Combating Predatory Lending
Not all lenders who offer home financing to consumers play fair. In fact, some use unscrupulous practices to prey on people trying to achieve the dream of homeownership, or struggling to hold on to their homes. Predatory lenders often target low-income people, immigrants and the elderly as their potential victims.
What is predatory lending?
Predatory lending is any practice in which lenders try to fool or intimidate consumers into agreeing to loans that are ultimately unaffordable and do not meet industry standards. Predatory lending is illegal.
Predatory lending practices involve some or all of the following:
- Offering only loans with higher interest rates than the borrower can afford
- Adding unnecessary fees to the cost of the mortgage
- Including "balloon payments" - a large one-time payment -- at the end of a payment schedule that disguises the true, higher-than-expected, cost of the loan
- Moving a borrower from one loan to another near the end of the payment schedule to extend interest payments and add to the overall cost of the loan
- Forcing borrowers to purchase more insurance than the law requires, and more than the borrower needs
How we fight predatory lending
Freddie Mac's mission is to expand opportunities for homeownership to individuals and families in America. We help people purchase homes they can afford and keep. Predatory lending is in direct opposition to our mission, our goals and our practices. Although we do not work directly with borrowers (because we don't originate loans), we protect borrowers from predatory lending practices in many ways. For example, we recently announced tougher standards for the subprime loans we purchase, including,
- Investing only in subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – that qualify borrowers at the fully-indexed and fully-amortizing rate.
- Limiting the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes.
- Strongly recommending that mortgage lenders collect escrow accounts for borrowers' taxes and insurance payments.
Freddie Mac will implement the new investment requirements for mortgages originated on or after September 1, 2007, to avoid market disruptions.
These standards build on Freddie Mac's long-term leadership in combating predatory lending. Our previously implemented anti-predatory lending practices include:
- Not investing in mortgages originated on or after August 1, 2004, that contain mandatory arbitration clauses. This policy protects consumers from predatory lending practices and allows homeowners to choose the mortgage dispute resolution option that best suits their interests.
- Refusing to do business with financial institutions that engage in predatory lending practices.
- Requiring that lenders provide complete credit information about borrowers to all the credit bureaus and reporting agencies.
- Refusing to invest in mortgages with the following characteristics:
- Originated in connection with single-premium credit insurance.
- High-rate or high-fee mortgages covered by the Homeownership and Equity Protection Act of 1994 (HOEPA loans).
- Subprime mortgages with prepayment penalty terms that exceed three years.
We support responsible lending practices by:
- Promoting consumer education so borrowers understand the mortgage origination process, their housing finance options, and how to avoid abusive lending practices.
- Providing competitive products and tools to reputable mortgage originators so that borrowers have a greater choice of financing options. As an example, Freddie Mac is developing fixed-rate and hybrid ARM products that will provide lenders with more choices to offer subprime borrowers. Freddie Mac's new hybrid ARMs will offer reduced adjustable rate margins; longer fixed-rate terms; and longer reset periods. Freddie Mac will require originators to underwrite these products at the fully indexed and amortizing rate, and plans to commit significant capital to purchasing these loans into its retained portfolio.
Helping borrowers avoid predatory lending
It takes an educated consumer to identify and avoid a predatory lender, and we encourage consumers to:
- Know and manage their payment patterns and overall credit rating
- Understand the home financing process
- Ask questions about all the fees being charged
- Be familiar with the terms of the loan including the number of payments, amount of each payment, how long payments will continue
- Be able to make those payments
- Have an appropriate amount of property and mortgage insurance - no more, no less
Consumers can learn more about homeownership - in English and in Spanish.
A key cooperative effort, Don't Borrow Trouble®, helps borrowers across the country to more effectively manage their money and make sound financial decisions. This program alerts consumers to predatory lending practices, such as exorbitant interest rates, excessive fees, or deceitful lending practices. It helps borrowers become familiar with:
- The language used by mortgages and "the small print" in mortgage disclosure documents
- Selecting the type of mortgage that will suit their circumstances
- Using the investment in their homes to strengthen their overall financial situation to build wealth
Don't Borrow Trouble was pioneered in Boston by Mayor Thomas M. Menino
and the Massachusetts Community & Banking Council. Freddie Mac is expanding
the program nationwide, and we've received an award for excellence from the
U.S. Conference of Mayors. For the location of a program near you, visit our
website at DontBorrowTrouble.com.
If you know a borrower who believes that he or she is a victim of abusive/predatory lending, please suggest that he or she contact a local Better Business Bureau, Legal Services Office, or a Bar Association. A local Don't Borrow Troubleoffice can also help; check the map on the Don't Borrow Trouble web site, or call (800) DBT-HELP.