Your Rights as a Borrower

  
     

Introduction
Commercials and door-to-door representatives can make it sound so simple and more and more Americans are borrowing money in order to buy homes, finance home improvements, pay medical expenses, or cover other personal needs.

But what you don’t know can cost you thousands of dollars or even your home. Many consumers may unknowingly become victims of unfair or "predatory" lending practices.

But you can protect yourself and your home by knowing the facts and doing your homework. This brochure describes the process of taking out a home loan and provides tips to help you make the lending choice that is right for you.

Loans, Lenders, and You

Prime, subprime and predatory lending
The marketplace for home loans, both mortgages and home equity loans, has different categories of loans based on the applicant's credit history. The two main groups are called prime and subprime loans.

Prime loans are the loans given at the lowest interest rates and costs to the consumer, and are generally given to consumers who present the lowest risk of default to the lender. These consumers generally have the best credit history and credit rating.

Subprime loans are more expensive loans given to consumers with flaws in their credit history or sometimes, no credit history. If your financial history shows other loans or financial obligations that you have not repaid, you may need to pay more (either in interest, fees, or both) in order to borrow money.

While more expensive, subprime loans provide access to credit for consumers that do not qualify for prime loans.

Predatory lending is a set of lending practices that takes unfair advantage of consumers. Consumers end up taking out loans that they cannot afford, have deceptive or unclear terms in them, or which cost more than necessary and may ultimately lead to the loss of one's home. Most predatory loans occur in the subprime market, but not all subprime lending is predatory.

Consumers need to beware of predatory lending practices when searching for a loan. Predatory practices target both home buyers (20% of predatory loans) and homeowners taking out second mortgages or home equity loans (80% of predatory loans). Many of the homeowners may be looking for home equity loans to get money for home improvements, personal or medical expenses, or to consolidate debts.

Getting a Loan
Before taking on a large debt like a first or a second mortgage, take the time to investigate the lending market, your own credit history and rating, and a number of lenders and programs. These simple steps, set forth below, can save you thousands of dollars and protect you from predatory practices.

  1. Assess your needs: First, determine what your primary financial need is. Do you need money to buy a home, make home improvements, consolidate debts, or find additional cash for personal needs? There are different types of loan programs and services available depending on the type of loan that you need. Next, determine how much money you need to borrow. Be wary of lenders that push you to take out a larger loan than you need.

  2. Assess your financial status: There are two critical elements to your current financial situation. First, determine how much cash you have available for a down payment or other fees. Next, look at your credit history so that you can understand what a lender will see. To do this, you want to check your credit report and credit score. You can order your credit report (a history of your financial transactions), from any of the three major credit reporting agencies, Equifax, Experian, or TransUnion. TransUnion and Equifax will also provide you with your credit score, a number between 300 and 850 that lenders use to help them evaluate your credit history. Many consumers who are eligible for prime loans incorrectly assume that they are not. By reviewing your own credit history, you can better determine if you might qualify for a prime loan. You should also correct any errors you discover in your credit reports before applying for loans.

  3. Finding the loan: You will need to research and comparison-shop to find the best loan. If you are purchasing a home, the real estate broker who has helped you find the property may recommend sources or assistance in finding a loan. A mortgage broker, mortgage shopping Web site or community group can help you in this process as well. For a fee, brokers and Web sites take your financial information and needs and attempt to find an appropriate loan. If you have a prior financial relationship with a bank or credit union, you may want to check with them first. However, you do not need to have a current or prior relationship with a bank in order to be considered for a loan. You will need to compare the true costs of the different loans - the annual percentage rate (or APR), fees, costs of any insurance, and the term of the loans, not just the monthly payments. For example, your monthly payments may be lower for a longer-term loan, but you will pay more money in interest over the life of the loan than you would with a shorter-term loan. Once you understand the terms, you can make the best decision based on your financial situation.

  4. Document review: The mortgage broker or mortgage lender will draw up documentation for the loan. Before signing, make sure you understand the documents including the amount and number of monthly payments that are required, the fees being charged, and whether or not there are any penalties if you want to repay the loan early. An attorney or trusted advisor can assist with this process. Remember, if you have a question or are unsure of something, don't be afraid to ask!

What happens if you don't qualify for a prime loan?
If you don't qualify for a prime loan, there are a number of other, legitimate lending options. You may still qualify for a subprime loan. Subprime loans are an important source of credit for consumers who do not qualify for a prime loan, and you should compare offers from subprime lenders in the same manner outlined above.

