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Mortgage Lending: 7.2.6.2.4 Dodd-Frank standards of affordability for nontraditional mortgages

Interest-only and negatively amortizing loans are not generally eligible for any presumption of affordability under the Dodd-Frank Act ability-to-repay rules.303 The CFPB underlined its basic skepticism about the affordability of these nontraditional mortgage loans by allowing eased requirements for measuring a borrower’s ability to repay when a new creditor is refinancing an adjustable rate, interest-only, or negatively amortizing loan into a fixed rate, fully amortizing mortgage.304 In oth

Mortgage Lending: 7.2.7.1 Overview

Courts have recognized that the practice of lending without regard to the borrower’s ability to repay is a per se unfair and deceptive act or practice.308 This may be the case even when the loan was a refinancing of an earlier loan that was, itself, unaffordable.309 Failure to follow the basic precepts of underwriting for affordability and sustainability can subject the originating creditor, the assignee,310 or even the investment banks who f

Mortgage Lending: Introduction

This appendix collects useful web addresses for mortgage-related organizations and topics. The organizations are listed first and are sometimes followed by specific resources hosted by the organization. If any of those links do not work, practitioners should search for the resource from the homepage of the organization that hosts it.

Live weblinks are included in the version of this appendix available online and will be updated when possible.

Mortgage Lending: 7.2.7.2.2 Improvident lending as a violation of general UDAP principles

Making loans for which the borrower did not have a reasonable ability to repay has been held by numerous courts to violate general UDAP principles of both unfairness and deception.343 The First Circuit found that making a loan with a monthly payment that consumed nearly three-quarters of a borrower’s income after factoring in borrower’s other regular debt obligations could be an unfair and deceptive practice under Massachusetts law, even though the borrower had been making payments of a similar size on a previous mortgage.

Mortgage Lending: 7.2.7.3 Risk-Layering; Commonwealth v. Fremont Investment and Loan

Risk-layering refers to the cumulative effect of multiple risk factors, such as relying on stated income when extending an adjustable rate mortgage that allows negative amortization to families with little or no equity in their home.364 Individually, all of these characteristics increase the default rates of loans; taken together, the impact can be devastating.365 Lenders that engage in risk-layering have always been on notice that in so doing they were increasing the default rates on those

Mortgage Lending: 7.2.7.4 Other State Statutes

Some states have statutes similar to UDAP statutes that are easily applicable to these practices. For example, the Uniform Consumer Credit Code (UCCC), as adopted in Idaho, Iowa, Kansas, and Maine, specifies that, in determining whether a practice is unconscionable, the court should consider whether the creditor had reason to know, when the consumer entered into the transaction, that there was no reasonable probability of payment of the obligation in full by the consumer.385

Mortgage Lending: 7.2.7.5 State Common Law Claims

In City Financial Services v. Smith,387 the court held that a home loan was unenforceable based solely upon the common law doctrine of unconscionability. City Financial Services made a $3000 loan to Ms. Smith at 22% interest plus $618 in insurance and other charges. Ms. Smith had $574 a month in disability income, was already in default with one loan with City Financial Services, and had over $6700 in other credit card debt.

Mortgage Lending: 7.3.1 Introduction

Creditors have a long and unhappy history of either steering groups of borrowers to certain unsuitable or higher-cost products,393 or targeting their marketing and outreach to a select group of borrowers.394 Too often access to this type of credit is not benign but involves active price discrimination. Borrowers who are perceived as vulnerable are steered into or targeted for inferior, overpriced, and abusive products.

Mortgage Lending: 7.3.4 Market Segmentation and Targeting Neighborhoods

The high-cost market has been a “push” market in which armies of telemarketers, brokers, and loan officers target borrowers and solicit business.452 Minority neighborhoods have been disproportionately the recipients of these unwanted advances.453 Even high-income whites living in communities of color found themselves disproportionately in high-cost loans.454

Mortgage Lending: 7.3.5 Investigating Credit Scores

Practitioners should not assume their clients got credit at the rate warranted by their credit scores. Good credit is no protection from being steered or targeted. Race can matter more than credit score in determining whether a borrower receives a subprime loan. In fact, the better an African American or Hispanic’s credit score, the more likely it is that they will receive a subprime loan compared to a similar white borrower.

Mortgage Lending: 7.3.6.1 Overview

Both state and federal law contain provisions against steering borrowers into or targeting borrowers for unfavorable loan products. The three most common federal claims arise under the Equal Credit Opportunity Act (ECOA), the federal Fair Housing Act (FHA), and the Civil Rights Act.477 Many states have parallel anti-discrimination statutes.

Mortgage Lending: 7.3.6.2 Discrimination Claims

The ECOA prohibits discrimination in any aspect of credit on the basis of race, color, national origin, religion, sex or gender, marital status, age, or public assistance status.484 The FHA and its state counterparts prohibit discrimination on the basis of race, color, religion, sex or gender, disability or handicap, familial status (for example, having children),485 or national origin in the sale, rental, or advertising of housing and in housing-related financing.

Mortgage Lending: 7.4.1 Introduction

Loan churning, also known as loan flipping, is a form of equity stripping that refers to repeatedly refinancing a homeowner’s mortgage, often in short succession. Loan flipping should be distinguished from property flipping (in which someone buys a home for quick resale, sometimes with shoddy repairs and at inflated values). Property flipping is discussed in § 7.5, infra.

Mortgage Lending: 7.4.2 Examples of Loan Churning

Loan originators may use the unaffordability of an existing loan514 or the existence of a balloon payment to push homeowners into refinancing. For example, borrowers who notice at closing that their loan is unaffordable are assured that they can refinance into a more affordable loan in a year or so.515 The new loan is usually even less affordable.516

Mortgage Lending: 7.4.3 Claims Arising from Loan Churning

The practice of loan churning may give rise to claims under state or federal law, including common law claims of unconscionability, fraud, and unfair and deceptive practices.532 Some states may have statutes specifically targeted at loan churning.533 The OCC has labeled serial refinancing as a per se predatory practice.534 The Seventh Circuit Court of Appeals has held that well-pleaded allegations of loan churning may state a federal racketee