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					What is Predatory Lending?
              Federal law does not define “predatory” lending, and states define abusive
             lending differently, however, predatory lending usually involves practices that
             strip equity away from a homeowner.

              Many experts agree that it is the result of a company misleading, tricking, and
               sometimes coercing someone into taking out a home loan (typically a home
               equity loan or mortgage refinancing) at excessive costs and without regard to
            the homeowner’s ability to repay. Victims who have trouble repaying a predatory
loan often face harassing collection tactics or are encouraged to refinance the loan at even
higher fees.

Predatory Lending is intended to achieve abnormally high returns by taking advantage of
consumers. The term typically is to describe a combination of unfair or abusive loan terms,
unscrupulous & misleading marketing, & high pressure lending tactics that limit
information or choices available to a consumer.


Who Are Victims Of Predatory Lending?
Reports indicate that predatory lenders target consumers they believe are in
need of cash or are otherwise vulnerable. Examples include older people who
need money for medical bills or home repairs; moderate and middle-income
consumers who need to pay off credit card bills or consolidate other debts, and
lower-income or minority communities where there may be limited competition
from more reputable lenders.


Knowing the Terms of Predatory Lending
What is Subprime Lending?
Subprime Lending refers to lending to borrowers who do not qualify for “prime” rates –
Subprime Lending tends to be done primarily by nondepository institutions, either finance
companies or mortgage companies that are not subject to routine regulatory compliance
audits and connected with regulated financial institutions. These subprime lenders generally
raise money directly from bond or equity markets and make subprime loans.

Subprime as opposed to prime rate is also known as B and C lending. Due to credit
blemishes, these borrowers would not qualify for conventional loans. (Some 35% of
subprime borrowers qualified for prime-rate loans even though they were sold high-interest,
high-fee loans by subprime lenders.)

One distinguishes predatory lending from subprime lending by the features of the loan
(predatory – high-interest; high-fees, etc.), and most importantly, by whether the borrower
understands the terms of the loan.


                                             -1-                                  February 10, 2012
       What is Loan Flipping?
               The lender encourages you to repeatedly refinance the loan and often, to
               borrow more money. Each time you refinance, you pay additional fees and
               interest points. That only serves to increase your debt.

                You’ve had your mortgage for years and the interest rate is low and the
               monthly payments fit into your budget, but you could use some extra money.

A lender calls to talk about refinancing and using the availability of extra cash as “bait”. They
say it’s time your equity in your home started working for you. You agree to refinance your
loan. After you made a few payments, the lender calls to offer you a bigger loan, say for a
vacation. If you accept the offer, the lender refinances your original loan and then lends you
additional money. In this practice, often called “flipping”, the lender charges you high
points and fees each time you refinance and it may increase your interest rate as well. If the
loan has a prepayment penalty, you will have to pay that penalty each time you take out a
new loan. You have the extra money, but a lot more DEBT. (Additional costs and fees and
now paying interest on those extra fees.)


What is Property Flipping?
Property flipping is an elaborate scam in which unsuspecting first-time homebuyers are sold
houses in serious states of disrepair for prices far above what the houses are actually
worth.

The typical “property flip” begins with an investor or real estate company
purchasing a distressed property for as little as a couple of thousand
dollars. After doing minimal cosmetic or even no work to the property, the
owner finds a buyer, frequently targeting low-income minority families.
The buyers have no agent representation of their own and no real estate
knowledge, putting them at the mercy of the seller/owner.                The
seller/owner abuses this position by lying about the condition of the house,
promising to make visibly-needed repairs, setting the sales price at far above the
property’s actual value, and referring the buyer to a subprime lender or broker.


What is Equity Stripping?
The lender gives you a loan, based on the equity in your home, not on your ability to repay
based on your income. If you can’t make the payments, you could end up losing your home
as well as stripping you of your equity.


What is Bait & Switch?
The lender offers one set of loan terms when you apply, then pressures you to accept
higher charges when you sign to complete the transaction. In other words, a “teaser” rate
is offered to the borrower, but the lender switches the rate at the time of closing.

                                              -2-                                     February 10, 2012
What is Credit Insurance Packaging?
Credit insurance is insurance linked to a specific debt or loan which will pay off that
particular debt if the borrower loses the ability to pay either because of sickness (credit
health insurance), death (credit life insurance), or losing their job (credit unemployment
insurance). The lender adds credit insurance to your loan, which you may not need.