There are also a number of federal and state programs that can help you qualify for a loan. Agencies such as the US Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), the Veteran's Administration (VA), Fannie Mae, Freddie Mac, and the State of New York Mortgage Agency (SONYMA) may have loan programs that meet your needs. These organizations do not make loans directly to consumers; they insure and/or purchase loans from private mortgage lenders, encouraging them to make loans to consumers who might otherwise not qualify for loans. These loans are often available with low down payments and flexible requirements for qualification. You should contact these organizations for additional information on their programs, and to find lenders approved to make these loans in your area. See the resource pages at the back of this brochure for contact information.


How to Spot Predatory Lending
The large majority of predatory loans are either first or second mortgages. The practices that make up predatory lending can involve any of the players in the loan market: lenders, mortgage brokers, real estate brokers, attorneys, even home improvement contractors. These schemes often target people who are "house rich, but cash poor," that is, consumers who have built up a lot of value in their homes, but do not have much available cash.

Consumers may get involved with predatory lenders in a number of ways. Some lenders or brokers use frequent advertising and neighborhood visits to encourage people to take out loans. Others target certain communities, through advertising in a specific language, or targeting neighborhoods with high numbers of elderly homeowners, or homeowners without much access to credit.


Common Practices

Charging excessive or unnecessary fees
Unusually high costs for mortgage or real estate brokers or for settlement services may be added to the loan without being clearly explained to the consumer. These fees (often described as "points"), when added to the principal of the loan, can add thousands of dollars in unnecessary costs. If you do not have the cash to pay these fees when you take out the loan, be aware that the lender will add these fees to the amount you are borrowing. Be sure that you understand the nature and full cost of any fee before you sign any documents.

Requiring unnecessary insurance
Some brokers or lenders will add unnecessary insurance to the loan. Often consumers are not informed that this insurance is optional, and will substantially increase the cost of the loan. This insurance may be single premium credit insurance (insurance paid in one lump sum to insure against default on the loan), disability insurance, or life insurance. The insurance may only protect the consumer against disability or death for 5-7 years, while the loan has a 30-year payback plan. Some predatory loans have a consumer paying for insurance years after the policy has expired. The documentation that you receive from the lender before signing for the loan should outline clearly the amount you are paying for insurance and the length of time that the insurance is valid.

Steering into high interest rate loans
Brokers or lenders may "steer" consumers who qualify for prime loans into more expensive, subprime loans. If you know your credit rating is good and you are feeling undue pressure to take a loan with excessive points, high interest or insurance, check with another lender first.

Balloon payments
Some loans are structured so that after a fairly short amount of time, 5-10 years, one very large payment is required to pay off the remainder of the loan. This is known as a balloon. Balloon loans may make the initial monthly payments very low, but the consumer must refinance these loans before the "balloon" payment is due, or the consumer will be asked to make a payment of thousands or hundreds of thousands of dollars. Consumers who are unaware of balloon payments in their mortgage may later be in danger of foreclosure. Consumers can lose all of the money they have put into their homes and the home itself if they cannot meet the large balloon payment at the end of the loan. To guard against unknowingly agreeing to a balloon, please be sure to ask for a copy of the proposed payment schedule and study it carefully.

Home improvement loan fraud
Unscrupulous home improvement contractors are a notorious part of predatory lending. These contractors may canvass neighborhoods, offering to arrange loans to finance home improvements. Consumers may be pressured into signing these loans without adequately reviewing the terms. In addition, many of these contractors provide substandard work. Be aware of anyone coming to your door with a limited-time or "special offer" if a deal seems too good to be true, it probably is!Flipping"Flipping" occurs when a lender, mortgage or real estate broker encourages a homeowner to refinance their loan repeatedly over a short amount of time, with no financial benefit to the homeowner. Consumers may be told that they are refinancing their loans at a lower interest rate, and that they may have lower monthly payments, however, the total cost of the loan may be higher. A consumer whose initial loan has a large balloon payment may then be given a refinanced loan that still does not have terms that the consumer can meet. The lender or broker may make a lot of money in the fees they charge in each transaction, and in the end, the consumer may be left with more debt than they can pay. Again, if you are unsure of the benefits of the loan proposal being made to you, ask a third party for advice.

Asset based lending
Asset based lending is the practice of making a loan to a consumer based on the value of their home (their "assets"), not their ability to repay the loan. Therefore, a consumer with a home with a lot of equity but a low income may be given a loan with payments that are too large to make, and the consumer may be in danger of losing their home. No matter the terms of your loan, make sure you are comfortable with the proposed monthly payment in relation to your personal budget.

