Predatory Lending by Mortgage Companies Add to Bankruptcy Filings

Predatory lending practices by many mortgage companies have led to increased bankruptcy filings.  As new mortgage programs were created to help serve those markets that were previously unable to secure a mortgage, predatory lending began to rise.  According to the US Department of Housing and Urban Development, “Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that are beginning to enjoy the fruits of our nation’s economic success.”

The Center for Responsible Lending, “a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices” has created the Seven Signs of Predatory Mortgage Lending.

• Excessive fees
• Abusive prepayment penalties
• Kickbacks to brokers
• Loan flipping
• Unnecessary products
• Mandatory arbitration
• Steering and targeting

Consumers that are new to financing a home mortgage may not be aware of the type and amount of fees that are typical.  These fees are often hidden among the stack of paperwork and are “rolled in” to the mortgage.  If the buyer isn’t paying these fees out of pocket, they may not realize that they exist.  According to the Center for Responsible Lending, the average fee structure is less than 1% of the loan; predatory loans often top 5% of the loan cost in fees.  This can lead consumers who are making a small down payment, or in some cases no down payment, to start off their homeownership with an upside down loan.

The prepayment penalty that is associated with many predatory, sub-prime loans, are making the most press these days.  Consumers who financed their home with an adjustable rate mortgage (ARM) are scurrying to refinance before the rate adjusts to a point that puts the monthly payment out of reach.  Many of these consumers are only now finding out about the prepayment penalty attached to their loan.  If a consumer wants to refinance, the must first pay a hefty fee (sometimes in the tens of thousands of dollars) to the existing mortgage company for the privilege to refinance. 

Consumers who are already facing financial hardship certainly don’t have the funds available to pay the prepayment penalty.  If they can’t pay the prepayment penalty then the loan rate will adjust and the new monthly mortgage payment is more than they can pay.  This combination is sending many consumers straight into bankruptcy.

If you are faced with a similar situation, it is important to work with a bankruptcy attorney that is familiar with the nuances of mortgages during bankruptcy.  In some cases, you may be able to save your house from foreclosure.  With the discharge of your other debts, making the monthly mortgage payment may be more attainable.