What is Steering?
Deliberately putting borrowers with good credit into loans with high interest rates – away
from more affordable options. A good percentage of borrowers are unknowingly moved into
the subprime bracket.


What are Balloon Payments?
Basically, it is a lump-sum payment that may be required when the plan ends. It
is the final payment of a mortgage, which is larger than the regular payment.
Mortgages with balloon payments are arranged so that after making a certain number of
regular payments (often 5 to 7 years worth, sometimes 15), the borrower must pay off the
remaining loan balance in its entirety, in one “balloon payment”. About 10% of subprime
loans have balloon payments.


What are High/Excessive Fees?
High or excessive fees are usually inflated origination & broker fees; inflated and “junk fees”.


What are Home Improvement Scams?
A home improvement contractor arranges the mortgage loan for repairs, often charging the
borrower for incomplete or shoddy work. Some contractors work together with lenders and
brokers to take advantage of homeowners who need to make repairs. They get the
homeowner to take out a high-interest, high-fee loan to pay for the work, and then the
lender pays the contractor directly. Too often, the work is not done properly or even at all.

   Get several bids from different home improvement contractors. Don’t get talked into
    borrowing more money than you need.

   Check with the Attorney General’s office to see if they have received any complaints
    about the contractor.

   Don’t let a contractor refer you to a specific lender to pay for the work. Shop around with
    different lenders in order to make sure that you are getting the best possible loan.

   Make sure any check written for home improvement is not written directly to the
    contractor. It should be in your name only or written to both you and the contractor, and
    you should not sign over the money until you are satisfied with the work they have
    completed.
                                              -3-                                    February 10, 2012
What is Packing?
          Lenders charge excessive, duplicative and often unjustified fees that constitute
            from 5% to 20% of the total loan amount. Another form of packing is when the
                lender sells the borrower unnecessary credit life or credit disability insurance,
                and finances the premiums over the life of the loan.



What is Mandatory Arbitration?
Some predatory lenders include mandatory arbitration clauses in their home loans. Signing
these means giving up your right to sue in court if the lender does something you believe is
illegal.


Charging Higher Interest Rates?
While the higher interest rates charged by subprime lenders are
intended to compensate lenders for taking a greater credit risk, too
many borrowers are unnecessarily paying higher interest rates.
Borrowers with perfect credit are regularly charged interest rates 3 to 6 points
higher than the market rates; with some subprime lenders, there simply is no lower rate, no
matter how good the credit. According to a rate sheet used by the Associates in the spring
of 2000, their lower interest rate for a borrower with excellent credit and a low loan-to-value
ratio was over 10% and during a similar period household borrowers with excellent credit
were seeing rates above 11%. And for borrowers with imperfect credit, rates are frequently
much higher than even somewhat blemished credit would reasonably warrant, as well as for
what the industry describes as standard rates for B, C, or D borrowers.


Aggressive & Deceptive Marketing – the Use of Live Checks in the Mail?
Much of the competition between lenders in the subprime industry is not based on
the rates or terms offered by the different lenders, but on which lender
can reach and “hook” the borrower first. Predatory lenders employ a
sophisticated combination of “high tech” and “high touch” methods, using
of multiple lists and detailed research to identify particularly susceptible
borrowers (minority, low-income, and elderly homeowners) and then mailing,
phoning, and even visiting the potential borrowers in their homes to encourage
them to take out a loan.

One of the methods used routinely and successfully by predatory lenders such as
Household is the practice of sending “live checks” in the mail to target homeowners. The
checks are usually for several thousand dollars and the cashing or depositing of the check
means the borrower is entering into a loan agreement with the lender.




                                              -4-                                    February 10, 2012
What is Yield Spread Premiums?
          A yield spread premium is compensation from a lender to a mortgage broker
            for the broker’s success in getting the borrower to accept a higher interest
              rate or more fees than the lender would have given the borrower at their
              standard or “par” rate. Yield spread premiums create an obvious incentive
               for brokers to make loans with the highest interest rates and fees possible,
                regardless of whether the borrower could qualify for better terms.



Who Is At Risk From Predatory Lending Practices?
Many times abusive or “predatory” lenders target people who are
strapped for cash – often preying on the elderly and people in lower
income groups. Homeowners can be tricked into taking out loans that
they cannot afford to repay. Some homeowners may even lose their
homes to foreclosure.

