- The Washington Times - Friday, March 26, 2010

Predatory lenders, mortgage lenders and brokers who deliberately mislead their customers to make a profit, have been among the groups of people and organizations blamed for the wave of foreclosures that has traumatized communities across the country.

Tightened credit markets and stricter scrutiny of these lenders have made them less visible, but this does not mean consumers are any less vulnerable to their tactics.

“A lot of predatory lenders have simply gone underground,” says Howard Banker, executive director of the Fair Mortgage Collaborative (FMC), a nonprofit group that certifies trustworthy lenders. “Mortgage pricing is where we are seeing predatory behavior coming out now.”

The FMC’s consumer Web site (www. FairLoanCertification.com) enables consumers to search directly in their area for certified lenders who have met FMC standards of not using predatory practices and of offering fair mortgage loans. Recently, FMC introduced a new tool, the Fair Mortgage Cost Check, so consumers can check the average price of loans in the ZIP code where they are applying for a mortgage.

Consumers can enter a ZIP code on the site and immediately receive a list of the average interest rates and closing costs for the area.

“When we evaluate lenders for certification, one factor that we check on is whether they are pricing their loans in line with others in their area,” Mr. Banker says. “We do not require the lenders to offer the best possible pricing in order to be certified, but they must be within the range of what is normal for the area where they are making loans.”

Mr. Banker says average interest rates and closing costs are updated daily on the site.

“The most important thing consumers can do to protect themselves from predatory lending is to check on the price of their mortgage loan,” he says.

The American Bankers Association (ABA) recommends that all consumers shop around for a lender and a loan in order to avoid predatory lenders. In addition to comparing rates, borrowers should be receiving recommendations for lenders from trusted colleagues or a trustworthy Realtor. Consumers should meet with at least two or three lenders and ask questions to make sure they understand the loan being offered.

The ABA also advises consumers to contact their local Better Business Bureau to ask if complaints have been filed against the lender. Consumers also can check on a lender’s state license.

“As of July first, all loan officers and mortgage brokers are required to be licensed by the National Mortgage Licensing System [NMLS],” says Marv Stanger, a certified mortgage planning specialist with Primary Residential Mortgage Inc. in Springfield, Va. “This license requires the lenders to pass state and national exams, have 20 hours of mortgage education and a background check. Consumers should ask each lender for their NMLS identifier number.”

Mr. Stanger points out that the NMLS does not require a license for lenders who work directly for a bank or credit union that accepts deposits. He also suggests that all potential borrowers meet in person with a lender.

“If someone refuses to meet with you and suggests handling the loan over e-mail or the phone, that should be a red flag that something is suspicious about that lender,” Mr. Stanger says. “A trustworthy lender should be willing to answer all your questions and explain every potential cost associated with the loan.”

The ABA recommends that borrowers “read all the fine print” to make sure they are being told the truth about their loan, but few consumers understand enough of the details of mortgage loans to catch deceptive advertising.

“Mortgage lending is a very arcane business,” Mr. Banker says. “Unless you want to go to grad school to study mortgage lending, it can be very difficult for even the best-educated consumer to understand every bit of a loan document.”

Mr. Banker says lenders can explain different interest rates or fees to consumers by telling them they are not as qualified as some other borrowers.

“This is one reason we are strong supporters of consumers shopping around and asking about pricing from more than one lender,” Mr. Banker says.

A borrower should be getting similar quotes from a variety of lenders regardless of their credit history. A consumer with poor credit is likely to receive loan offers with higher interest rates than someone with better credit, but by shopping around, they will have a better idea of their options.

A typical ploy of predatory lenders, a “bait-and-switch” tactic in which consumers are quoted one price and then, at the settlement table, handed loan documents with different closing costs and a higher interest rate, has been addressed by the new Good Faith Estimate forms all lenders are now required to use.

“The new Good Faith Estimate [GFE] must be delivered to borrowers once they complete an actual loan application with a property address,” Mr. Stanger says. “In other words, it is not required with a prequalification for a loan. The GFE tells consumers to shop around for a loan and also has very strict requirements on when and by how much the actual closing costs and fees can vary from the original estimate.”

Lenders often provide a worksheet with estimated loan costs and fees when consumers are shopping for a loan and have not completed the actual application with a property address and estimated property value. Mr. Stanger recommends that consumers compare worksheets from several lenders to be sure they are getting a fair price.

The GFE provides specific places on the first page where lenders must answer questions about the loan on offer, including whether the loan incurs negative amortization and whether there is a prepayment penalty. In addition, lenders are required to state whether the interest rate will change and if a balloon payment is required. Prepayment penalties and negative amortization could be an indicator of a predatory lender.

“While the GFE can be helpful, I think it is more important for consumers to do their homework in advance of applying for a loan for a specific home,” Mr. Stanger says. “Everyone should get recommendations from a Realtor or a settlement attorney for a good lender. If you get a recommendation from someone else, ask your Realtor or a title company if they know anything about that lender. Ask for references and check them out.”

The FMC allows consumers to search for a certified lender by ZIP code.

“Our Web site will generate a list of multiple lenders that we know will give you a fair deal, and consumers do not have to enter any personal information to get that list,” Mr. Banker says. “Some Web sites that generate loan quotes are legitimate, but not all of them are. Many of them include advertising, which means that consumers are directed to lenders who are also advertisers and may not always provide the best service.”

As part of the FMC lender certification process, FMC audits loans to check pricing versus credit risk. Borrowers who are considered a higher credit risk will naturally qualify only for a mortgage with a higher interest rate or higher fees, but FMC looks for a pattern of high-priced loans regardless of borrower qualifications.

Mortgage lenders and brokers voluntarily apply for FMC certification, so it could be assumed that predatory lenders would not bother to attempt to qualify. But Mr. Banker says there have been many lenders whom they had to turn down or decertify because of untrustworthy practices. Shopping around among FMC-certified lenders provides an extra measure of confidence to consumers that an external nonprofit organization is watching these lenders to make sure they keep meeting high standards.

“Just think about how much money is involved with taking out a mortgage,” Mr. Banker says. “If you are buying a $300,000 home, one point is $3,000. It just shows you how important it is for consumers to do their homework to make sure they are working with a lender who will be fair.”

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