Legislation and Predatory Lending in the Mortgage Industry
The American Dream has been one of this nation's most enduring ideals of the
past half-century. Presumably, every young couple, low-income family, and incoming
immigrant hopes to one day produce 1.7 kids, obtain 1.3 cars, and of course purchase the
house with the white picket fence. But fulfilling these goals costs money; and the
aforementioned groups are among the least financially stable in the country. These
people's need for extra funding has led to the extension of credit to large segments of the population who were previously deemed unqualified. However, some lenders have tried
to take advantage of these people by granting mortgages to them at terms that are
deceptive and unfavorable. This practice is known as predatory lending and there is a
growing legislative movement all over the country to end it. However, there is a limit to
how effective even the best of these laws can be.
The fundamentals of finance dictate that loans to individuals with the highest risk
of non-payment should have higher interest rates than persons who are more likely to
repay. For this reason, mortgages to low-income homeowners usually have higher rates
than loans to more economically stable borrowers. These loans are known as sub-prime
mortgages and are perfectly legal. However, unscrupulous lenders can give illegally high
interest rates or add excessive fees, terms, and contingencies to the mortgages that
eventually makes them unaffordable. This becomes predatory lending and is illegal.
The illegality of predatory lending compels bankers to be creative in order to hide
what they are doing. Legislative actions taken within the last two decades have rendered
easily identifiable forms virtually extinct. Practices like issuing loans that are ostensibly more than 10 points above comparable U.S. Treasury Notes and attaching balloon
payments to mortgages that are longer than five years are now rare (Connor).
However, newer forms of this practice still abound. These include: Compelling
borrowers to refinance unnecessarily, upselling loans at terms so high that refinancing is impossible, adding up ITont points, fees, or credit insurance without disclosure to the borrower, splitting loans in two so that interest can be charged twice, and colluding with brokers and insurers to limit the choices of prospective homebuyers (Connor).
Many of the problems with predatory lending can be traced to the historic
practices of redlining. Redlining was the practice by financial institutions of pinpointing an area with a certain racial makeup and refusing to do business there. Many
municipalities ignored this practice for a long time and some even supported it (Wyly and
Holloway). In the latter part of the last century, both the federal government and
successive local governments have taken steps to eradicate this. However, the banks
which had previously refused to do business in these...