Subprime lenders target homeowners who are “cash-poor, but equity-rich”.

   Elderly Homeowners

    These homeowners are the main targets for predatory lenders. With limited or fixed-
    incomes, many of these homeowners are “cash-poor” even though they are “asset-
    rich”. When faced with large or unexpected bills for medical expenses or repairs on
    their older homes, these elderly homeowners have little choice but to tap into their
    home’s equity. The following is an example for the “perfect customer” according to an
    ex-employee of one subprime lender:

          Uneducated widow who is on a fixed income-hopefully from her deceased
           husband’s pension and social security;

          Who has her home paid off, is living off of credit cards, but having a difficult time
           making payments; and

          Who must make a car payment in addition to her credit card payments?


   Subprime Lenders

    Many of these lenders, who are considered high-risk borrowers, are often low-income
    and/or have poor credit. Typically, many are uneducated about financial issues.


    Predatory lending can harm not only individuals, but financial institutions and
                               communities as well.



                                             -5-                                     February 10, 2012
To Determine If A Loan Is Predatory In Nature, Ask Yourself
These Questions:
   Does your past credit history justify the high rate and fees
    charged?

   Is the loan being made on the basis of your ability to repay the
    loan and not solely on the value of the property?

   Have the loan’s terms been fairly represented & explained to
    you?

   Does the type of loan & the loan services provided meet your
    needs & interests?

If you answered “No” to any of these questions, there is a possibility the loan is predatory
in nature.


How to Spot a Predatory Loan
Abusive or predatory lending practices can include:

   Monthly Payments You Can’t Afford - Making loans without regard to the borrower’s
    ability to repay
   Flipping - Repeatedly refinancing a loan within a short period of time and charging high
    points and fees with each refinance
   Rates & Fees - Charging excessive rates and fees to a borrower who qualifies for lower
    rates and/or fees offered by the lender
   Packing a loan with extra charges or products such as single premium credit insurance
    products, and not adequately disclosing the inclusion, cost or any additional fees
    associated with the insurance.
   Aggressive & Deceptive Marketing through the use of “live check” in the mail – the
    loan has an artificially high interest rate and monthly payment in order for the predatory
    lender to be able to offer the homeowner an opportunity to refinance it, along with other
    debts, into another loan.
   Excessive prepayment penalties - Penalties for early pay-off of the loan
   Negative Amortization – the monthly payment on the loan is insufficient to pay off
    accrued interest and therefore increase the principal balance, resulting in a situation
    where the borrower actually owes more than the amount originally borrowed.
   Balloon Payments – This is a large payment usually at the end of the loan – Often after
    a series of low monthly payments
   Making Loans in Excess of 100% loan to value (LTV) – where the loan amount
    exceeds the fair market (appraised) value of the home. This can be dangerous because
    it makes it difficult for the borrower to refinance the loan or sell the house to pay off the
    loan. In addition, if the borrower defaults on the loan, a foreclosure sale may not
    generate enough to pay off the loan and the borrower could be subject to a deficiency
    claim.

                                              -6-                                    February 10, 2012
The Tricks of Predatory Lending
#1 – Selling the Monthly Payment

When dealing with loans, it is a mistake to focus exclusively on the monthly
payment – it’s not the whole story.

   What is the loan’s interest rate & other finance charges as shown by its
    annual percentage rate (APR)?

   How long will it last and how much will it cost in total payments?

   Will the regular monthly payments pay it off, or is there one large balloon payment at the
    end?

   Is there a risk of the interest rate going up, and how will that affect the monthly payment?

In addition, when comparing claims of savings over your current mortgage payments,
include the cost of setting aside the property taxes and home insurance if these costs are
currently part of your monthly payments.


#2 – Flipping by Repeated Financing

               This trick usually targets a person who has already been overcharged by
               the same lender or broker.

                It is an offer to refinance a high cost/high rate loan at a slightly lower rate
                than the one they arranged for the borrower within the past year or so.

                The catch is that the borrower is again charged, or more likely
              overcharged, for all Loan Origination fees, Broker Fees, Points, & Other
             Closing Costs.


#3 – Growing the Debt

Just what is says – you borrow a small amount of money, and then the lender
approaches you about borrowing MORE money.

Home Improvement Scams are good at growing the debt.


#4 – Equity Stripping

The lender is using your home as payment when you may not be able to repay the loan
according to your actual income.




