1. 4.05.07 Housing and Economic Rights Advocates 2007 (c) 1 Introduction to Predatory Mortgage Lending Scams and Defenses Legal Aid Association of California April 5, 2007 Training 12noon – 1pm as conducted by Housing and Economic Rights Advocates Trainer: Heidi Li, Co-Director

2. 4.05.07 Housing and Economic Rights Advocates 2007 (c)2 What Is Predatory Mortgage Lending?  Definition: IMPORTANT to keep in mind both: What may be “non-legal” assessment standards vs. – ALSO - a “Legal” standard for bringing claims (either civil or criminal) for abusive practices.  PLUS: the homeowner’s story / experience is key – find out: What Happened – in order to refer must get at least a quick 3 – 5 minute account of their experience What documents / papers do they have (or don’t have) Who (individuals / company’s) may be involved or responsible? Who is being harmed – e.g., a senior, person w/disability, person of color, etc.

3. 4.05.07 Housing and Economic Rights Advocates 2007 (c)3 Predatory Lending – definition: Non-Legal Criteria Homebuyers / homeowners being “tricked” or misled into taking out: High-cost, subprime loans or “non-traditional” loan products A loan they can’t afford (or are convinced to take out a loan that will put them in worse financial position)  AND - Homeowners in distress end up losing legal ownership of their home when they were instead seeking financial assistance / help to keep their home.

4. 4.05.07 Housing and Economic Rights Advocates 2007 (c)4 that said… Bad Loans Are Common  Bad loans are high-cost loans. The interest rate is high and the fees that the lender or the mortgage broker charges are high  In California, fees to the lender or mortgage broker in excess of 5% of the loan amount is a common problem (CRC, Stolen Wealth) Example: 5% of $200,000 Is $10,000.  High-cost loans are subprime or “non-traditional mortgage” loans and NOT “prime” rate loans.

5. 4.05.07 Housing and Economic Rights Advocates 2007 (c)5 Prime vs. Subprime Loans  Also known as a conventional loan  Available for “B+” to “A” borrowers  Lower interest rates  Little or no closing cost fees  No pre-payment penalty  available for “B”, “C”, “C” borrowers  2% higher interest rate than current prime % rate  usually has higher closing costs & fees  has a Pre-payment penalty PrimeSubprime

6. 4.05.07 Housing and Economic Rights Advocates 2007 (c)6 “Bad” Loan…. ( vs. )  Higher interest rate due to borrower’s poor credit, limited income and/or high debt to income ratio  Prepayment penalty of 2 years or less  Proper disclosures were given  No “hiding the ball” by lender or lender rep.  Fees not excessive  Loan is “suitable” for the borrower

7. 4.05.07 Housing and Economic Rights Advocates 2007 (c)7 ( vs. ) Predatory Loan “Indicators”:  Loan provides little or no benefit to borrower  Unsuitable for the borrower  Likely to be subprime OR now increasingly “non traditional” loan products (neg. amort. option ARMs, “stated income” loans)  Involves fraudulent, deceptive, or coercive tactics in the marketing or closing of the loan  May violate local, state or federally defined laws / standards  PLUS will involve 2 – 3 of the following identified predatory practices / abusive loan terms -- 

8. 4.05.07 Housing and Economic Rights Advocates 2007 (c)8 Predatory Practices – breakdown of different stages:  Deceptive Solicitations  Home Improvement Scams  Lending to People Who Cannot Afford the Loans  Approaching Incapacitated Homeowners  Steering to High-Rate Lenders Marketing the Loan

9. 4.05.07 Housing and Economic Rights Advocates 2007 (c)9 Predatory Practices - breakdown of different stages:  Falsified Loan Applications, Unverified Income  Adding Co-signers  Forgeries [NOTE: * A resulting legal violation here could then exist here that is either civil and/or criminal in nature.] “Juicing Up” of Loan Documents by the broker &/or lender – NOT by the borrower:

10. 4.05.07 Housing and Economic Rights Advocates 2007 (c)10 Predatory Practices - breakdown of different stages: “Bait and Switch” Tactics:  mortgage broker &/or lender misrepresents or fails to disclose clearly during communication with the borrower: actual, true final loan terms closing costs; &/or “cash out” payments [ NOTE: generally, if can be proven, a civil violation results only -- vs. criminal -- unless able to show proof of a widespread or pervasive business practice.]

