Posting for

Wednesday, June 28, 2000

by: Bert Rush

brush@firstam.com

SUBPRIME LENDERS/PREDATORY LENDING/MORTGAGE LENDERS

Storm clouds have formed over subprime lenders.

Item: In March, California-based First Alliance Corp. shut down after 29 years in business, and filed bankruptcy, as private lawsuits and government probes over "abusive mortgage lending practices" mounted against the firm. In April, First Alliance announced losses $14.5 million for the first quarter, 2000, compared with profits of $2 million for the same quarter last year. In May, plaintiffs' lawyers added Lehman Brothers as co-defendant in a class action lawsuit based on First Alliance lending practices, alleging that the Wall Street investment bankers "financed fraud" by providing funds for First Alliance loan originations.

Item: On May 12, a group of protestors rallied by the "Association of Community Organizations for Reform Now" demonstrated outside the World Financial Center in New York, demanding that Wall Street firms (Lehman Brothers and Merrill Lynch) agree to guidelines for subprime lending.

Item: A recent study reported in the Nonprime Mortgage Report (a publication of University Financial Associates), concludes that the default risk on new subprime loans is approaching unprecedented and worrisome levels. The study was conducted done by Dr. Dennis Capozza of the University of Michigan Business School, and was commissioned by University Financial Associates. Warns Dr. Capozza:

"Nonprime lenders should expect defaults

on loans currently being originated to be

about 25 percent higher than the average of

loans originated in the 1990s. The analysis

is based on a 'constant-quality' loan, that

is, a loan with the same borrower and

collateral characteristics. The increase in

the index reflects only the changes in

economic conditions which are now less

favorable."

According to Real Estate Finance Today (6/19/00), this heightened risk could have an "adverse effect on prime-time lenders."

Item: On June 15, the Mortgage Bankers Association issued a "Position Paper on Predatory Lending," including a "Seven Point Plan for Mortgage Reform." The Plan includes support for federal legislation to prohibit practices, such as the following cited by the North Carolina Fair Housing Center:

--Steering borrowers to high-rate loans/lenders

--Engaging in the practice of intentionally

structuring high-cost loans with payments the

borrower cannot afford

--Falsifying loan documents

--Making loans to mentally incapacitated

homeowners

--Changing the loan terms at closing

--Requiring credit insurance

--Falsely identifying loans as lines of credit

or open end mortgages

--Increasing interest charges when loan payments

are late

--Charging excessive prepayment penalties

--Failing to report good payment histories on

borrowers' credit reports

--Failing to provide accurate loan balance and

payoff amounts.

Item: In the wake of the MBA Position Paper, HUD and the U.S. Treasury Department have issued their own joint report calling for reforms to curb predatory lending. This report describes abusive practices as involving land flipping; excessive fees and costs (such as single premium credit life insurance) "packed" into the loan; raising the price and hiding the true cost of the loan; lending without regard to the borrower's ability to pay; and/or outright fraud. The report proposes an overhaul of mortgage-consumer protection laws, but these proposals were quickly criticized by the MBA as making the loan origination process even more confusing and complex. (The MBA prefers to offer lenders an exemption from RESPA's prohibition of referral fees, if they will offer consumers a "fixed" quote for "bundled" mortgage related services.)

Item: On Monday (June 26), The Money Store was shut down by its parent, First Union Corp. This closing results from the large number of nonperforming and under-performing loans generated by the subprime lender, which have now reduced First Union's overall earnings and value of its loan portfolio. Despite its strong brand name, The Money Store is no longer being offered for sale, because the market is seen as glutted with subprime asset offerings.

Comment: By lumping these Items together, I do not suggest that all subprime lenders have engaged in abusive practices or "predatory lending" (whatever that term may come to mean).

Instead, the point is that subprimes are finding themselves in a pinch these days, partly as a result of their past successes in "penetrating" the high risk loan market, partly due to unfavorable economic conditions, and partly due to growing political pressures to create more protections for their borrowers.

In this climate, escrow/closing and title folk will be wise to keep their guard up. Be wary of unusual requests, watchful for frauds, resistant to pressure tactics, and mindful of "good funds" requirements.

**********

Following Wednesday's posting, Dick Lamb (Fresno, CA) writes:

The Joint HUD-Treasury Report, HUD No. 00-142, dated June 20, 2000, can be found at

I've been alerting our agents to feel free to "drop a dime" on any lender they come across who appears to be involved in these predatory practices...the Mass. Attorney General/Division of Banks are more than willing to follow up on calls (even anonymous) and our attorney agents are in a position where they may have clients who are subject to these practices. We have even heard that these lenders are buying the court lists of pending foreclosures to "data mine" them for customers. Not nice people.