                                              -7-                                    February 10, 2012
Tips to Avoid a Predatory Loan
   Always shop around – Only deal with licensed mortgage lenders and
    brokers to those operating under and subject to federal and state
    regulations.

   Ask questions.

   Read and get copies of everything you sign in connection with your mortgage.

   If you don’t understand the loan terms, talk to someone you trust to look at the
    documents for you.

   Don’t trust ads promising, “No Credit? No Problem!” If a deal seems too good to be true,
    it probably is!

   Ignore high-pressure sales tactics – Beware of “Bait & Switch” where the lender or
    broker makes an offer with one set of terms and then pressures you to sign a loan with
    more expensive rates and hidden costs.

   Make sure your monthly payments are affordable, and that you are NOT
    comparing apples to oranges when looking at the old vs. the new
    payment. Be sure that if the escrow of taxes and insurance is part of
    your old payment, it is included in your new payment when comparing
    price savings.

   Don’t take the first loan you are offered.

   Make sure the rate and terms quoted by your lender and/or broker are given to you
    in writing and do not significantly vary from those presented at closing.

   Remember that a low monthly payment isn’t always a “deal”. Look at the TOTAL cost
    of the loan.

   Do NOT shop based solely on lower mortgage payments. Payments may be lower if
    the loan has a balloon payment or a variable rate. Unless you expect falling mortgage
    rates, a higher income or a better credit rating in the future, these loans eventually cost
    you more.

   Be wary of promises to refinance the loan to a better rate in the future.

   Never sign a blank document or anything the lender promised to fill in later.
    Forms should be completely filled out with no blank boxes or spaces.

   Beware of door-to-door home improvement offers where the contractor
    offers to find you the necessary financing to make the improvements.




                                             -8-                                    February 10, 2012
Tips to Avoid a Predatory Loan
   Do not fall for scams from out-of-state businesses claiming
    to arrange mortgage loans for an advance fee or with the
    advance purchase of special loan insurance. Sending them a
    money order to the post office box or mail drop will likely be the last
    time you see your money.

   Never falsely state or allow others to falsely state your income. You
    won’t have your dream home very long if you can’t afford to make the payments.

   Borrow only what you need and can afford to pay back. If you need $5,000 to pay for
    a home improvement, there is little sense in refinancing your existing mortgage and
    paying $6,000 in closing fees to arrange the loan.

   Remain current on your present mortgage obligations until closing and disbursement
    of new loan proceeds. If you are paying other debts off as part of the loan, remain
    current on them as well. Falling behind on your current debt while waiting to get your
    new loan will hurt you in the long run.

   Understand that if you consolidate your credit card debt and other
    consumer debt into your mortgage or home equity line of credit to have
    one lower overall monthly payment, nonpayment of the loan could
    cause you to lose your home. Also, any monthly savings will disappear if
    you accumulate credit card debit again.

   Know your credit rating and qualify for the loan you deserve. There is
    no reason to pay high rates and fees if you can qualify for better terms.

   Do NOT deed your property to anyone. First consult an attorney, a knowledgeable
    family member or someone else you trust.


Protecting Yourself
   Ask specifically if credit insurance is required as a condition of the loan. If
    it isn’t, and a charge is included in your loan and you don’t want the
    insurance, ask that the charge be removed from the loan documents. If you
    want the security of credit insurance, shop around for the best rates.

   Keep careful records of what you’ve paid, including billing statements and canceled
    checks. Challenge any charge you think is inaccurate.

   Check contractors’ references when it is time to have work done in your home. Get
    more than one estimate.

   Don’t be afraid to ask questions.

   Never act too quickly.

                                              -9-                                     February 10, 2012
Protecting Yourself
   Read carefully before you sign

   Know Your Contract

     Know the Amount Financed

     Know the Finance Charge & the Annual Percentage Rate (APR)
        APR – the percentage cost of credit on a yearly basis, which is your key to
        comparing costs, regardless of the amount of credit or how long you have to repay
        it. APR takes into account not only the interest rate, but also the points, mortgage
        broker fees and certain other fees that you have to pay.

        Finance Charge – Total dollar amount you pay to use credit. It is
        based on the interest and fees charged, the amount borrowed
        and the length of the loan.

        Federal law requires that the creditor tell you – in writing and
        before you sign any agreement – what these terms will be.

        Truth in Lending Disclosure Statement – will show you the APR and other
        payment information for the loan you have applied for.

