Ohio releases 7 tricks of predatory lenders
By MortgageDaily.com staff
3/17/2005

The state of Ohio has identified seven tricks "unscrupulous" subprime lenders and brokers play on unsuspecting mortgage shoppers -- and one of the state's agencies is attempting to educate applicants about these predatory tactics.

In its article, Predatory Lending: Tricks of the Trade & How to Recognize Them, Ohio's Division of Financial Institutions discusses the seven main methods used to place consumers in higher-cost mortgages.

"In today's lending market, more and more people can qualify for a home loan or equity line of credit," the division said in the report. "However, some unscrupulous lenders and brokers have taken advantage of the situation to place borrowers in unnecessarily costly and inappropriate loans for their own financial gain."

"While predatory lending can be found in all type of loans, it generally happens in the subprime loan market," it added.

Trick No. 1 was listed as "selling the monthly payment." The division warned that consumers should not make the mistake of being sold solely on the monthly payment as there are components of equal or greater significance in the loan, including the interest rate, term, and total cost.

Trick No. 2, "flipping by repeated financing," targets borrowers who have already been overcharged by the same lender or broker. "Since the ... loan's interest rate is needlessly higher than the one the borrower could qualify for, the borrower is soon contacted and urged to refinance," the division said. The borrowers are usually contacted within a year or so of the loan's origination with offers of refinancing into a slightly lower rate with the purpose of once again being charged loan origination or broker fees, points and other closing costs to increase the debt on the loan.

"Growing the debt" was trick No. 3. When borrowers finance appliances or other goods, they are approached by the lender about borrowing more money, which ends up in having to refinance the mortgage to have all debt paid in one loan secured by the home. Growing the debt is also done through home improvement schemes that, rather than providing a loan only for the cost of the repairs, seek to provide the funds through refinancing the whole mortgage to gain on loan fees, according to the state agency.

The fourth trick was "equity stripping." Borrowers are sometimes encouraged to overstate their income to qualify for a home with a high value. When borrowers default due to payments being beyond their ability to pay, they lose their home and any built equity, the division reported.

The division listed "over-inflating the appraisal" as trick No. 5. When an initial appraisal indicates the home does not have sufficient value to support the loan, a broker may suggest a more "friendly" appraiser take a second look. With an alleged higher value, the broker is able to suggest or obtain higher fees on the loan. It also makes finding a lender difficult at a later time when borrowers seek to refinance the loan to a lower rate, the article stated.

Trick No. 6 is "insurance packing," the agency said. Credit insurance, with the most common forms being, life insurance, disability insurance and unemployment insurance, are a highly profitable product for mortgage lenders so some try to push these sometimes unneeded or unsuitable products to borrowers.

"Trapping the mark" was trick No. 7. While the goal of a subprime loan may be to reestablish credit to possibly refinance to a lower rate in the future, the agency said prepayment penalties and inflated appraisals on these may result in leaving the borrower trapped in the subprime credit market.

The division did acknowledge that "subprime lending is not bad in and of itself," as it "allows individuals who would not otherwise be able to purchase a home to find financing, but that "it becomes a problem when predatory lending practices or 'tricks' become part of the deal."

The National Home Equity Mortgage Association, the primary organization representing nonprime mortgage lenders, requires member companies to subscribe to a code of ethics in line with what Ohio says, including:

* "To make credit available to prospective borrowers without regard to race, gender, marital status, religion, age or national origin," and

* "Treat all consumers fairly with regard to loan pricing, underwriting and servicing," and

* "To refrain from engaging in any intentionally deceptive or misleading business practices."

NHEMA also includes in its code of ethics a requirement that its members don't pack insurance and that they "encourage borrowers or potential borrowers to use credit responsibly and to seek advice from independent financial advisors."

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