1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
(651) 296-3353
(800) 657-3787
TTY:(651) 297-7206
TTY:(800) 366-4812
National Consumer Protection Week PDF
National Consumer Protection Week:
BE ON GUARD AGAINST PREDATORY MORTGAGE LENDING
From the Office of Minnesota Attorney General Lori Swanson
In recognition of National Consumer Protection week, Minnesota Attorney General Lori Swanson encourages consumers to arm themselves with knowledge and be on guard against predatory mortgage lending. Rising adjustable interest rates, deceptive lending practices, and other factors threaten to cost some Minnesotans the very home that they live in. Don’t let this happen to you!
Home ownership is a fundamental aspect of the American dream and a key component of stable communities. Unfortunately, home foreclosures continue to rise across the nation, with many analysts anticipating even greater problems as many Adjustable Rate Mortgages reset with the changing interest rates in the spring of 2007. Across America, foreclosure rates have been above 100,000 in each of the preceding 5 months. Increases in the number of foreclosures are often attributed to a substantial growth in the sub-prime lending market (loans to consumers with impaired credit), which has expanded to account for 20% of new mortgages in 2006. Attorney General Lori Swanson has assembled a Predatory Lending Study Group to address some of these issues through proposed legislation in Minnesota. In the meantime, borrowers are advised to be proactive in protecting themselves from predatory lending practices. Here are some things to watch out for:
- Can You Make the Payments? Don’t let a broker or lender talk you into something you can not afford. Just because the institution is willing to lend you money does not mean you can afford the loan. Increasingly, brokers and lenders are using “no-documentation (no-doc)” or “Stated Income” loans, whereby a consumer may simply state their income without certain documentation or underwriting by the lender. In some cases, brokers and lenders have encouraged consumers to inflate their stated income in order to qualify for a loan. Don’t let this happen to you! Furthermore, when you are shopping for loans, make sure that you are including the cost of homeowner’s insurance, taxes, and any escrow payments in your comparisons and payment estimates. In some cases, unscrupulous brokers or lenders may compare the monthly payment you make now (including escrow, insurance, taxes, etc.) with a monthly payment that only includes the payment of principal. Make sure that you compare the entire cost associated with the loans over the entire life of the loans.
- Adjustable Rate Mortgages (“ARM”). ARM loans fluctuate with the interest rates set by the Federal Reserve. Since these rates can increase, you should be on guard against low introductory rates that may change. Under an ARM, you can wind up paying significantly more in your monthly payments than you initially paid at the beginning of the loan. In some cases, mortgage payments may as much as double in a considerably short period of time. Since interest rates have been relatively low in recent years, consumers have often been able to get ARM loans with a lower initial payment than what they might find with a fixed rate mortgage. As rates increase, however, many homebuyers are faced with sticker shock as their mortgage payment quickly surpasses what they might have been paying with a fixed mortgage.
- Be on Guard Against Interest-Only Loans. Interest-only loans are structured so that for the first few years of the loan, you only pay the interest on the loan. Although you may be drawn to such loans because the initial payments may seem substantially lower than other loan products, be careful: once the interest-only period ends and you must begin paying on the principal of the loan, the monthly payment may skyrocket. Similarly, some loans may even be structured with a negative amortization. Under a negatively-amortized loan, you do not even pay the full amount of the interest on the loan, so that, in essence, the principal of the loan, or the amount borrowed, actually grows with the life to the loan. Such loan products can jeopardize your home and your finances.
- Beware of Balloon Payments. Be on guard against loans that bear an unusually large payment toward the end of the loan, also known as a “balloon payment.” In some cases, the true cost of a loan may not be reflected by the initial monthly payments, because a large portion of the cost may be hidden in the balloon payment. Although the initial mortgage payments may make the loan appear attractive, you may not be able to pay when the balloon payment comes due, leaving you vulnerable to foreclosure or unfavorable refinancing. Make sure that you read your loan documentation very carefully to determine whether or not the loan contains a balloon payment.
