While there is no precise definition of predatory lending, it’s fair to say that the expected result is some harm to the borrower, and as it applies to sub-prime mortgages, there is a greater chance that the borrower may lose their home due to the difficult terms of the mortgage.
Some of the more common abusive practices of predatory lending are:
Making loans based primarily on the collateral or liquidation value of the home upon foreclosure instead of the ability to repay the mortgage.
“Loan flipping,” causing the borrower to repeatedly refinance a loan in order to charge increasing fees.
Excessive prepayment penalties, which forces the sub-prime borrower to stay in the loan despite the fact that it’s in their best interest to refinance the loan as soon as their credit improves. The penalty period usually extends past the low, “teaser” rate and keeps them in the loan when the interest is reset at a much higher rate;
“Steering” the borrower to a sub-prime loan even when the borrower may have qualified for a mainstream loan. This is particularly disturbing since it has been estimated that about half of sub-prime borrowers could have qualified for better loan terms. Also, these loans can have mandatory arbitration, which states that borrowers aren’t allowed to seek legal remedies in court if they find that their homes are threatened by abusive or illegal terms, making it less likely that borrowers will receive a fair treatment.
The New Jersey Department of Banking and Insurance regulates independent mortgage bankers and brokers.
Banks that accept deposits and make mortgage loans are regulated by some combination of the Comptroller of the Currency, Federal Reserve and the Federal Department Insurance Corporation.
Nevertheless, the DOBI, along with other states, adopted the federal agencies’ statements on sub-prime lending made this past June. The DOBI acknowledges that sub-prime loans are not necessarily predatory, but they have taken steps to ensure that independent brokers do not make predatory loans.
New Jersey is one of 24 states that have anti-predatory lending laws and sub-prime mortgages have grown dramatically statewide. The DOBI is concerned about state residents and the possible difficulty with sub-prime mortgages, including sharply increased payments due to the resetting of their adjustable rate mortgages and possible foreclosures.