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Orie Proposes Legislation to Curb Unscrupulous
Predatory Lending Practices
HARRISBURG -- Seeking
to protect homeowners from unscrupulous lenders, Sen. Jane Orie (R-Allegheny)
has introduced legislation to curb a number of abusive lending practices that
have resulted in higher bankruptcy and foreclosure rates.
Orie said her legislation
would provide stronger oversight over lending practices, particularly in the sub
prime market. This market includes lenders who are willing to extend credit
when banks and conventional mortgage companies would not, second mortgages and
loans to borrowers with less than “A” credit.
“The growth of the sub prime
market has brought credit to millions of people who had earlier been unfairly
judged to be poor credit risks,” Orie said. “Unfortunately, this expansion in
lending has also put into jeopardy those homeowners who can least afford it and
has forced people out of their homes and into bankruptcy.”
Orie said that in Allegheny
County, the number of sheriff’s sales has tripled, with over 4,300 last year,
and an estimated 6,000 expected to occur this year.
“In many cases, unscrupulous
lenders prey on the elderly and those on a limited income, enticing them to make
financial decisions that can be devastating,” she said.
Orie’s legislation would
expand upon and strengthen current state laws by prohibiting a number of
“predatory lending practices” which are often accomplished through a combination
of aggressive marketing, high-pressure sales tactics, and loan terms, such as
prepayment penalties, that inhibit a borrower's ability to go elsewhere for
credit. These practices include:
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Lending without regard to a
borrower's ability to repay the loan. In these cases, loans are made based
solely on the amount of equity a borrower has in a property, rather than
considering their ability to repay the loan. Loans made to individuals who do
not have the income to repay the loan are designed to fail; they usually
result in the borrower losing their home through foreclosure or by signing
over the deed to the lender in lieu of foreclosure. The lender then makes a
profit on the resale of the property.
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Excessive fees and
insurance. Such fees go by a variety of terms (mortgage broker fees,
origination fees, servicing release fees, processing fees, discount fees,
etc.) but have two common characteristics: they are significantly higher than
those charged on conventional "A" quality loans and are not paid by the
borrower at the time of loan closing, but are instead financed as part of the
loan. These fees can have a ruinous impact on a homeowner's equity,
especially when combined with prepayment penalties on a loan.
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Unnecessary or expensive
insurance coverage such as credit life insurance, credit disability insurance,
or unemployment insurance. Predatory lenders often automatically include such
coverage in the loan without the borrower's knowledge, and then threaten to
delay a loan closing if the borrower tries to decline the coverage.
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Unnecessarily high interest
rates and "balloon" payments. Predatory lenders are able to charge very high
interest rates on their loans (frequently 16%-18%) because sub prime borrowers
with limited financial resources may accept credit at any price. In addition,
predatory lenders often structure a loan to have lower monthly payments,
attaching a large "balloon" payment at the end of the loan term to pay off the
loan.
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Loan "flipping" (frequent
refinancing). Flipping occurs when a lender induces a borrower to refinance a
loan with a new larger loan designed to both pay off the previous loan and
finance the fees and costs of the new loan. As the initial loan is extended
over a longer period of time and the loan balance increases, a borrower is
exposed to greater risk of losing his home through foreclosure.
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Prepayment penalties.
Lenders use prepayment penalties to discourage borrowers from refinancing
their mortgages. As a result, borrowers are locked into loans carrying very
high interest rates for as many as 30 years. Or if they choose to pay off or
refinance the loan anyway, the prepayment penalty reduces their home equity
even further.
In addition, Orie’s
legislation would place additional limitations on mortgage brokers to protect
consumers and would permit the Pennsylvania Housing Finance Agency to reduce the
interest rate charged on loans made to homeowners under the agency’s Homeowner’s
Emergency Mortgage Assistance Program (HEMAP). HEMAP provides short-term
mortgage assistance to qualified Pennsylvanians who fall behind in their loan
payments.
Orie said her consumer
protection package would put tight restrictions on these common predatory
practices and provide greater disclosure to borrowers -- to ensure that they are
not taken advantage of.
“Predatory lending practices
are resulting in more and more foreclosures and threatening the American dream
of homeownership,” Orie said. “Our goal is to stop these practices and ensure
that home owners are protected and informed.”
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