable. Predatory lenders often convince borrowers to agree to various lending terms that have no benefit to the borrower, such as:

• Excessive fees
• Abusive prepayment penalties
• Unnecessary loan products
• Mandatory arbitration
• “Steering and Coercing”: convincing borrowers to take on sub-prime mortgages when the borrower could qualify for a traditional mortgage
• “Loan flipping”: a borrower refinances a loan without any net benefit to the borrower
  

These questionable lending practices take place in different lending arenas, such as pay day loans, overdraft loans, credit card loans, car title loans, refund anticipation loans, and mortgage lending. The predatory lending industry has often focused its efforts on low income home owners and other financially vulnerable groups.

Predatory lending is now expanding its affect on the mortgage market. The United States Department of Housing and Urban Development (HUD) revealed in an assessment, that the Federal Housing Administration (FHA) lacks the resources to protect consumers from predatory lenders. The increasing quantity of lender and brokers looking to be covered by FHA makes this a pressing issue.

FHA is the world’s largest government insurer of mortgages. The agency provides mortgage insurance on single and multifamily homes by FHA approved lenders throughout the United States. Generally, loans insured by FHA must meet certain requirements to qualify for the FHA insurance. When loans are covered by FHA, lenders bear a reduced level of risk because FHA pays the lender if a borrower defaults on his or her loan.

With the lending market undergoing upheaval, lenders in greater numbers are seeking the protection that FHA offers against borrower default. As evidence of FHA’s increasing involvement in the home mortgage market, there has been a 525% increase in the number of FHA lender approvals between 2006 and 2008. This raises the current total of FHA appraisers to 3,300. With this increase in lender approvals, FHA is also now serving metropolitan areas that FHA had not served previously.

Even with FHA experiencing unprecedented lender interest, the HUD report reveals that FHA currently has insufficient staffing and lacks appropriate technology. Moreover, the report also notes that FHA also does not have the legal authority needed to determine whether the lenders attempting to participate in the issuance of FHA loans should qualify.

One FHA flaw that HUD discusses in its report is FHA’s appraiser roster. HUD reveals that the FHA roster of appraisers includes 3,480 appraisers with expired licenses and 199 appraisers that had been state sanctioned.

FHA’s lender approval process also has major limitations. It currently uses a random, manual review process for reviewing loans. Under the existing process, FHA only reviews about five percent of all loans it insures. Otherwise, the agency relies on other information, such as high delinquency rates or early default rates, to determine which lenders need an extensive review. The approval process requires improvement to ensure that only quality lenders are able to lend through FHA. HUD suggests providing FHA with the resources to use pre-screening computer software to improve the lender review process.

The HUD report provides one example of the shortcomings in FHA’s current lender approval system. HUD approved an Arizona corporation as an FHA lender in 1996. This corporation had its license suspended by the State of Arizona and it filed for bankruptcy, after a series of Real Estate Settlement Procedures Act (RESPA) violations. Even after these changes, a principal owner and manager of the original corporation reconstituted the business under a different name, using the same location for the business. HUD approved of this re-named corporation to originate and process FHA loans in 2008.

Laws to limit predatory lending are very slowly entering federal and state law, as evidenced by the information that the Center for Responsible Lending provides on nationwide legislation and policy. As a result, the need for FHA to improve its lender approval policies and quality controls remains vital for consumer protection against predatory lenders. HUD does provide state specific information on reporting predatory lending to the appropriate authorities on its website.

Thanks for reading our blog. The National Justice Coalition is made up of Plaintiffs Attorneys in the United States who have been recognized by Best Lawyers in America, Super Lawyers and who have received the top rating of Martindale Hubbell, the leading directory of lawyers in America.

If you have a comment or question, please feel free to reply to this posting, or send us an e-mail. Keep in mind that your comments will not be confidential. If you are a victim or think you are victim of predatory lending, please feel free to contact us at the National Justice Coalition regarding your legal matter.