     Know if You are Paying “Points”
        Points are fees that affect your interest cost which are paid to the lender for the
        loan. One point equals 1% of the loan amount. In some cases, the money
        needed to pay points can be borrowed, but doing so will increase the loan amount
        and the total costs. Ask for points to be quoted to you as a dollar amount rather
        than the number of points, so that you will actually know how much you will have
        to pay.

     Know the Total Number & Exact Dollar Amount of Each Payment

     Know the Payment Date

     Know about Collateral




                                           -10-                                  February 10, 2012
What You Can Do?
Various federal laws help protect consumers from certain predatory lending practices.

   The Truth in Lending Act

    Requires lenders to provide timely information about loan terms
    and costs. Under TILA, the failure to provide timely and accurate
    disclosures of the cost of mortgage credit may result in
    mandatory administrative reimbursement of excess finance
    charges; statutory damages and other civil liability; and the
    borrower’s right to rescind the entire transaction.

   “Right of Rescission”

    You have the right to cancel a home equity loan and certain other loans secured by a
    home up to three business days after signing the loan contract.

   Home Ownership & Equity Protection Act - HOEPA

    High cost mortgage loans originated through brokers or by third-party lenders must
    comply with the substantive protections and disclosure requirements set forth in the
    Home Ownership & Equity Protection Act. HOEPA prohibits creditors from engaging in
    a pattern or practice of making certain high-cost loans based on the homeowner’s equity
    without regard to repayment ability. Substantive protections of HOEPA also restrict
    many of the other loan terms and structures often cited in discussions of predatory
    lending practices, including refinancing that may constitute loan flipping; payments to
    home improvement contractors; balloon payments; prepayment penalties; and negative
    amortization. Civil liability for HOEPA violations may include restitution of all the finance
    charges and fees paid by the consumer.

   Fair Lending Laws

                     Predatory lending practices can also raise fair lending concerns.
                     Predatory lenders often target identifiable groups of consumers that are
                     (or are perceived to be) less financially sophisticated, currently have less
                     access to mainstream lenders, or are otherwise vulnerable to abusive
                     practices. If this targeting is based on age, race, national origin, gender,
                     or other prohibited bases under the law, the abusive practices may
                     represent violations of the Equal Credit Opportunity Act (ECOA) or the
                     Fair Housing Act. Even if such targeting has been performed directly by
                     a mortgage broker in soliciting applications, the creditor making the loan
                     could nevertheless be subjected to civil lawsuits and government
    enforcement actions. ECOA also provides for successor liability by defining the term
    “creditor” to include “any assignee of an original credit who participates in the decision to
    extend, renew or continue credit”.




                                              -11-                                   February 10, 2012
   Federal Trade Commission Act (FTC Act)

    Predatory loans may involve violations of the FTC Act, which
    make unlawful “unfair or deceptive acts or practices”.
    Practices involving fraud, misleading conduct, or material
    omissions of information concerning costs, risks or other
    terms and conditions may violate the prohibition against
    deception. Under relevant precedents, this prohibition is
    violated by representations, omissions, acts or practices that
    are material are likely to mislead a reasonable consumer in
    the audience targeted by the advertisement or other practice.
    Loans with unconscionable terms may also involve violations of the prohibition against
    unfair acts or practices. Evidence of practices such as loan flipping, equity stripping, or
    the refinancing of loans made under governmental or nonprofit programs with terms
    unfavorable to the borrower may be indicative of unfair or deceptive practices that violate
    the FTC Act.

   MAP Program

    The State of Illinois, Office of Banks & Real Estate and the Department of Financial
    Institutions have developed the Mortgage Awareness Program (MAP), which is a
    counseling and education component.

    The Core Curriculum of the MAP should include:

       Explanation of the Amount Financed
       Explanation of the Finance Charge
       Explanation of the Annual Percentage Rate
       Explanation of the Total Payments
       Explanation of the Loan Costs, including Broker’s Fees, Finance Charges, Points,
        Origination Fees
       Explanation of the Right of Rescission
       Explanation of Foreclosure Procedures
       Explanation of the Significant Debt Ratios, including Total Debt to Income, Loan
        Debt to Income & Loan Debt to Value of Residence
       Explanation of Adjustable Rate Mortgage
       Explanation of Balloon Payments
       Explanation of Credit Options
       Explanation of Each Item That Appears on a Good Faith Estimate
       Explanation of Pre-payment Penalties

    Counseling session attendees must also complete a personal income & expense
    statement, as well as a balance sheet, on forms provided by OBRE.

