The most recent regulatory report on subprime lending is the Statement on Subprime Mortgage Lending (June 2007). This 31-page document was released by the Federal Reserve and other federal financial regulatory agencies in response to the current out-of-control subprime lending market. It describes in detail the requirements made of subprime lenders for the financial protection of both the borrower and the lender.
The first issue of concern is improved communication to subprime borrowers about the real, hidden cost of their adjustable rate mortgage (ARM) loans. This kind of loan is often suggested to subprime borrowers because the introductory rate of interest is so low – so low, in fact, that it’s often called a “teaser rate”. Before the appearance of the government Statement, ARM loans assessed huge penalty fees for refinancing the loan or prepaying it before the term expires. Often, the penalties continued for most of the duration of the loan.
Regulators tighten rules for subprime lending in the Statement by providing guidelines requiring subprime lenders to offer full disclosure of fees and rates associated with an ARM. Moreover, they state that “liar loans,” loans that ignore a borrower’s capability of repaying the loan and require no documentation of earnings, must be curtailed. These liar loans are also called “stated income loans,” “low-doc loans,” and “no-doc loans.” A borrower simply states the amount of his income, without being required to produce a W2 form or pay stubs to substantiate his statement. Based on what he has claimed, he qualifies for a loan he cannot really afford. It’s clear that this practice is the cause of at least part of the subprime market problem!
The Statement is specific about predatory and deceptive lending practices – what they are, and why they must not be used. Such predatory practices often victimize those who may not really understand what they are being asked to sign, members of particularly vulnerable groups: the elderly, minorities, and first-time home buyers. It is also very clear about the fact that not all subprime lenders can be considered predatory.
If you are a subprime buyer, what do these new regulations mean to you? For one thing, you can’t be entrapped in an ARM with an upcoming reset date: 60 days notice is now required. If you decide to refinance early in the loan, or if for some reason you become able to repay it early, no astronomical prepayment fees will be assessed. Lenders must now require proper documentation to verify income. This is a positive improvement, because a subprime borrower should never borrow more than he will really be able to repay. Many subprime financial institutions have gone under in recent years, simply because they ignored the critical need to determine accurately each home buyer’s capability to meet financial obligations. The regulations force subprime lenders to deal more ethically with subprime borrowers. They must show due diligence with their determination of these borrowers’ future solvency. Foreclosures ruin local real estate markets, as well as borrowers and lenders.
Earlier guidelines issued by the regulatory agencies have been tightened by the Statement. Some have been incorporated into its text; others, like the 2001 Expanded Guidance, are referenced. The intention of the federal agencies in tightening the rules for subprime lending is to protect subprime borrowers from lenders of questionable integrity, and to protect lenders from ruining themselves because of laxity in their underwriting practices. This document is bound to have a positive effect on the current downward-spiraling real estate market.
Posts Tagged ‘Lending’
Subprime Mortgage Lending – Regulators Tighten Rules
July 26th, 2010What can the peer-to-peer lending industry change or add to better benefit consumers?
July 19th, 2010I’m researching and writing a paper regarding the US peer-to-peer (P2P) lending markets. (1)If you have ever used or have been tempted to use micro-lending for personal gain how has this new trend of lending/borrowing benefited you, (2)what/how do you think these companies can change and/or add to better benefit the consumer, and (3)what segmented markets are still untapped? Thank you 
Predatory Lending
July 13th, 2010Were you the victim of Predatory Lending? Deceptive and predatory lending practices were all too common between 2001 and 2008, as the lawyers at www.ConsumerDebtAdvocate.net find over 90% of all loans we perform a forensic analysis on have multiple violations. If you took out a new mortgage loan during this period of time it is highly likely that there were violations in Truth in Lending, RESPA, Section 32, or Regulation Z. Even the best educated consumers may have been victims of predatory lending practices. CDA’s Attorney’s offer a complete forensic analysis of your loan documents by a recognized expert in the field who has over 30 years of experience helping consumers. CDA uses the results as leverage to force your lender to restructure your loan terms, or as an alternative, suing to challenge the validity of the loan itself. If you win a predatory lending case in court, you will often receive your home’s Deed free and clear, plus be re-paid all payments and fees you have made from the time you took out the loan.
Common Predatory Lending Practices:
? Predatory lenders use deceptive or aggressive practices to sell their loans, often targeting certain neighborhoods? Predatory lenders strip equity form homes through excessive fees without considering the borrower’s ability to repay the loan, sometimes resulting in foreclosure? Predatory lenders use prepayment penalties and adjustable loans that increase without regard to market conditions.? Predatory Lenders offer you one rate and fee structure, but change the loan terms at the last minute without proper disclosures.? Predatory lenders may use Spanish speakers to gain the trust and confidence of Hispanic Homeowners.? Predatory lenders charge excessive fees, points, and interest rates.? If you did a “stated income” or “stated asset” loan, you likely were the victim of mortgage fraud.? If you are elderly (over age 65), you may also be the victim of Elderly Abuse.
