Mortgage laws protect both lenders and consumers
The mortgage lending industry is governed by a number of state and federal laws that protect consumers against predatory lending, the illegal and unethical business practices committed by mortgage lenders for gain.
Examples of such practices include charging excessive fees and/or interest rates or targeting people with a lack of experience or understanding of the mortgage loan process.
Predatory lenders may use high-pressure sales tactics or deceptive practices, without sufficient consideration of the customer’s creditworthiness and ability to repay the loan.
Typical indicators for predatory lending include charging above-market interest rates and excessive finance charges. These lenders may encourage the borrower to misrepresent their income and assets to get the loan approved. Instead of approving the borrower on their ability to repay the loan, unscrupulous lenders may grant the loan based largely on the amount of equity in the property.
Predatory lending may include the use of adjustable rates, balloon payments and prepayment penalties that result in a higher monthly payment or a large principal balance due at some point in the loan that the borrower is unable to pay. If the borrower cannot qualify to refinance, they could lose their home. Predatory lenders often encourage the borrower to refinance multiple times, resulting in additional points and fees paid on each transaction.
There are two sides to this coin, however; the other side is known as mortgage fraud.
Mortgage fraud is defined as material misrepresentation of the facts to mislead a lender into extending credit beyond what would normally be approved if the truth were known.
Mortgage fraud may be committed by a single entity, such as a borrower, or it could be committed by one or more parties who would profit from the loan transaction, such as the mortgage loan originator, appraiser, real estate agent, title or escrow representative or attorney.
The two main types of mortgage fraud are fraud for property and fraud for profit. An example of mortgage fraud for property is a borrower who wants to purchase an investment property but misrepresents this fact to the lender, stating instead that they will occupy the property as their primary or secondary residence. This misrepresentation would allow them to get a loan with better terms – a smaller down payment and a lower interest rate – than would be available with an investment property mortgage.
Fraud for profit could involve any number of illegal practices, such as inflating property values and property flipping, undisclosed kickbacks, and the use of straw buyers.
Predatory lending hurts the consumer. Mortgage fraud hurts the lender. Both are considered to be serious civil and criminal offenses and are punishable by law.
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