    Counselors shall privately discuss with each attendee that attendee’s income &
    expense statement and balance sheet, as well as the terms of any loan the attendee
    currently has or may be contemplating and provide a third-party review to establish the
    affordability of the loan.


                                             -12-                                   February 10, 2012
MAP Program (continued)

    Counseling session attendees must be given a brochure that contains information
    covered by the Mortgage Awareness Program.

    Any lender, prior to making a high-risk home loan, shall inform the borrower in writing
    of the right to participate in the Mortgage Awareness Program.

    No Lender shall offer less favorable loan terms to a borrower due to a borrower’s
    participation in the Mortgage Awareness Program.

    The Borrower may waive participation in this program, provided that such waiver
    occurs no less than 2 business days after the day that the borrower receives the
    written notice required by the lender and that such waiver is in writing in a form
    approved by the Commissioner.



Be a SMART Consumer
Shop around for the best loan.      Visit several reputable lenders.
Compare interest rates, fees and points, and examine all the terms
of the loan. Talk with family, friends, and neighbors about
where they obtained their mortgages and their experiences.

Manage your money. A person’s credit history is his or her
own responsibility. Review your income and expenses and                           borrow
within your budget. Don’t inflate your earnings or provide other                    false
information to qualify for a loan. Don’t become house poor. Remember there are more costs
associated with buying a house than the mortgage cost.

Ask questions about the terms of the loan. Check the contract to confirm that the terms you
have discussed are clearly written in the loan documents.

Read the entire mortgage contract carefully. Make sure you fully understand
your obligations and all provisions of the contract before signing. Never sign
a blank form or sign one with information that is incorrect.

Talk to a knowledgeable and trusted financial consultant or attorney of
your own choosing prior to signing a loan agreement. Remember,
never allow yourself to be pressured to sign a contract that you are
uncomfortable with or do not understand. Understand your right to
cancel the loan application.




                                            -13-                                 February 10, 2012
                    Agencies that Can Help

    Agency                     Description                   Phone Number                 Website
                    State Agency                              877.793.3470
                                                             (MAP Program)
Office of Banks &                                                                   www.obre.state.il.us
   Real Estate
                                                         Consumer Services Line:
                                                             877.793.3470
 Department of      State Agency
     Financial                                                888.298.8089           www.state.il.us/dfi
    Institutions
Illinois Attorney   State Agency
                                                              800.243.0618           www.ag.state.il.us
General’s Office
  Federal Trade     Works to prevent unfair business
   Commission       practices                                 877.382.4357              www.ftc.gov
       (FTC)
                    Clearinghouse for free & low-cost
    Federal
                    booklets published by various
   Consumer
                    federal agencies on topics such as        888.878.3256          www.pueblo.gsa.gov
  Information
                    getting a mortgage or home equity
     Center
                    loan
                    Supervises and regulates banking
                    institutions to ensure the safety
                    and soundness of the nation’s
Federal Reserve                                                                    www.federalreserve.gov
                    financial & banking system and
                    protect the credit rights of
                    consumers
                    Enforces fair lending practices
  U.S. Dept. of     involving home loans backed by
Housing & Urban     the federal government; HUD also
                                                              800.569.4287             www.hud.gov
 Development        maintains a list of approved
     (HUD)          housing counseling agencies that
                    can give advice.
 Association of     A         HUD-certified    housing
                                                          877.692.0233 or e-mail
  Community         counseling Agency & community
                                                                 them at               www.acorn.org
Organizations for   organization of low and moderate-
                                                         acorndcadmin@acorn.org
Reform (ACORN)      income families.




                                                 -14-                                       February 10, 2012
                                           Glossary of Terms

Adjustable-Rate Loans: Also known as variable-rate loans, usually offer a lower initial interest rate than fixed-
rate loans, The interest rate fluctuates over the life of the loan based on market conditions, but the loan
agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan
payments; and when interest rates fall, your monthly payments may be lowered.

Adjustable Rate Mortgages (ARMs): ARMs that only adjust up, increasing a borrower's interest rate and
monthly payment as often as every six months.

Annual Percentage Rate (APR): The annual percentage rate (APR) is the cost of credit shown as a yearly rate.
Although the APR is not a calculation of your monthly payment, it does show how much a loan will cost including
all fees and points.

