Magazine article Mortgage Banking

The Predatory Lending Maze. (Executive Essay)

Magazine article Mortgage Banking

The Predatory Lending Maze. (Executive Essay)

Article excerpt

LIVONIA, MICHIGAN-BASED QUICKEN Loans Inc. and its branch-based Rock Financial division have been in the mortgage lending business since 1985. We originate and close mortgages in all 50 states via our Web site and our three large branches in the Detroit area. While most of our business is traditional conventional lending, I feel compelled to comment on the nature and extent of the predatory lending problem and to weigh in on various proposed solutions.

Just how pervasive is the predatory lending problem? The term "predatory lending" has been used loosely by different people to cover the entire gamut of lending activities. Unfortunately, this overly inclusive and subjective use of the term undermines legitimate lenders, who provide services which should be welcomed in the underserved subprime market. The term should be used only when discussing inherently abusive practices involving fraud and deception.

Fair, legitimate and legal lending practices are not and should not be considered "predatory." Just because the term "subprime" is attached to a loan does not make the loan predatory. Normal, everyday people find themselves in difficult financial situations, and often the subprime loans accommodate those situations. Many people would not be able to enjoy the American dream of owning a home without these loans.

True predatory lenders are those who give the borrowers certain disclosures at application, only to significantly switch the numbers around at the time of closing without a logical explanation. Or they offer costly subprime loans to borrowers who clearly qualify for less costly conventional loans. Or they simply fail to give the appropriate legal disclosures to the borrowers. In these instances, the borrowers can legitimately be labeled as predatory lending victims.

While the number of true predatory lending cases probably is small in relation to the overall number of subprime lending transactions, it is an important issue the industry must address. Several solutions and government actions have been proposed to address the predatory lending issue. I'd like to comment on three of them.

Limiting interest rates and fees. Some people have called for the government to impose limits so that rates and fees are "fair." But how exactly would the government determine whether rates are too high for any particular borrower? What standard would be used? It is simply not possible for the government to determine whether a loan is priced fairly for every borrower in every situation, and to presume to know what is best for a particular borrower. Plus, there is already vigorous price-based competition in the mortgage industry.

Licensing. Some have suggested that we re-examine lender licensing requirements. Most of these requirements are quite extensive, yet haven't stopped unethical lenders from getting into the business. Requiring lenders or individuals to fill out and submit extra papers would just result in more paperwork and bureaucracy, and lead to increased costs that ultimately could get passed along to consumers.

Disclosures. Some have suggested we pass new legislation mandating that lenders make certain additional disclosures to borrowers in potential predatory lending situations. But much of the problem stems from the complicated, paper-intensive nature of the mortgage transaction itself. What makes us think that borrowers who need cash would be deterred by an extra disclosure when they are not deterred by the disclosures that currently exist? Additional disclosures would simply make the mortgage process even more difficult by adding yet more documentation for all of the parties to deal with. …

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