11. 4.05.07 Housing and Economic Rights Advocates 2007 (c)11 Predatory Practices – breakdown of different stages: Predatory Loan Terms  Kickbacks to Mortgage Broker  High Annual Interest Rates  Excessive High Points  Balloon Payments  Negative Amortization  Padded Closing Costs  Inflated Appraisal Costs  Padded Recording Fees  Bogus Broker Fees  Excessive Prepayment Penalties Excessive Fees and Costs

12. 4.05.07 Housing and Economic Rights Advocates 2007 (c)12 Predatory Practices - breakdown of different stages:  Paying Off Low Interest Mortgages  Shifting Unsecured Debt into Mortgages  Loans in Excess of 100% Loan to Value  Making A Loan That The Borrower Cannot Afford  Steering to High-Rate Lenders  Mandatory Arbitration Clauses Other Practices/Terms That Do Not Benefit Borrower

13. 4.05.07 Housing and Economic Rights Advocates 2007 (c)13 Predatory Practices - breakdown of different stages:  Property flipping by a particular realtor &/or broker  Repeated borrower loan refinancing or “flipping” particularly by the same mortgage broker in a discrete time period (e.g., 2-3 loan refinances within a 3 – 4 year period)  Foreclosure Rescue Scams (see add’l information in this presentation)  Placing low-and-moderate income borrowers into “Exotic” (e.g., no document or asset based loans) or “Non Traditional” (e.g., negatively amortizing option ARM, interest only loans) where borrower true income does not support ability to pay mortgage  Reverse mortgage abuses Other Practices/Terms That Do Not Benefit Borrower

14. 4.05.07 Housing and Economic Rights Advocates 2007 (c)14 Predatory Practices - breakdown of different stages:  Lender / Servicer Failure to Acknowledge borrower’s payments (either at all or in a timely manner)  False Reporting to Credit Bureau: Claiming On-Time Payments Are Late Payments  Excessive Late Penalty Fees or Charges imposed  Higher Interest Rate Resulting When Payments Are Made After Due Date  Forced Placed Insurance Imposed after Borrower’s Payment are Not Correctly Recorded by Servicer or Lender  “Loan Flipping” by Broker or Lender Post-Origination Practices

15. 4.05.07 Housing and Economic Rights Advocates 2007 (c)15 Key Players in Predatory Lending  Marketer/Runner  Home improvement salesman/contractor  Foreclosure / Financial Consultant  Real estate agent  Mortgage broker  Appraiser  Title Company  Lender – (institutional & investment)  Mortgage Servicer  Secondary market  Debt collectors / agent (for note holder) pursuing foreclosure sale

16. 4.05.07 Housing and Economic Rights Advocates 2007 (c)16 Who is Targeted  Legally Protected Groups Are Often Targeted, Such As: Seniors Women People of color People with disabilities Immigrants

17. 4.05.07 Housing and Economic Rights Advocates 2007 (c)17 When Predatory Lending May Be Also Unfair (Discriminatory) Lending:  Protected groups most likely to be targeted: people of color, seniors, immigrants and people with disabilities  Can show nexus between predatory lending abuse and borrower’s protected status  Strength in numbers (harmed borrowers) - pre- litigation investigation is paramount (e.g., evaluation of HMDA, census data, other fair housing investigation)

18. 4.05.07 Housing and Economic Rights Advocates 2007 (c)18 Predatory Loan Case Examples – Senior Home Loan Refinance  An 86-year old woman who had owned her home for 40 years heard a knock at her door one day; it was a nice young man who offered to make repairs to the house and to help get a loan to pay for those repairs. The homeowner agreed. The young man returns several times. What happens next: Hurried document signing at the woman’s house No – or – shoddy repairs are done by a contractor New loan note showing a complete refinance of the home New monthly payment that’s hundreds of dollars more per month than the old loan payment and has a prepayment penalty No more young man; senior is left with an unaffordable loan that leads to default.