Application Fee: Fees that are paid upon application. May include charges for property appraisal and a credit
report.

Appraisal: A determination of the value of a home by a third party who is hired by the lender to assure the
home has enough value to pay off the loan should the borrower default. Beware of inflated appraisals,
particularly when a second appraisal has to be conducted because the first one was too low to justify the loan.

Bait-and-Switch Schemes: The lender may promise one type of loan or interest rate, but without good reason,
gives you a different one. Sometimes a higher (and unaffordable) interest rate doesn’t kick in until months after
you have begun to pay on your loan.

Balloon Payment: The final payment of a mortgage which is larger than the regular payment; it usually
extinguishes the debt.

Conventional Loans: Mortgage loans other than those insured or guaranteed by a government agency such as
the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development
Services (formerly knows as Farmers Home Administration, or FmHA).

Credit Insurance Packing: The lender adds credit insurance to your loan, which you may not need.

Deceptive Loan Servicing: The lender doesn’t provide you with accurate or complete account statements and
payoff figures. That makes it almost impossible for you to determine how much you have paid or how much you
owe.

Equity Stripping: The lender encourages you to borrow heavily from the equity in your home (the amount you
own free and clear of your mortgage) as an easy way to get additional money, consolidate debt or fund home
repairs, knowing that the fees and payments are so high you may not be able to make them. You dramatically
reduce your equity and, in the worst case, the lender forecloses on the loan, takes possession of your home,
and strips you of the equity.

Equity: Difference between market value of the property & the homeowners mortgage debt.

Escrow: Holding of money or documents by a neutral third party prior to closing. It can also be an account held
by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Excessive Foreclosures: Making loans without regard to a borrower’s ability to repay. Homeowners
struggling to make payments under the combined weight of excessive fees and high interest rates often pay the
ultimate price – the loss of their home and all the equity they had accumulated in it.

Excessive Mortgage Broker Compensation: In the subprime market, there are mortgage brokers who will
attempt to sell the borrower on a loan with the most fees and highest interest rate possible so that he/she will
get more compensation.




                                                      -15-                                          February 10, 2012
                                             Glossary of Terms

Excessive Points & Fees: Most borrowers can expect a pay a 1% origination fee and possibly another 1% of
the loan amount in points, as well as basic closing costs, which would include appraisal and attorney’s fees.
Some predatory lenders loan up loans with these upfront charges and charge additional “junk fees” to pad the
closing costs.

Finance Charge – Total dollar amount you pay to use credit. It is based on the interest and fees charged, the
amount borrowed and the length of the loan.

Fixed-Rate Loans: Generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the
monthly payments (for principal and interest) stay the same during the life of the loan.

High fees: Inflated origination & broker fees; inflated & "junk fees."

Home Improvement Scams: A contractor talks you into costly or unnecessary repairs, steers you to a high-cost
mortgage lender to finance the job, and arranges for the loan proceeds to be sent directly to the contractor. All
too often, the contractor performs shoddy or incomplete work, and the homeowner is stuck paying off a long-
term loan where the house is at risk.

Interest Rate: The cost of borrowing money expressed as a percentage rate. Interest rates can change
because of market conditions.

Lending without ability to repay: Making a loan based on the equity that the borrower has in the home,
without regard to the borrower's ability to repay the loan.

Loan Flipping: The lender encourages you to get additional cash by refinancing your mortgage again and
again. This tactic significantly increases your debt because fees (often exorbitant) are tacked on to each loan
transaction, and you may pay a higher interest rate than with your original loan. You become saddled with
higher payments, higher debt, and the risk of losing your home.

Loan Origination Fees: Fees charged by the lender for processing the loan and are often expressed as
percentage of the loan amount.

Loan Packing: The lender adds charges to the loan contract for overpriced items or items you don’t need or
didn’t use, often totaling thousands of dollars. Examples: The lender may pressure you into buying insurance
you don’t need or trick you into paying for phony services.

Lock-In: Refers to a written agreement guaranteeing a homebuyer a specific interest rate on a home loan
provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also
specifies the number of points to be paid at closing.

Margin: The number of percentage points the lender adds to the index rate to determine the annual percentage
rate.

Mortgage: A document signed by a borrower when a home loan is made that gives the lender a right to take
possession of the property if the borrower fails to pay off on the loan.

Mortgage Broker: A bank, savings institution, or mortgage company that offers home loans.

