In January of 2009, as the housing market collapsed, I took a job blogging for a law firm that specializes in predatory lending and wrongful foreclosure lawsuits.
I read case after case about borrowers who signed documents for loans that came with interest rates and other costs that were far higher than what they believed they were getting. Even when the correct documents were provided, borrowers had trouble understanding them—especially when lenders rushed them through closing.
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When those loans ended up in court, many judges had no sympathy for the borrowers because they couldn’t see the power imbalance between the lender and the borrower. Unlike with business contracts, the vast majority of mortgage borrowers don’t have attorneys, aren’t qualified to understand the contract and have no opportunity to negotiate changes. In my opinion, too many courts dismiss these factors, saying that borrowers are legal adults who aren't under duress, so they knew—or should have known—what they were signing.
Public opinion is even harsher. No matter how clearly an article lays out the bank's role in a foreclosure, online commenters tend to blame the borrower’s lack of “personal responsibility.” Looking back, I see that I was also guilty of thinking that the key to avoiding predatory lending is a matter of education and careful reading.
Last fall, I realized just how wrong that thinking was when my husband and I decided that we were ready to buy a home.
I felt confident going in: I was plugged into the legal world, understood typical predatory lending and had plenty of lawyer contacts who could help. But, by the end, I was convinced that not even a well-informed layperson like me has a good chance of understanding loan documents—and the system needs serious reform.
Why You Really Can't Shop Around
When we were looking to buy, it was a seller’s market in our area. In this climate, buyers’ chances substantially improve if they first get “pre-approved” for a mortgage by a lender before they make an offer because the seller knows that the deal won’t fall apart over lack of funding.
To get pre-approved, the lender asks for documentation on all of your assets and debts, and pulls your credit score. It’s not real loan underwriting—that comes later, which I’ll explain below. But, in a seller’s market, your real estate agent will probably pressure you to get pre-approved long before you're ready to make an offer.
This process—and the accompanying time pressures—makes it hard to use a lender other than the one who pre-approves you. Plus, lenders expressly warn that the pre-approval may not look like your final loan—when your offer is accepted, the lender checks your financial situation again to make sure that it hasn’t changed.
Unfortunately, this means that there’s risk in getting more than one lender’s opinion because, depending on the formula that the credit-requesting company uses, your credit rating could actually be harmed if several lenders pull your credit score over a “shopping period” that exceeds 14 to 45 days.
A mortgage broker can help you compare several lenders, but the loans still aren’t guaranteed to stay the same—and brokers can also be predatory. During the height of the housing bubble, some brokers failed to disclose that banks would pay them extra if they sold a loan that cost more than what the homebuyer had qualified for in the vetting process. (The federal government outlawed the practice of paying these so-called “yield-spread premiums” in 2010.)
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Once your offer on a property during a seller’s market is accepted, you need to have the loan funded within a specified number of days (ours was 17) or the deal could fall through—and you'll lose your earnest money. Unfortunately, the bulk of the loan underwriting is done after the buyer’s offer has been accepted, and these days, the bank takes as long as it needs to feel comfortable about granting a mortgage. Even our underwriting, which had no surprises, went past the deadline.
Our loan officer was very responsive—but her company kept sending out documents with obvious mistakes.
This is yet another reason why it’s tough to truly “shop around.” Sure, you can always turn down the initial lender, and find someone else once you see the loan details. But if you do this, you're probably going to go over the deadline—and your deal can fall through, unless the seller is nice enough to extend it. Luckily, we had very nice sellers.
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Sloppy Mistakes Can Lead to Tense Moments
Our loan officer was very responsive—but the problem was that her company kept sending out documents with obvious mistakes. For example, one listed the closing date on a day that had already passed. I had read so much about predatory lending that this sloppiness made me nervous. When the loan officer said, “trust me,” I thought, “That’s exactly what I’ve just spent the past few years learning not to do!”
In one case I read during this time, the borrower testified that she trusted her loan officer’s assurances that she could refinance the loan within six months—but she couldn't. Her initial paperwork illegally failed to disclose several of the final loan’s major features, some of which were very expensive.
Instead of blindly trusting my loan officer, I called on resources that not everyone is lucky enough to have: the law firm where I worked and a lawyer relative. I also did online research about the lender, and decided that it probably made mistakes because it rushed through its loans.
The main thing my client told me to watch out for was a substantial difference between the loan I thought we were getting and the loan described by two major documents: the final Truth in Lending Act notice and the Housing and Urban Development Settlement Statement. The federal government issues these forms to help borrowers understand what they’re getting. Our final documents didn’t differ substantially from the initial ones—but my husband and I are native English speakers with good credit. People without these advantages were especially likely to be victims during the bubble.
How Busy Lives Affect the Loan Process
Another factor that prevents people from understanding their mortgage documents: Life gets in the way.
My loan documents totaled well over 100 pages. When I had childcare, I was rushing to meet work deadlines, and when I didn’t, I was taking care of the baby. My husband’s father also had a heart attack hours before we received the loan documents. We were scheduled to sign them the next day.
My advice to future home-buyers: carefully scrutinize the HUD settlement statement and the TILA notices—and don’t sign until you understand everything. Although I think that these documents aren't as consumer-friendly as they could be, they’re the best chance you have for a clear explanation. If necessary, use the explanations distributed by federal agencies. You can also hire an attorney (required in some states) to review your documents.
Making the Process More Transparent
My loan had no actual wrongdoing—as far as I know. Still, if homeownership is to be safe for everyone, I would like to see a few changes.
I support a proposal by the Consumer Financial Protection Bureau to create two “Know Before You Owe” forms that clearly lay out the total cost of the transaction, as well as how high costs could get in the future. A three-page loan estimate would be provided soon after the loan application is approved, and a five-page closing disclosure would have to be provided three days before the loan closes, so people have a better chance to review it thoroughly. This should also be backed up by a tough penalty for violations, such as cancellation of the loan, which is the penalty for TILA disclosures. I also support another CFPB proposal to ban certain high-cost loan features, such as balloon payments, which are high payments that are due at the end of a loan's life. This was a feature of some subprime loans that were made during the bubble, and the CFPB rightly says that it "can trap consumers in high-cost mortgages."
To solve the challenge of shopping around for a loan, laws (probably at the state level) should forbid parties from contracting for an unreasonably short loan contingency period—the deadline by which the loan must be funded. Fortunately, these deadlines are often ignored when the parties are agreeable. But when the parties are not so agreeable, they cause lawsuits. Why let people set themselves up for trouble?
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I’d also like to see a federal requirement that mortgage contracts be written in the language used to negotiate them. A few states already require this, and judges have the discretion to void contracts when it’s clear that the borrowers didn’t have the opportunity to read what they signed. A nationwide law would extend that protection to everyone.
And while I know it's not likely to happen, I’d like more kindness to victims of predatory lending—especially in the courts. If you’re already a victim of predatory lending, suing is one of the few ways to redress it. But when those contracts are challenged in court, far too many judges gloss over the issue by reasoning that the borrower had an opportunity to understand what was signed. My experience has left me more convinced than ever that they’re wrong.
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