Predatory Lending

Predatory Lending

In communities across America, people are losing their homes and their investments because of predatory lenders, appraisers, mortgage brokers and home improvement contractors who: Sell properties for much more than they are worth using false appraisals. They encourage borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan and knowingly lend more money than a borrower can afford to repay. The problem has continued to get worse to the point where some lenders charge high interest rates to borrowers based on their race or national origin and not on their credit history. They outrageously charge fees for unnecessary or nonexistent products and services and even pressure borrowers to accept higher-risk loans such as balloon loans, and steep pre-payment penalties. Some lenders shamelessly continue to use high pressure sales tactics to sell home improvements and then finance them at high interest rates.

The Real Estate Settlement Procedures Act is a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships. By researching why predatory lending takes place and understanding the root cause, I believe that my company can use the knowledge to gain consumer confidence and hence increase the volume of loans originated. For example, according to The Center for Responsible Lending, predatory mortgage lending costs Americans more than $9.1 billion each year. Research shows that most of the abusive lending practices take place in the sub-prime market. This market is classified by people with weak or blemished credit and who might have had severe financial problems in their past. To illustrate my point, if I knew my competitor was engaged in unethical lending practices, I would use this information to acquire customers in my competitors region by doing things like holding seminars that educate and empower home buyers and owners and providing them with free information of their rights. I would engage in marketing activities that direct the general public to our company's website to where they can get free information on what to do if they are a victim of loan fraud and how to prevent themselves against the above described predatory lending tactics.

I believe that good ethics is good business. Ethics plays a major role in inducing predatory lending. Let me share with you a personal example. I have a friend who works as an underwriter for a Bank. The underwriter is essentially the person who approves or disapproves your loan application. My friend Rachel whose real name I shall withhold for privacy reasons has shared with me some of her experiences with the applications that have been submitted to her. On one occasion she recalls getting an application from a loan officer that was supposed to be a refinance transaction. The only problem is the client happened to be a senior citizen, living comfortably in her home that was in good condition (she has access to pictures of the house in the application) and that would be paid of in a year. Now Rachel had a hard time understanding what the benefit to the client would be. However she could certainly see what the benefit to the loan officer was, and you guessed it; the commission. Surely enough she denied the application.

Personally I have an abundance mentality and I believe that there is more than enough money for everyone to make, especially in our society today. I can personally attest to this because our company does not have an advertising budget, and 80% of our business is through referral. By researching what fuels predatory lending I'm confident that I would find greed fueled by unethical practices is a major cause of the current problem. Investors will pay more to lenders that push or promote the products that yield them a higher return. Hence when this news reaches the loan officers that sell these financial instruments, there is a natural tendency to sell home buyers loan products they don't need, just to earn a larger commission. Would you do the same thing if you knew you could earn $10,000 in one transaction by pushing a certain loan product? Do you think your boss would urge you to sell only the products that make the company more money if he was earning a six figure salary based on the sale of these products? Loan fraud destroys the benefits of homeownership and will eventually lead to the 800,000 foreclosures in the U.S this year.

Allow me to digress briefly and introduce you to the 80/20 Principle.