Mortgage Lender: An individual or firm that matches borrowers to lenders and loan programs for a fee.
Anyone who acts as a go-between and gets a fee or other compensation.

Mortgage Servicing Abuses/Scams: After getting the loan, you’re told you own additional money for bogus
taxes, insurance, legal fee or late fees. Or, if you try to pay off the loan, the lender provides inaccurate
information that causes you to pay too much or discourages you from refinancing with another lender.




                                                        -16-                                        February 10, 2012
                                             Glossary of Terms

Negative Amortization: Amortization means the monthly payments are large enough to pay the interest and
reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover
all the interest cost. The interest cost, which is not covered by the payment, is added to the unpaid principal
balance. This means that even after making many payments, you could owe more than you did at the beginning
of the loan.

Overages: The difference between the lowest available price and any higher price that the homebuyer agrees
to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra
compensation.

Packing: Including overpriced insurance such as credit life, disability, and unemployment insurance. The lender
finances the insurance as part of the loan, instead of charging periodic premiums outside of the loan.

Points: Fees paid to the lender for the loan. Points are usually paid in cash at closing. In some cases, the
money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs. A
point is equal to 1% of the loan amount you are borrowing. Assume a $60,000 mortgage loan with 1 point; one
point means you will pay $600 in addition to the interest and any other fees associated with the loan.

Points: One point is equal to 1 percent of the amount of the credit line. Points must usually be paid at closing
and are in addition to monthly interest.

Prepayment Penalties: Huge fees charged when a borrower pays off the loan early or refinances into another
loan. Prepayment penalties are designed to lock borrowers into high-interest loans.

Private Mortgage Insurance (PMI): Protects the lender against a loss if a borrower defaults on the loan. It is
usually required for loans in which the down payment is less than 20 percent of the sales price, or in a
refinancing, when the amount financed is greater than 80 percent of the appraised value.

Rate-Risk Disparities: Charging borrowers a higher rate of interest than their credit histories would indicate is
justified – often either by the lenders or its affiliate’s own underwriting criteria.

Sell the Monthly Payment: Many brokers and lenders advertise “bill consolidation” home equity loans.
Predatory Lenders encourage consumers to pay off all their debts by consolidating them into one home loan
with the promise to reduce the monthly debt payment.

Signing Over the Deed: Another lender may contact you when are in trouble of foreclosure, and offer to help
you find new financing. Before they can help you, they ask you to deed your property to them, claiming it’s a
temporary measure to prevent foreclosure. The promised refinancing that would let you save your home never
comes through.

Steering: Charging high, subprime interest rates (9-20%) on borrower's that have well enough credit to qualify
for prime-rate loans (8-9%).

Subprime Lending: generally characterized as a lending program or strategy that targets borrowers who pose
a significantly higher risk of default than traditional retail banking customers. Institutions often refer to subprime
lending by other names such as the nonprime, nonconforming, high coupon, or alternative lending market. It is a
high-risk lending activity.

Subprime refers to the credit characteristics of the borrower at the loan’s origination, rather than the type of
credit or collateral considerations. Subprime borrowers typically have weakened credit histories that include
payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies.
They may also display reduced repayment capacity as measure by credit scores, debt-to-income ratios, or other
criteria. Generally, subprime borrowers will display a range of credit risk characteristics that may include one or
more of the following:

       Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the
        last 24 months.

                                                        -17-                                            February 10, 2012
                                           Glossary of Terms

       Judgment, foreclosure, repossession, charge-off in the prior 24 months.

       Bankruptcy in the last 5 years

        Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of
        660 or below (depending on the product/collateral), or other bureau or proprietary scores with an
        equivalent default probability likelihood; and/or

        Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living
        expenses after deducting total monthly debt-service requirements from monthly income.

Thrift Institution: A general term for saving banks and savings and loan associations.

Transaction, Settlement, or Closing Costs: May include application fees; title examination, abstract of title,
title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents;
attorney’s fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement
Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within
three days of application. The good faith estimate lists each expected cost either as an amount or a range.

Transaction Fee: A fee charged each time you draw on your credit line.

Truth in Lending Disclosure Statement – This document will show you the APR and other payment
information for the loan you have applied for.

Yield Spread Premium: Payment to the broker for selling a higher interest rate loan than would otherwise be
charged for that borrower.




                                                      -18-                                          February 10, 2012

				
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