- Shop Around to Avoid High Interest Rates and Fees. Interest rates and fees vary from loan to loan and from lender to lender. Remember that everything is negotiable. You do not have to simply accept the terms offered by a given lender. In some cases, mortgage brokers may actually receive payment from the lender for providing you with a higher interest rate loan than you may be qualified for. The difference in these rates is called the yield spread. Avoid high yield spreads and fees by comparison shopping for the loan with lowest fees and the best interest rate over the life of the loan.
- “Churning”: Refinance Without Benefit to the Borrower. Some unscrupulous brokers or lenders may solicit you to refinance your home with a loan that does not benefit you. This practice is called “churning.” In some cases, brokers or lenders may even attempt to convince you to refinance a “special loan”, such as a loan that is subsidized by the government or non-profit agency bearing little or no interest. Be on guard against any refinance offers that sound “too good to be true.” Brokers or lenders may present a loan that appears to bear a low introductory rate, but may bear large fees, balloon payments, negative amortization, prepayment penalties, steep rate adjustments later in the life of the loan, or other adverse conditions that may lead to financial difficulty and/or foreclosure. Don’t let this happen to you! Closely scrutinize all the terms and conditions of a given loan, comparison shop, and consider consulting an attorney, or a non-profit or governmental organization approved by the United States Department of Housing and Urban Development before agreeing to refinance such loans.
- Inflated Appraisals.Whether you are a first time home buyer or a homeowner looking to refinance, be wary of appraisals that overstate the value of your property. Appraisals are only estimates of the property’s worth. For instance, as a first time home buyer, you may obtain a $200,000 loan based upon an inflated appraisal for a property that is really only worth $160,000. When you attempt to sell the property, you may wind up owing the bank as much as $40,000 beyond the sale price. Additionally, if you rely on an inflated appraisal to borrow an unusually large amount against your home’s equity, you may be vulnerable to becoming financially overextended.
- Who’s Looking Out for You? For most people, the purchase of a home is the largest and most important consumer transaction in their life. Years ago, consumers brought lawyers or financial advisors to their closing to review their documentation and represent their interests in the transaction. Since this is no longer such a common practice, consumers may be left asking the question: “who’s looking out for me?” Due to the high volume of paperwork required at the closing, you may be tempted to simply listen to the broker or agent’s verbal advice regarding the documentation. Be careful what you sign. It is advisable to bring someone to the closing that you trust, who can review the documents to ensure that what you are signing is in your best interest. Verbal guarantees may be difficult to prove in court if you need to take legal action later.
- Equity Stripping. Equity Strippers are scam artists who prey on those vulnerable to foreclosure in order to steal the equity they have built up in their home. If you are in foreclosure and you still have equity in your home, you typically have two options: (1) sell the home and take cash for the equity; or (2) get new financing to solve the foreclosure. Equity strippers scam those in foreclosure by claiming that they can “save their home.” Oftentimes, the equity stripper may claim that the financing to save the home has fallen through at the last minute, however, and convince the owner to sign the property over to them, under the agreement that the owner will still be able to live in the home, and may rent to own from the equity stripper. Don’t let this happen to you!
If you would like to file a consumer complaint, ask a consumer question, or obtain additional information about mortgage lending, or other consumers issues, you may contact the Minnesota Attorney General’s Office as follows:
Minnesota Attorney General's Office
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
(651) 296-3353
1-800-657-3787
TTY: (651) 297-7206
TTY: 1-800-366-4812
The Minnesota Department of Commerce is the State agency responsible for licensing and taking disciplinary action against mortgage brokers, realtors, appraisers, and other real estate professionals. If you believe you have been deceived or unfairly treated in connection with a real estate transaction, you should immediately file a complaint with the Department of Commerce as follows:
Minnesota Department of Commerce
85 East 7th Place, Suite 500
St. Paul, MN 55101
(651) 296-2488 or 1-800-657-3602
www.commerce.state.mn.us