Common Indicators of Predatory Lending:
Excessive Points, late charges, and pre-payment penalties: Loan origination fees and other charges can cost many thousands of dollars, even if your were promised a “No Fee” or “No Charge” loan. Pre-payment penalties may make it very expensive to refinance or sell your home.
High Interest rate: Victims of predatory lending pay a higher interest rate than the national average or pay an interest rate not commensurate with their credit score.
Asset-based Lending: Rather than receiving a loan based upon your ability to repay the loan, you were given a loan based on how much equity you had and were able to pull out or pay as fees. You may have been encouraged to “inflate” your income or it was done without your knowledge so your could “afford” the loan. They may lend you more than you could afford to repay, as the lender would get the full amount of equity if they foreclosed on your property even if the loan was small.
Misrepresentations: The loan officer may offer you one set of terms (including rate and fees) and then change them at closing. They may also misrepresent the terms such you signed.
Balloon Payment: A large sum of money due at the end of the loan that is often beyond your ability to repay, often causing you to lose the home. IT is also illegal in sub-prime loan under HOEPA regulations.
Discrimination: The lender charges a woman, older adult, or minority consumer more than a similar consumer who is not a member of that group.
What Can You Do?
There are several important documents you should have received as part of the loan process to better help you understand your loan. Three days before you signed loan documents your lender must have provided you with a Good Faith Estimate that should outline your rate and fees. At closing, compare this to the Settlement Statement or HUD-1. It tells you where all the money you are borrowing will go. If there are any differences between the Good Faith Estimate and the HUD-1, make sure you agree with them before you sign.
You should also study the Truth in Lending disclosures which detail how much you are paying for your loan, what the percentage rate and APR is, and what you will owe at the end of the loan. Also review the contract to determine if there are prepayment penalties that lock you into the loan for a pre-determined period of time. IF you feel you were a victim of predatory lending, it is critical you get a forensic review of these documents before the statute of limitation runs out. Some violations can restart the rescission clock and you will have up to three years from the time you discover the violations to address them.
How do you start a small lending firm?
July 6th, 2010I have a lot of capital, and I am a financial analyst, but I’m interested in starting a small lending firm in Louisiana.
Peer to Peer Lending: Discretionary Investing
June 29th, 2010Peer to peer lending is often considered riskier than other forms of investment. Looking at peer to peer lending sites like Lending Club, they state the risk of investment is at your own risk and if you are not able to loss your money don’t invest. This is stated on their prospectus with the SEC and this represents the worse case scenario for investors. This admission is often enough to scare the majority of people away. So why is peer to peer lending so risky and if it so risky why are people still lending?
The overall risk is based in the nature of the loan issued. It is unsecured. Meaning, it has no real collateral backing the loan as in an auto loan or mortgage. There is only a promise to pay the loan by the borrower. This is not the only type unsecured loan today. Every credit card and store credit is an unsecured loan. These loans or lines of credit carry a high rate of interest due to the fact they are unsecured. The same is in true of peer to peer lending.
How is peer to peer lending different than a credit card? There time period to pay off the loan or maturity. Loans are usually over a three year period. The borrower pays installments and not minimums. The goal is to completely pay off the loan by the term.
So how risky are the loans? They often carry the same risk that credit cards and other types of unsecured debt. The risk is always present of non payment or late payment, but many steps are taken by lending institutions to reduce this risk.
First, the qualifications for borrowers are clearly stated and include a credit check. The institution reviews the credit history, utilization, credit score and several other factors as well as employment to assign the borrower’s loan a grade. If a person does not meet loan standards they are rejected. These are often posted for investors to review. This provides reassurance that the institution is doing its job. Second, the pertinent information from the background and credit check is posted with the loan request. Lenders are allowed to review this information and make their own decision as to whether to invest or not. Third, lenders are not required to invest in just one loan. Lenders can take their capital and spread it out among several loans. This has the effect of diversification and helps to further reduce risk to the lender.
So why are people investing in peer to peer loans? The returns are high. A site like lending club list a return in the range of 6% to 19% depending on the loan funded. This is an extremely high rate of return and is far better than other investments. Secondly, the default rate is low. Lending club is currently listing defaults of 120 plus around 2%.
The risk is always present, but the right steps need to be taken to avoid them. Find a reputable site for peer to peer lending. They make sure the proper background checks are performed and reject the borrowers that are too high of a risk. A lender should diversify their holdings of loans to further reduce their exposure to risk. For most lenders, the returns out weigh the risk and make it a feasible investment.
Credit Lending is Down in June
June 22nd, 2010The Bank of England has just released its statistics on lending to individuals for June – the report includes figures on net lending secured on dwellings – which is broken down into house purchases and remortgages.
