Banking on Your Future

1. Banking on Your Future Preventing Mortgage Lending Scamsfrom Happening to You Funded by

2. How do you feel about…. …buying a home?

3. Learning Objectives • Identify predatory financial practices in the home lending industry. • Recognize advertisements and tactics used by the predatory lenders. • Demonstrate new skills that keep borrowers away from predatory lenders. • Identify predatory practices.

4. Meet the Ellisons

5. Knowledge is Power! • Knowing these things will protect you... • What are the traps predatory lenders use? • What are the signs of predatory lending? • What are the right questions to ask?

6. What do Predatory Lenders Do? • Pressure consumers • Charge higher interest rates • “Pack” loans with additional fees or products • Charge excessive closing costs • Make loans with excessive monthly fees • Add early payment penalties and balloon payments • Add mandatory arbitration clauses • Include hidden terms

7. Why Predatory Lending is Bad • Takes advantage of innocent people • prey on people’s dreams; creates hopelessness • make them feel ashamed when they have done nothing wrong • Puts people’s money and homes at risk • Destroys credit • Can cause homelessness

8. Low-moderate income Elderly Persons of color People in financial crises People with equity People without access to information People who are intimidated by mainstream services Predatory Lending Targets

9. Bad Credit? No Credit? Congratulations! – ‘pre-approval offers’ I know someone who can help you! - referrals This is best we can do given your credit -steering Getting You in the Door…

10. Advertising offers sound too good to be true Telemarketers, door-to-door soliciting Promises that “bad credit is no problem” Can lead to foreclosure STAY AWAY from these lenders Check lenders out with local NW organization Ignore their ads If it sounds too good to be true, it probably is Bad Credit, No Credit? THE TRAP – Too good to be true THE SOLUTION – Ignore them

11. Unsolicited letter, fax, call, or email “You are approved for a home mortgage!” “You’ve been chosen!” They want your personal information to sell to predatory lenders Don’t answer these solicitations Good lenders can answer all your questions! Check lenders out with local NWO Ignore their ads If it sounds too good to be true, it probably is “Congratulations! You’re Approved!” THE TRAP – Unsolicited approvals THE SOLUTION – Don’t go there

12. Dishonest mortgage brokers Referrals to predatory lenders Lender pays broker a “kickback” Lender charges borrower high interest rates and fees Beware of broker’s fees Shop around for the best loan! Get information about all costs in writing before loan closing A NW organization can help you compare the loan offers Be safe - visit a NeighborWorks lender partner “I know someone who can help you.” THE TRAP – Bad Referrals THE SOLUTION – Get all the Facts

13. Aggressive selling “this loan is your last resort” “no one else will give you a loan” Lender charges borrower high interest rates and fees NeighborWorks organizations know lenders who will work with people with credit challenges Know your credit score Shop around “This is the best we can do for you” THE TRAP – Steering Bad Loans THE SOLUTION – Know your options

14. Protect Your Dream

15. Knowledge is Power:Protect Yourself! • If it sounds too good to be true….. • Connect with good lenders • Understand how predatory lenders operate • Question everything – expect answers • You can ALWAYS walk away

16. Tools: Protection from Predators • The Truth in Lending Act (TILA) • Home Ownership and Equity Protection Act (HOEPA) • Real Estate Settlement and Procedures Act (RESPA) • State Unfair and Deceptive Acts and Practices Laws (UDAP)

17. Real Estate SettlementProcedures Act (RESPA) Protects consumers from unnecessarily high settlement charges and certain abusive behaviors in the real estate industry

18. RESPA Closing Cost Disclosure Requirements • No later than 3 business days after application, the consumer must be given a Good Faith Estimate. • All settlement agents must use the HUD-1 settlement statement clearly itemizing all charges imposed on the borrower • A comparison of these 2 documents will indicate whether there was a bait and switch.

19. RESPA Prohibits ‘Kickbacks’ and Unearned Fees • No person shall accept any fee, kickback or anything of value or split any fee for the referral of a mortgage settlement service • Payments for goods, services or facilities provided by the broker are not illegal.

20. Truth in Lending Act (TILA) • Right to rescind (cancel) a loan, as long as the loan is secured by your primary residence. • Includes home equity and home improvement loans • Lender must provide notice of the right to cancel • Three business days to cancel • Lenders must clearly explain loan terms. • You have up to three years to cancel the loan, if lender did not follow these rules

21. Home Ownership and EquityProtection Act (HOEPA) • Protection from high interest rate loans • Additional disclosures for loans 3% above Treasury rate • Lender must disclose APR and monthly payment amount 3 days before closing • Prevents certain terms in loans

22. State Laws • States have laws to protect borrowers • Laws may prevent: • Unaffordable loans • Flipping • Equity stripping • Misrepresenting loan terms

23. Types of Lending:What’s the Difference? • Prime • Sub-prime • Predatory lending

24. “A” loans ‘Prime’ loans Made to a borrower at the going rate Made to borrowers with very good credit ratings (FICO score). Types of Loans – Prime Loans

25. Anything under an “A” rating is ‘sub-prime’. “A-” loans -- slightly higher interest rate. Borrowers with few credit blotches “B”, “C”, and “D” loans Borrowers with significant credit blemishes. “D” loans have highest interest rate Made to people with the weakest credit histories Can include bankruptcy. Types of Loans – Sub-prime Loans

26. FICO Scores: What to Expect *as of 10/21/05 myfico.com

27. Lender says, “Because of your credit rating, the loan will cost you more.” “This is your only chance to get a loan, that he is taking a high risk in giving you the loan. Shop around and know your credit score. Visit other lenders and find out what kinds of deals you can really get. Call your local NWO to find good lenders. Beware of High-Interest Rates THE TRAP-High interest rate loans THE SOLUTION

