Ebook Unmasking the Predatory Loan in Sheep’s Clothing: A Legislative Proposal
For the past ten years, unscrupulous, silver-tongued mortgage brokers and lenders have successfully induced ffnancially unsophisticated borrowers to enter into “predatory loans” secured by their homes. Not only have such victims of predatory lending been deceived into paying tens of thousands of dollars more for credit than they should have, but a substantial number of these victims are eventually unable to continue to make these payments and have lost their homes at foreclosure sales.
Whole communities have been adversely affected by the phenomenon of predatory lending because aggressive mortgage brokers target speciffc neighborhoods within which to market these high-cost home loans, and the subsequent foreclosures in these areas have led to rows of boarded up homes being inhabited by gangs and drug dealers. While the problem of predatory lending has received widespread local, state, and federal attention over the past ten years, unfortunately, the laws enacted so far have been ineffective at substantially preventing the problem. The failure to adequately address the problem is due in large part to the unresolved and heated debate between consumer advocates and lenders over how to curb the activities of predatory mortgage brokers and lenders without adversely affecting the robust legitimate sub-prime market.
This Article contends that in a free market economy where usury type limitations on interest rates, fees, and closing costs largely do not exist, the best proactive way to ffght mortgage brokers and lenders who peddle predatory loans disguised as “great ffnancial opportunities” is to require that an equally knowledgeable counter-balancing influence be available to possible victims before they close on a potentially predatory loan. The proposal presumes that when a ffnancially knowledgeable person, whose goal is to help the borrower, advises the borrower on whether a proposed high-cost loan is overpriced or unaffordable, or whether there is a net economic benefft to the reffnance, the borrower will be in a position to move away from the predatory loan and enter into a loan that is better priced or otherwise better suits the borrower’s needs.
This Article argues that requiring a trained mortgage counselor to advise a borrower contemplating entering into a high-cost home loan can effectively prevent a great number of predatory lending without impinging upon the legitimate sub-prime market. This Article contains a model mortgage counseling law that would accomplish this objective and recommends that responsible lender and consumer advocates join together to make it the law of the land.
The Article begins with a brief explanation of predatory lending, why it began approximately ten years ago, and why it continues to thrive today notwithstanding the enactment of local, state, and federal laws to address the problem. The Article then details the kind of counseling and intervention that would take place under the proposed counseling intervention law, including how mortgage counseling can prevent predatory lending and how mortgage counselors can be trained and compensated.
The Article then argues that the mortgage counseling intervention law proposed would be an important reform that lenders and consumer advocates should embrace because it will create a comprehensive, aggressive, and proactive approach to preventing predatory lending without impeding the legitimate sub-prime market. In making this argument, the Article responds to the claim of consumer advocates that counseling puts the burden of the problem on the victim, and that counseling would be ineffective for many borrowers.
The Article also responds to lender advocates who have not embraced mandatory counseling due to their concern that it would add signiffcant delays and costs to the mortgage loan process. The Article then evaluates how this proposed counseling law harmonizes with, but is also distinctive from, other reform proposals, and whether the proposed mortgage counseling law should be enacted on the federal level or on a state-by-state basis. The Article concludes with the text of the proposed federal counseling law.
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