19. 4.05.07 Housing and Economic Rights Advocates 2007 (c)19 Potential Legal Claims/ Defenses:  Senior Home Loan Refinance Elder financial abuse claims (FINANCIAL ABUSE OF A DEPENDENT ADULT Welfare & Institutions Code section 15610, et seq. Breach of fiduciary duty, fraud or misrepresentation Home improvement or door-to-door solicitation claims State licensing claims (broker, contractor abuses) Duress, oppression, undue influence Lack of capacity to contract UDAP - Cal. B. & P. Code Section 17200, et seq.

20. 4.05.07 Housing and Economic Rights Advocates 2007 (c)20 Predatory Loan Case Examples – Immigrant Home Purchase  A young, Spanish-speaking Latino couple, purchasing their first home, told a mortgage broker they could afford $2500 a month, including taxes and insurance. The broker said “No problem”. He spoke to them only in Spanish and told them he would get them a loan they could afford. What happens next: All loan documents are in English No mortgage broker at the closing at the title company A piggy-back loan with payments of $3500 a month, which did not include taxes and insurance. No final loan and disclosure papers given to borrowers until several months after signing, and only after repeated requests to the broker.

21. 4.05.07 Housing and Economic Rights Advocates 2007 (c)21 Potential Legal Claims/ Defenses:  Immigrant Loan – Home Purchase Breach of fiduciary duty, fraud or misrepresentation State language of contract claims (Cal. Civ. Code Section 1632) * State licensing claims (broker, realtor, appraiser misconduct) Cal. predatory lending law UDAP claims - Cal. B. & P. Code Section 17200, et seq. Possible violation of federal or state unfair lending laws (FHA, ECOA, Civ. Rights Act, FEHA, Unruh)

22. 4.05.07 Housing and Economic Rights Advocates 2007 (c)22 Predatory Loan Case Examples –Homeowner Refinance A man refinances his lower-rate, fixed interest loan with a “fixed” teaser rate loan. A broker convinces the homeowner to roll his car loan and credit card debt into the mortgage and get some “cash out”. The broker says the monthly payments will stay about the same. What happens next? Quick signing of papers at the title co., or at the borrower’s home or office New fixed, monthly loan payment for the first 6 months (or less) which then adjusts upward by hundreds of dollars each month to a much higher payment After loan closing, the homeowner gets a check for a “cash out” payment which is much less than originally promised.

23. 4.05.07 Housing and Economic Rights Advocates 2007 (c)23 Potential Legal Claims/ Defenses:  “Property Flipping”/ (aggressive, often multiple refinancing into new loans of existing homeowners: Breach of fiduciary duty, Fraud or Misrepresentation UDAP - Cal. B. & P. Code Section 17200, et seq. possibly Cal. “Covered Loan” law, Fin. Code Section 4970, et seq. State licensing claims (broker, realtor, appraiser, notary, title company, misconduct) State or federal fair housing act claims (possible, where in a local community a particular protected category consumer / homeowner population is being marketed to / targeted by a certain mortgage broker and/or realtor)

24. 4.05.07 Housing and Economic Rights Advocates 2007 (c)24 Predatory Loan Case Examples  WHERE mortgage brokers and lenders are putting Homebuyers / Homeowners into unaffordable “non-traditional” loan purchase loan products: See same possible legal claims as listed previously under especially “Property Flipping.”

