1. Single Premium Credit Insurance
Credit insurance premiums should not be financed into the loan up-front in a
lump-sum payment. One type of credit insurance, credit life, is paid by the
borrower to repay the lender should the borrower die. The product can be useful
when paid for on a monthly basis. When it is paid for up-front, however, it does
nothing more than strip equity from homeowners.
2. High Fees
The borrower should not be charged fees greater than 3% of the loan amount (4%
for FHA or VA loans). Points and fees (as defined by HOEPA) 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.
3. Prepayment Penalties
Subprime loans should not include prepayment penalties, for the following
reasons:
Prepayment Penalties Haunt Many Refinancers
Prepayment penalties trap borrowers in high-rate loans, which too often leads to foreclosure. The subprime sector should provide borrowers a bridge to conventional financing as soon as the borrower is ready to make the transition, though prepayment penalties are designed to prevent this from happening.
Prepayment penalties are hidden, deferred fees that strip significant equity from over half of subprime borrowers. Prepayment penalties of 5% are common. For a $150,000 loan, this fee is $7,500, more than the total net wealth built up over a lifetime for the median African American family.
Only 2% of borrowers accept prepayment penalties in the competitive conventional market, while, according to Duff and Phelps, 80% in subprime do.
4. Yield-Spread Premiums
Brokers originate over half of all mortgage loans, and a relatively small number
of brokers are responsible for a large percentage of predatory loans. Lenders
should identify -- and avoid -- these brokers and refuse to pay yield-spread
premiums -- fees lenders rebate to brokers in exchange for placing a borrower in
a higher interest rate than the borrower qualifies for.
5. Steering
Lenders should make sure that borrowers get the lowest-cost loan they qualify
for. As Fannie Mae and Freddie Mac have shown, subprime lenders charge prime
borrowers who meet conventional underwriting standards higher rates than
necessary. HUD found that steering has a racial impact since borrowers in
African-American neighborhoods are five times more likely to get a loan from a
subprime lender -- and therefore pay extra -- than borrowers in white
neighborhoods.
6. Mandatory Arbitration
Increasingly, lenders are placing pre-dispute, mandatory binding arbitration
clauses in their loan contracts. These clauses insulate unfair and deceptive
practices from effective review and relegate consumers to a forum where they
cannot obtain injunctive relief against wrongful practices, proceed on behalf of
a class, or obtain punitive damages. Arbitration can also involve costly fees,
be required to take place at a distant site, or designate a pro-lender
arbitrator.
7. Flipping
Flipping of borrowers occurs through repeated fee-loaded refinancings. One of
the worst practices is for lenders to refinance subprime loans over and over,
taking out home equity wealth in the form of high fees each time, without
providing the borrower with a net tangible benefit.
This
article is brought to you by Education Center 2000 Our mission is to
educate consumers about secured and unsecured credit and homeowners about
predatory lending practices, bank fraud and the legal options available to
them. We believe that if
you don't know your rights, you don’t know your options. website:
http://educationcenter2000.com Copyright © 2006 KMD
Enterprises. All rights reserved.
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