28. A point is 1% of the loan (for a loan of $75,000 one point is $750). Legitimate lenders use points to lower the interest rate or for originating the loan (origination points). Predatory lenders charge excessive points, but the borrower doesn’t see a drop in the interest rate of the loan. Ask for details in writing, fees, points and interest rate Ask how much the lender is lowering the interest with the payment of the points. Shop around for other deals Check with an NHS lender partner for a better deal Avoid Unaffordable Fees THE TRAP THE SOLUTION

29. A point is 1% of the loan (for a loan of $75,000 one point is $750). Legitimate lenders use points to lower the interest rate or for originating the loan (origination points). Predatory lenders charge excessive points, but the borrower doesn’t see a drop in the interest rate of the loan. Even if your credit is damaged you could still get a loan from a traditional lender. Ask them what fees they charge. If a contract has fees you do not understand, question the lender. Ask for the dollar amount rather than the percentage. Do not sign any blank pages! Get a copy of signed documents at closing before you leave. Avoid Unaffordable Fees (cont’d) THE TRAP THE SOLUTION

30. Ads that offer a very low interest rate. Later, the quoted rate changes to a higher rate Sometimes, buyers don’t know about the change until closing This is a predatory lender. Know your rights-notice is required each time loan changes. Refuse to sign the loan. Contact your local NW organization. Shop around for a better deal including NW partners and other traditional lenders. Bait and Switch THE SOLUTION THE TRAP

31. A lender offers a very good sounding deal—minimal payments for the first 10 years on a loan. After the 10 years, the balance of the loan is due. Get copies of signed documents at closing. Understand how long you will make payments, whether the payments will cover any of the principal, and finally, how much and when the final lump sum payment will be due. Also, beware of any prepayment penalties that will not allow you to refinance the loan. Do not sign if you do not like the terms. Avoid Balloon Payments THE SOLUTION THE TRAP

32. Lender makes loan that you cannot afford to repay High monthly payments Forces borrower to refinance Lender charges additional fees at this time Borrower gets deeper and deeper in debt Foreclosure Get all costs in writing. By law, lenders have to give you the Good Faith Estimate document three days after you apply, but you can ask for it before committing to anything. The Good Faith Estimate is just that—an estimate of all the fees and charges you will be paying. Remember that it is an estimate, but most reputable lenders come very close to the amount they estimate. Unaffordable loans THE TRAP THE SOLUTION –

33. Lender makes loan that you cannot afford to repay High monthly payments Forces borrower to refinance Lender charges additional fees at this time Borrower gets deeper and deeper in debt Foreclosure Do not sign a loan for more money than you need Understand how much your payment will be. Do not sign a loan if the payment is more than you can comfortably afford. Do not count on a raise to make the payments. Unaffordable loans - continued THE TRAP THE SOLUTION

34. Loans which penalize the borrower for making additional payments or trying to pay the loan before the loan term ends. Usually means that you cannot refinance without being penalized. Read every paper before you sign it. Ask for a copy of loan documents before closing. Review loan documents with a housing counselor. Ask if there is a prepayment penalty clause and how long does it last, what the terms are, and to point it out in the contract. Avoid Prepayment Penalties THE TRAP THE SOLUTION

35. Loans which penalize the borrower for making additional payments or trying to pay the loan before the loan term ends. Usually means that you cannot refinance without being penalized. If the lender says that there is no prepayment penalty, ask them to point out where it states that there isn’t a penalty. If you do not like the clause, walk away from the deal. Avoid Prepayment Penalties THE TRAP THE SOLUTION

36. Monthly mortgage payments which aren’t big enough to even cover the interest payments each month Homebuyer ends up owing MORE money that they originally borrowed – deeper in debt than ever. Do your homework. Understand how long the loan is for, how much (in dollars including the interest and fees), and how much of each payment will go to paying the principal. Do not accept a loan that you don’t like. Shop around for a better deal. Negative Amortization THE TRAP THE SOLUTION

37. Loan that forces you to go to arbitrator in case of dispute with lender. Arbitrators most often find against the borrower. Limits your ability to challenge lender in court. Ask if there is a mandatory arbitration clause Refuse to sign the contract if one is included. Get a copy of signed documents at closing. Find a reputable lender. Avoid Mandatory Arbitration THE TRAP THE SOLUTION

38. Lender adds additional costs Credit insurance or other fees Does not inform the buyer Lender may forge documents Lender may ask you to sign blank documents Read every page. Question the fees that are being charged and why. Ask for itemized fees, in dollar amounts, from the lender. If you do not like the deal, leave. If the lender pressures you or tells you that this will be your only chance to get a loan, leave and report the lender to the better business bureau. Avoid Loan “Packing” THE TRAP THE SOLUTION

39. Lenders offer no-cost loans to the buyer. There are no free lunches Costs are added to the loan balance, making the loan much more expensive than regular loans. Avoid these loans Understand all the costs involved Ask for all of the fees and costs in writing before you sign. Understand “No-Cost” Loans THE TRAP THE SOLUTION

40. Lender makes loan knowing that borrower will not be able to make the payments. Lender lies on the application, saying that your income is higher than it actually is. This makes the loan easier to sell to investor Buyers are presented with papers that are blank, or with blank spaces, to sign. NEVER sign blank pages or pages with blank spaces! If there is a blank space, write N/A (“not applicable”) on the space or put a big “X “through it. Walk away from this type of predatory lender. Avoid False Applications THE TRAP THE SOLUTION

41. Keeping my dream alive….

42. Summary We can…. • Identify predatory financial practices in the home lending industry. • Recognize advertisements and tactics used by the predatory lenders. • Demonstrate new skills that keep borrowers away from predatory lenders.