Congress has passed new regulations concerning mortgages and predatory lending. The purpose of these regulations is to prevent lenders from selling mortgages riddled with fine print that binds consumers financially in ways unknown to them.
For example, before the recession many people were sold mortgages with variable interest rates they believed were backed by the federal government.
Others bought houses with mortgages that had affordable payments the first few years and then the payments skyrocketed at some point. Still other consumers took on loans that had them paying only interest payments and when housing prices fell they were sitting there with an overvalued home and no equity.
What has come out of the near collapse of the mortgage industry and the selling of toxic assets is the fact many consumers did not fully understand their mortgage agreements. You might be telling yourself this the fault of the consumer, but at a mortgage closing, pages and pages of fine print documents are presented that are all written in legal language.
Unscrupulous lenders would conveniently leave out important information in their verbal explanations too.
The new rules that are in affect now make it necessary for lenders to be more forthright in their loan explanations. They also forbid twisting the truth by not telling the full story. For example, lenders can no longer say a loan has a fixed interest rate if the rate will actually change at any point during the life of the loan.
Another new rule requires all fees and charges attached to the mortgage to be clearly stated in an understandable format. It is amazing how much critical information is literally buried in fine print. The lender will have consumers initial each page of the agreement and that’s how they were getting away with adding all these charges without the consumer even knowing.
The rules also address loan advertising. Advertisements for mortgages can no longer use misleading language to give false impressions to consumers as to eligibility or as to how the loan is structured. If there are special loan conditions those conditions must be clearly stated. In addition, when different types of loans are compared to calculate various payments, the comparisons must be done fairly, accurately and honestly.
Even more important is the fact that lenders are no longer allowed to extend credit until the consumer’s ability to repay the loan is fairly assessed. This addresses the fact that many people in foreclosure today have loans they should have never qualified for based on their income and assets.
So what is predatory lending? Predatory lending can take many different forms, but the bottom line is that it is when a company uses false information to qualify people for loans. The false information could be false appraisals or false income statements or creating false expectations or presenting false facts.
Predatory lending is also when a loan is approved that should never be approved if reasonable standards are applied. For example, the figures are manipulated to make consumers loan eligible or second mortgages are approved that over commit the property. Many of the “under water” homes that exist today have multiple liens against them such as a first mortgage and an equity loan.
When housing prices dropped and wage earners lost their incomes due to unemployment, many of the equity loans had been fully accessed leaving the owners with payments they could not afford and unable to sell the house for enough money to pay off the loans.
Predatory lending also involves convincing people to refinance property when it is not in their best interests.
These are not all of the predatory lending tactics used by debt suppliers, but it gives you a good idea. The US Congress is determined to prevent the mortgage bubble that collapsed from ever forming again. Before signing any dotted line it is important to clearly understand the debt you are assuming. The new predatory lending laws should make that much easier to accomplish from this point forward.
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Tags: Lending, Predatory Lending
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