What is predatory lending?  As strange as it may sound, there is no national standard that clearly defines the term.  There are however characteristics of loan products and practices which are designed to dupe the public.  

What are some of these practices?

• Charging high fees

• Excessive prepayment penalties

• Excessive yield spread premiums charges for phantom services

• Steering

• Loan flipping

• Mandatory arbitration

• Failure to disclosure loan terms and rate

Before you sign any loan document, review it carefully.  Until there is a national standard, the caveat of buyer beware is a good rule of thumb. NFHC Will Assist you with the Service at no cost.

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.

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.

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 lead 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.

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.

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.

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.

Flipping
Flipping of borrowers occurs through repeated fee-loaded refinancing. 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.