Predatory mortgage lending: What you can do to protect your members

The Problem When Karen and Jeff saw what they hoped would be their first home, they began looking for a mortgage lender. Both knew that their credit had been less-than-perfect in the past, but having seen and heard all kinds of ads that read, "even if your credit is really bad, you can get a mortgage," Karen and Jeff didn't think there would be a problem. Their credit wasn't really bad anyway. Or that's what they thought before they spoke with Mark. Mark came highly recommended by the real estate section of their Sunday paper. In a mortgage brokers' ad, that is. Mark promised he'd get them the best rate possible, and Karen gave him their social security numbers so he could run credit. Mark called back later that day and said their credit was terrible. Most lenders wouldn't even consider giving them the loan. It was going to be tough, he said, but he would pull it through for them. Gratefully, Karen and Jeff signed the application, paid an application fee and asked about interest rate. "I'll let you know in a few days," Mark told them. Over the next two weeks, Mark asked for all kinds of documents, but refused to answer the rate question. When Jeff finally reached a processor at the brokers' office, he found at why. "16.75%!" he told Karen. "There's no WAY I'm paying that!" Jeff was ready to back out, but Karen said, "We've come this far, let's just get the house. Mark said we can refinance later, and I'll take another part-time job." But when they got to the closing table, even she had second thoughts. The 6 points no one had informed them of just about cleared all their savings. Reluctantly, they signed the closing documents, mentally balancing a payment they could not afford with all their other debts. Why is any of this your business? Because Jeff and Karen are members of your credit union, and now have more debt than they can handle. Both will soon be behind on their car loans, not because of overspending, but just to keep a roof over their heads. Or, they'll pay their other bills and let the house go into foreclosure. Either way, two members who were getting back on their feet were thrown way off. And yes, you could have done something to prevent it. Just going above the standard interest rate doesn't make a lender "predatory." There are consumers who don't fit conventional guidelines but have a need for real-estate loans. Predatory lenders are those who mark up interest rates significantly, charge excessive rates and fees, and are not interested in the borrowers' welfare. If a lender sees the consumer is uncomfortable with monthly payments, he should not push her into the loan. Sometimes it's better to wait a year or two before buying a house, and an honest lender will explain that to consumers. Sub-prime lenders are up-front about rates, fees, and terms of the loan. Predatory lenders are usually not. Solutions While many credit unions don't get involved in sub-prime real estate lending, there are several things that can be done to make sure your own members' assets don't become a broker's assets. By educating members on what to look for in a lender, you may be able to avoid much aggravation and loss. Credit unions' newsletters are perfect vehicles for articles about what to do if credit is an issue, and members who use the advice will be appreciative that you've brought it up. Your newsletter, after all, is more than a marketing piece. It's an educational tool that can help members become increasingly financially savvy. Another idea is to have someone on staff volunteer to review documents members get from other financial institutions. This staff member can give objective advice, and let members know that the credit union not only wants their business, but also is concerned about their overall financial welfare. Had Jeff been able get a credit union loan officer on the phone with Mark, he may have forced Mark into giving him "an idea" of where the rate was. He could have had someone take a close look at his loan disclosures and been clearer on points and fees they were being charged. If your credit union can offer sub-prime loans, that's going to be the best deal for members, guaranteed. But if you can't, it may be worth doing a little research into lenders who do. By referring members to other institutions, you can protect them from unnecessary high fees and interest rates. To take it a step further, look at the loans your credit union is denying now. If the number is significant, it may be time to sign up with a lender who will allow you to originate the loans you can yourself, while they will do the rest for you. A program like this should explicitly state that there is no risk to the credit union in these loans. Rate: how high is too high? Since Jeff and Karen didn't qualify for conventional financing, their mortgage application presented a greater risk than a member who was never 30 days late in their life. At the same time, you have to wonder, how should you know if the rate is "right"? Is 15% too high? Is 9.5% okay? There is one simple answer to this question. If your member can get a better rate elsewhere, the rate is too high. When you apply for a car loan, you may be happy with the rate the dealer quotes, until you see a lower one advertised down the street. Provided the terms of the loan are still the same, the rate you were happy with just became too high. Fees, not only interest rates, should be examined. Different factors, such as pre-payment penalties may effect the rate, too. Does an interest rate make sense? Only by looking at the full picture will you be able to make that call. Another consideration should be government loans. Veterans are eligible for 100% financing, and credit guidelines are lenient. FHA is widely available, requires only 3% down and common sense underwriting is used. Since FICO scores are not the sole criterion, loans that essentially "make sense" but don't meet guidelines can be approved at an interest rate close to conventional loans. In looking for a sub-prime lender with lower interest rates, look for one who will offer government loans, too. Taking the time to research sub-prime lenders, educating your members on the subject, or originating these loans is one more thing that differentiates credit unions from all the other "ducks" out there. And all the Karens and Jeffs of your credit union will come in to thank you. They'll trust you, and wouldn't dream of doing their financial business anywhere else.