- The Washington Times - Thursday, April 7, 2005

One out of five loans is subprime in today’s market. These are loans to consumers whose credit is substandard.

A subprime mortgage means it has tougher terms for the borrower, such as more points, a higher interest rate and high private-mortgage-insurance premiums as part of the mortgage payment. It is in this arena that you will find the practice called “predatory lending.”

Before moving forward, let me emphasize that many subprime mortgage programs are legitimate. Consumers with bad credit can purchase homes with these programs, which carry less-than-stellar terms.

When you have missed payments, filed for bankruptcy or taken on too much debt, you are not going to receive the best of terms. When others are paying 5.75 percent, you could be paying 8 percent, 9 percent or 10 percent.

The U.S. Department of Housing and Urban Development lays out how to recognize predatory lending practices. Predatory “mortgage professionals” may try to:

• Sell properties for much more than they are worth using false appraisals.

• Encourage borrowers to lie about their income, expenses or cash available for down payments to get a loan.

• Knowingly lend more money than a borrower can afford to repay.

• Charge high interest rates to borrowers based on their race or national origin and not on their credit history.

• Charge fees for unnecessary or nonexistent products and services.

• Pressure borrowers to accept higher-risk loans such as balloon loans and interest-only programs with steep prepayment penalties.

• Target vulnerable borrowers to take cash-out refinancing offers when they know the borrowers need cash because of unemployment or medical or debt problems.

• “Strip” homeowners’ equity from their homes by persuading them to refinance again and again when there is no benefit to the borrower.

• Use high-pressure sales tactics to sell home improvements and then finance them at high interest rates.

They may use strong-arm and alarmist techniques, such as telling customers that these terms are their only chance of getting a loan or owning a home. If you find that the house you are buying costs a lot more than other homes in the neighborhood but isn’t any bigger or better, this could be a sign of predatory lending.

Here are some “red flags” to watch for:

• You are asked to sign a sales contract or loan documents that are blank or that contain information that is not true.

• You are told that Federal Housing Administration insurance protects you against property defects or loan fraud — it does not.

• The cost or loan terms at closing are not what you agreed to.

m You are told refinancing can solve your credit or money problems.

• You are told that you can get a good deal on a home improvement only if you finance it with a particular lender.

Over the years, states and localities have put together piecemeal legislation to protect consumers from those who would prey on their constituents. Now a couple of national bills have been introduced in Congress to bring all these rules in line to close loopholes that allow predatory lenders to exist.

The Responsible Lending Act (HR 1295) is one of those bills, introduced this session by Rep. Bob Ney, Ohio Republican and chairman of the subcommittee on housing and community development, and Rep. Paul E. Kanjorski, Pennsylvania Democrat.

The Coalition for Affordable and Fair Lending has published a clear summary of the bill on its Web site (www.fairlendingnow.org), stating that the bill would “cover far more loans, add many new protections … for covered loans, strengthen penalties for violations, apply limited liability in certain instances to secondary market purchasers of loans (so-called ‘assignee liability’) and set uniform national standards by preempting state laws dealing with these issues.”

If you believe you have experienced mortgage fraud, visit www.stopmortgagefraud.com, where you’ll find a survey on mortgage-fraud practices. In addition, by entering your ZIP code, you will be directed to state and local commissions where fraud can be reported.

Be a smart consumer by knowing who you’re dealing with in the area of real estate and mortgages. The best way to protect yourself is by going with a reputable professional who belongs to an accepted industry association, such as the Mortgage Bankers Association of America (www.mbaa.org) or the National Association of Mortgage Brokers (www.namb.org).

M. Anthony Carr is the author of “Real Estate Investing Made Simple.” Post questions at his Web log (http://commonsensereal

estate.blogspot.com)

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