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The report will be of interest to those SME owners and managers whose lines to credit are similar to those of households and individual consumers. While total net lending to consumers is indeed increasing it is slowing – giving more and more substance to the phrase UK citizens have all now become familiar with – the credit crunch. Further slowdowns in the growth of credit provision can be expected in the coming months as lending institutions remain cautious. A report today released by the Treasury expects the shortage of mortgage finance to persist until at least the end of 2010.Overall lending The total net lending to individuals in June stood at £4b. Mays total was £5.1b representing an increase of 0.3%. The increase between April and May was 0.4%. A slowing trend has been recorded for the past 4 months. When compared to the same period last year it would appear that the growth in lending stood at 7.4% – year on year this is lower than the figures for the past 4 months. The year on year growth for March stood at 8.7%. Housing market also slows – govt may step in In all the increase in net lending secured on dwellings was £3.1 billion, this figure is below the increase in May and the previous six-month average. These figures will come as no surprise to a housing market that is starting to see house prices stop rising and in some circumstances fall as a result of tighter credit lines. The numbers of loans approved for house purchase stood at 36,000, remortgaging at 84,000 and other purposes 45,000. All figures were lower than in May. The government in recognising the housing market crisis has indicated that they may have to give a taxpayer guarantee to billions of pounds of mortgage market bonds.This comes with a report commissioned by the Treasury that has suggested possible options to reviving the housing industry through stimulating the mortgage market. The assessment of the outlook for mortgage finance is due to be published later by Sir James Crosby, the deputy chairman of the City watchdog, the Financial Services Authority. Credit cards The increase in net consumer credit in June was £0.9b which is below that in May and the previous six?month average. Net credit card lending rose by £0.4b also below the increase in May.The annual growth rate of consumer credit slowed by 0.2 percentage points to 6.8%; the three-month annualised growth rate fell by 0.6 percentage points to 5.7%.
Subprime Mortgage Lending : What?s Good About It?
June 16th, 2010In recent months, the media would lead us to believe that the risks and damages possible in subprime lending have ruined everyone who has chosen this kind of mortgage. While there have, indeed, been many catastrophes in this area, not all cases of subprime lending fall into this category. Some subprime lending benefits do exist.
Someone who borrows at a subprime rate pays a higher rate of interest than the “prime,” or currently normal, rate of interest. Often, the only way people with a poor credit score (FICO, or Fair Isaac Corporation score) can obtain a mortgage is by borrowing at a subprime rate. But perhaps your credit history is compromised because of a past circumstance that is behind you. Maybe temporary unemployment, a divorce, or some illness in the family that ran up your bills was the cause of your credit problem. You are, nevertheless, still considered to be a subprime borrower.
However, here is some information on how you may still reap the advantages of subprime lending, even if your past credit history hasn’t been the best. You, too, can get a mortgage and become a homeowner. People whose credit ratings indicate past problems are classified as subprime borrowers, simply because the risk to the lender is perceived as higher than normal. But subprime lending is sometimes called “second chance” lending, and that’s because subprime lenders give responsible individuals a second chance to improve their credit. The most important thing to remember if you are one of those individuals is: do not buy a house you cannot afford! You may be told that you “qualify” for a higher mortgage on a more expensive house. Pay no attention to that information. Buy the house whose costs you know you will be able to handle.
Let’s look at an example. You are currently renting a house at an amount with which you are comfortable – say, $1,000 a month. With that rental payment, you have still been able to put something away monthly toward a modest deposit on a new home. You have a rather poor FICO score, and so are classified as a subprime borrower. When you meet with a lender to discuss a mortgage, you’re told that you “prequalify” for a mortgage of $300,000. Consider what buying a house in the range of $300,000 would mean to you. Besides the mortgage, there will be property taxes and homeowners insurance to pay. You’ll probably want to consider a fixed-rate 30-year mortgage: what will the subprime rate on such a loan be monthly? You’ll find it significantly exceeds the $1,000 you are presently paying, which is within your budget! The smart thing to do is to forget about that maximum amount for which you qualify. Don’t let a broker convince you to purchase a bigger, more expensive home than you could afford. You will be able to find plentiful bargains in the present real estate market. Look for those, do the math, and find something that’s not going to cost you much more than what you pay now in rent. Budget carefully, and always keep that budget in mind when you’re looking at houses.
Subprime lending does have its risks, that’s true. But there are benefits as well, especially for people whose credit may have been compromised. Make absolutely sure you understand everything you sign, keep focused on your budget, and you’ll be one of the folks who gets a second chance through subprime lending!
Japan bank lending logs record fall in May
June 9th, 2010Japan bank lending logs record fall in May
Japanese bank lending marked its biggest annual fall in nearly five years in May, as companies remained reluctant to boost…
Subprime Lending Returns to the U.K.
June 2nd, 2010Subprime Lending Returns to the U.K.
Three years after defaults on U.S. subprime mortgages sparked a devastating financial crisis, lending to borrowers with less-than-perfect credit histories is making a comeback in Britain. General Electric’s GE Money unit and Investec’s Kensington division have started lending to customers rejected by mainstream banks. This time they say their loans are for less money and are going to clients …
What IMPLICATIONS does the SUBPRIME LENDING have on the corporate, banking and insurance sector?
May 26th, 2010What implications does the subprime lending have on the corporate, banking and insurance sector?
