Mortgage Lending: Advocacy Organizations
- Center for Community Change:
- https://communitychange.org
- Center for Economic Justice:
- www.cej-online.org
- Center for Responsible Lending:
Appendix E to Part 1022—Interagency Guidelines Concerning the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies
The history of FCRA rulemaking is complicated, and is discussed in more detail in § 1.3.3.1, supra.
Some state or local UDAP statutes specifically prohibit improvident lending.
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.
In many cases borrowers are baited into unaffordable loans with the illusory promise of a more affordable refinance.359 Such a refinance is, as the lender knows, either unlikely or completely speculative.
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
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
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.
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.
Fifty years ago race was regarded as a legitimate factor in lending.
African Americans and Hispanics pay more for credit, in part, because they are denied or discouraged from applying for good credit disproportionately.
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
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.
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.
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.
The Truth in Lending Act (TILA) also contains prohibitions against steering.
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.
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
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
Property flipping scams involve speculators who buy dilapidated or just older residential properties at low prices and resell them to unsophisticated first time home buyers at huge markups.538 Sometimes these scams involve new construction, with a home builder selling first-time homebuyers overpriced, poorly constructed homes or undeveloped lots in a subdivision.539 Buyers are persuaded to enter into purchase agreements only after the seller has promised to make necessary or agreed upon repa
While many property flipping schemes rely on steering borrowers to high-cost lenders,552 other schemes depend on the availability of government insurance.553 (And some property flippers do both—steering good credit prospects to Federal Housing Administration (FHA) loans and bad credit prospects to subprime loans).