DURHAM, NC (June 16, 2004) -- Buying a home is the single largest purchase most Americans will make. Homeownership is also the primary way that families accumulate wealth and a symbol of financial success for many. June has been designated National Homeownership Month to celebrate this important achievement in the lives of American families and to encourage others to join their ranks.
According to the 2000 U.S. Census, 66.2 percent of Americans are homeowners, a two percent increase since 1990 -- the largest increase in homeownership since the 1950s. This increase is due in large part to a growing subprime lending market which has exploded in the past decade. Subprime loans are geared to borrowers with lower credit scores and are priced higher to accommodate lender risk.
"Historically, people with damaged credit had less access to mortgage loans, but a robust subprime lending market has opened more opportunities," said Mary Mountcastle, president of the Center for Responsible Lending (CRL). "Unfortunately, some of these transactions represent better opportunities for unscrupulous lenders than for borrowers."
While bringing benefits to borrowers with low credit scores who want to purchase or refinance a home, the growth of the subprime mortgage market also has led to an increase in abusive loans that include high fees and unnecessary terms. Deceptive practices are most common in the refinancing market, where many low-income, minority and elderly homeowners become targets. According to CRL's 2001 report "Quantifying the Economic Cost of Predatory Lending" (available in PDF format here) U.S. borrowers lose an estimated $9.1 billion annually due to predatory lending practices. Predatory practices affect nearly 2.7 million families each year.
To effectively address the problem of predatory lending, strong federal and state laws that close loopholes and offer less temptation to unscrupulous lenders are needed. CRL also encourages borrowers to protect themselves by becoming familiar with these seven signs:
1. Abusive Fees & Excessive Fees
A threshold of 5% of the total loan amount (rather than the current federal threshold of 8%) has been adopted by some states in anti-predatory lending legislation and by several major subprime lenders in their internal policies on "best practices." Points and fees that exceed this amount (not including third party fees like appraisals or attorney fees) take more equity from borrowers than the cost or risk of subprime lending can justify.
2. Yield-Spread Premiums or Kickbacks
A yield-spread premium is a fee lenders pay to brokers in exchange for placing borrowers in a higher interest rate than the borrower qualifies for. In the subprime market, these kickbacks provide brokers a strong incentive to charge borrowers a higher interest rate.
3. Prepayment Penalties
A prepayment penalty is a fee required by the lender when borrowers pay off a mortgage loan early. In subprime loans this fee can trap borrowers in a high-rate loan or effectively penalize them for qualifying for a better one.
Flipping occurs through repeated refinancings with no true benefit to the borrower. Lenders charge fees each time the loan is refinanced, increasing the overall amount of the loan and offering no real savings.
Borrowers who qualify for a competitive interest rate may be steered to higher interest subprime rates by unscrupulous lenders. Consumers should shop around and speak to several lenders to ensure they receive the lowest-cost loan.
6. Mandatory Arbitration
In case wrongful practices come to light, mandatory arbitration clauses in loan contracts prevent borrowers from seeking legal remedies in court.
7. Single Premium Insurance Products
Examples of products that are of questionable benefit to the borrower such as debt cancellation agreements, credit life insurance, accident, health, and loss of income insurance should not be financed into the loan up-front in a lump-sum payment.
"Consumer education and awareness is a positive step, but it isn't enough," said Mountcastle. "Ultimately, secure homeownership will result through industry reform combined with legislation that includes strong consumer protections. Passage of a federal standard such as the Miller-Watt bill, in tandem with laws such as those enacted in North Carolina, New Mexico and New Jersey, would be real cause for American homeowners to celebrate."
Contact: Sharon Reuss at 919-313-8527 or firstname.lastname@example.org