Predatory Lending- Some thoughts

Posted by kevin on October 1, 2012 under Foreclosure Blog | Comments are off for this article

Predatory lending is sort of a catch all phrase dealing with lender impropriety. Last week, I was speaking with a judge whom I have known for years. He was assigned a mortgage foreclosure case because of the overflow calendar in his county. He said that the borrower’s attorney was claiming that the loan was predatory but the rationale for that conclusion was lacking in the judge’s opinion. I was asked how I would define a predatory loan. My response was that it could entail false advertising, a bait and switch, taking advantage of unsophisticated borrowers, equity stripping and the like. However, the definition which makes the most sense, and is consistently mentioned in OCC Advisory Letters is that a predatory loan is a mortgage loan that is based primarily on the value of the collateral and not primarily on the ability of the borrower to repay the loan.

Now, using that definition, we see that the vast majority of predatory loans happen with no-doc loans or stated income loans. No doc is self explanatory- the lender does not even require the borrower to list an income on the application. A stated income loan (sometimes called a liar loan) has an income stated in the application but the lender does nothing to verify the amount of income. In other words, the lender abdicates its due diligence role and then blames the mortgage broker and/or borrower when things go bad. However, the lender is the licensed entity and it is bound by bank regulations to check things like income and the ability to repay.

The judge then asked a pertinent question. Assuming that the loan is predatory, how do you assess damages? I told the judge that is the $64 dollar question. In thinking about that simple but compelling question, I think that I have come up with a simple, and hopefully, compelling argument. If the basis for lending is to put the borrower in a loan that he or she can afford, the appropriate damage is to give the borrower a loan that he or she could afford based on his current income or based on his actual income at the time of the loan. In other words, compel a modification that is affordable. That is what the loan was supposed to look like from the beginning according to OCC guidelines. Of course, lenders will say that such a remedy is too harsh. In selling that theory, the fundamental question to the court should be, why should the lender be obtaining a benefit by its violation of the law.