Prepayment penalties
To prevent a consumer from paying off their loan in advance, some lenders charge a penalty for early pay off. These penalties may make it difficult for consumers to refinance their loans at a lower rate, as well. The documentation given to the consumer prior to signing for the loan should clearly state if there are any prepayment penalties in the loan, and what the penalty is.

Negative Amortization Loans
Negative amortization occurs when the mortgage payments do not cover the full amount of interest due. As a result, the principal balance increases rather than decreases because the unpaid interest is added back to the outstanding mortgage principal. Depending on the rate of appreciation with housing values in the real estate market where you live, this may negatively affect the equity that you have invested in your property. Be sure to carefully read all loan documents and disclosures to determine if your loan terms allow for the possibility of negative amortization - if they do, be sure that the loan is right for your particular situation.

Important Tips

Don't

  • Sign any documents with any blank lines.
  • Sign anything with false or inaccurate information.
  • Be rushed into signing a loan because it is a "Limited Time" offer.
  • Pay up-front fees without adequate explanation.
  • Do business with lenders that you haven't checked out.
  • Assume that you can't go to a major or neighborhood bank - check out your options.

Do

  • Be very cautious about lenders or contractors who come to your door.
  • Get all fees and terms explained.
  • Know what your loan will cost you each month and in total.
  • Ask questions - get full and thorough explanations.
  • Review all documents or have someone you trust review them for you.
  • Know that you have three days to cancel loans signed at home.
  • Know that you generally have three days to cancel home improvement contracts.
  • Make sure you are comfortable with the loan terms if you have applied for a "balloon" loan.

If you think that you have an inflated or predatory loan, there are a number of steps that you can take.

What to do if you think you have a predatory loan

  1. Housing counseling services - There are a number of neighborhood agencies that assist consumers with problem loans or who are in danger of foreclosure. You can find a local agency by contacting HUD, your local legal services organization or Legal Aid Society. See the resource page at the back of this brochure for additional contacts.

  2. Report the problem to agencies such as HUD, your Attorney General's office, or the Federal Trade Commission.

  3. If your problem loan involves a home improvement contractor, report the contractor to the local Department of Consumer Affairs and the Better Business Bureau.


For More Information 
The Better Business Bureau Serving Metropolitan New York can provide information on mortgage brokers, lenders, and real estate brokers, as well as industry reports. Contact the BBB at:

257 Park Avenue South
New York, NY 10010
212-533-6200 ($3.80 by credit card)
900-555-4BBB ($.95 per minute)
www.newyork.bbb.org

TransUnion - You can order your credit report and credit score for $8.50 either by mail or through the Internet. Please contact them by phone to determine what information you need to provide to order the report.

TransUnion LLC
Consumer Disclosure Center
PO Box 1000, Chester, PA 19022
800-888-4213
www.transunion.com

Equifax - You can order your credit report for $8.50 by mail, phone or Internet. You can order your credit report and credit score for $12.95 through the Internet only.

Equifax, Inc.
PO Box 105496, Atlanta, GA 30348-5496
800-997-2493
www.equifax.com

Experian - You can order your credit report for $8.50 by mail, phone, or Internet.

Experian
PO Box 2002, Allen, TX 75013
888-397-3742
www.experian.com

Fannie Mae Consumer Resource Center
800-7-FANNIE (732-6643)
www.homepath.com
www.fanniemae.com

Veterans Administration Regional Loan Center -
Dept. of Veterans Affairs
275 Chestnut Street, Manchester, NH 03101
603-666-7562
www.homeloans.va.gov

SONYMA (State of New York Mortgage Agency)
641 Lexington Avenue, New York, NY 10022
800-382-4663
www.nyhomes.org

Freddie Mac
800-FREDDIE
www.freddiemac.com/homebuyers

HUD/FHA
26 Federal Plaza, Rm. 3541
New York, NY 10278-0068
212-264-6500

HUD Customer Service Center - 800-767-7468
HUD Servicing Center (for consumers who have
difficulty paying back a HUD/FHA loan) -
888-297-8685
www.hud.gov

To File a Complaint 

Federal Trade Commission - 
Consumer Response Center
600 Pennsylvania Avenue NW
Washington DC 20580
877-FTC-HELP (877-382-4357)
www.ftc.gov

HUD Predatory Lending Hotline -
800-440-8647

New York State Attorney General's Office
120 Broadway, New York, NY 10271
800-771-7755
www.oag.state.ny.us

www.lawhelp.org - This Web site provides links to legal resources and foreclosure prevention services.