25. 4.05.07 Housing and Economic Rights Advocates 2007 (c)25 Predatory Loan Case Examples – Foreclosure “Rescue” Scams  After 4 months, this homeowner can’t make her monthly home loan payments and goes into default and receives a recorded notice of default in the mail. Desperate, she opens her mail and sees an advertisement that says, “Having problems making your home payments? We can help!!”  She calls the tel. no. listed and a woman comes to her home and assures her not to worry, “We can help you keep your home.” The woman comes back with another person, and is very reassuring. She asks the homeowner to sign some papers but doesn’t explain what these papers mean.  Two weeks later, the homeowner then receives some papers in the mail that seemed to show that she no longer owners her home, has sold her house and now has an option to buy it back in the next 10 years (at a fair market value) provided she is timely also with her monthly $800 “rent payments.”

26. 4.05.07 Housing and Economic Rights Advocates 2007 (c)26 Foreclosure Rescue Scams  Generally involves homeowner’s: Loss of title to home Loss of cash Adding strangers to title

27. 4.05.07 Housing and Economic Rights Advocates 2007 (c)27 Potential Legal Claims/ Defenses:  Foreclosure Rescue Scams Homeowner Sales Contract Act (HESCA - - Civil Code section 1695, et seq.)* [NOTE: homeowner who has lost title may still have extended rescission/cancellation rights] Mortgage Foreclosure Consultants Act (MFCA - Civil Code section 2945, et seq.)* [NOTE: same as above] Breach of fiduciary duty Fraud, Misrepresentation UDAP - Cal. B. & P. Code Section 17200, et seq. State licensing claims (broker, realtor, appraiser, notary, title company, misconduct)

28. 4.05.07 Housing and Economic Rights Advocates 2007 (c)28 Other Relevant Laws To Be Aware Of:  State consumer legal remedies act (separate from state UDAP)  State fair debt collection laws  Door-to-door sales laws  State licensing laws (realtors, contractors, mortgage brokers, appraisers, etc.)

29. 4.05.07 Housing and Economic Rights Advocates 2007 (c)29 Other Relevant Laws To Be Aware Of:  Foreclosure Laws: Beware of timeline (e.g., 30, 90, and then 21 day notice triggers) Possible opportunity to address predatory lending abuses as part of defense to foreclosure HOWEVER, before a foreclosure sale – a homeowner may need to file separate, affirmative claim for predatory lending; OR Possibly file a Chapter 13 bankruptcy to stop the foreclosure sale (NOTE: need to schedule appt. for consumer credit counseling before filing the petition)

30. 4.05.07 Housing and Economic Rights Advocates 2007 (c)30 Truth In Lending Action (TILA). (15 U.S.C. § 1601, et seq. and implementing regulation, Regulation Z, 12 C.F.R. § 226).  Summary: A “disclosure” statute which covers brokers, lenders and their agents’ conduct. In the context of home loans, TILA covers either: 1) loan document technical reporting violations for closed-end loans; 2) violations that are apparent on the face of the loan documents for “non-purchase money” loans. An exception is a “high cost” loan” where HOEPA (see below) may provide for enhanced protections.  Remedies:  1.CLOSED END LOANS:  a) Penalty damages of $1,000 (in CA) per statutory violation.  b) Actual monetary or enhanced damages depending on type of disclosure violation.  c) NON-PURCHASE MONEY LOANS: Cancellation of loan where failure to provide borrower:  (1) timely & proper notices of right to cancel; &  (2) material disclosures: (amount financed, finance charge, APR, payment schedule and total no. of payments).  SOL:  1) 1 year  2) 3 years (for rescission).  Look at:TILA Disclosure Notice, Notices of Right to Cancel, HUD-1, estimated Buyer / Seller Closing Cost Statement, loan note.

31. 4.05.07 Housing and Economic Rights Advocates 2007 (c)31 Federal TILA rescission claims  What to look for to see if extended 3-year right to cancel exists:  3-Day Right to Cancel extended when: Non-purchase money loan; Notice to Cancel (duplicate copies for each borrower) are not given at or before time of signing of final loan documents; &/or The Notice is defective (e.g., doesn’t include date for cancellation on the notice itself).