With the deregulation of the consumer credit industry and inflation of property values, a market for equity-secured lending has emerged. For example, most home improvement loans are tied to the equity on the home. Regrettably, a practice known as predatory lending has also emerged. Predatory lending involves financial institutions which use high fees, outrageous costs and other unscrupulous or deceptive lending practices to strip the equity from a homeowner's home. Such practices are usually targeted to the poor, elderly and minorities, who typically lack access to traditional banking services and rely on financial companies or other less regulated lenders.
The Federal Trade Commission has identified several practices for which homeowners should be “on the lookout” and has posted them on its website located at www.ftc.gov. Such predatory practices include (1) equity stripping (e.g., the lender gives a homeowner a loan based on the equity in his or her home and not on the homeowner's ability to repay); (2) loan flipping (e.g., the lender encourages the homeowner to repeatedly refinance the loan and often to borrow more money); (3) credit insurance packing (e.g., the lender adds credit insurance to the homeowner's loan, regardless of need); (4) steering (e.g., the lender puts borrowers with good credit into loans with high interest rates and away from more affordable options); (5) pre-payment penalty charges (e.g., the lender tries to lock borrowers into predatory loans for as long as possible, making it extremely difficult or impossible for borrowers to refinance or otherwise get out from under the loan); (6) “hidden balloon” payments (e. g., the lender sets up the loan so at the end of the loan, the borrower still owes most of the principal amount borrowed, and offers to refinance the mortgage at excessive fees to eliminate the balloon payment); (7) “bait and switch” (e.g., the lender offers one set of loan terms when the borrower applies, then pressures him or her to accept higher charges when he or she signs to complete the loan.); (8) packing (e.g., packing the loan with exorbitant fees); and (9) fraud (e.g., the manipulation of data to qualify unqualified borrowers).
In addition, federal credit laws and consumer protection statutes have been enacted to deter such practices. For example, the Home Ownership and Equity Protection Act of 1994 (“HOEPA”) includes restrictions on financing of points and fees, limitations on the payment of prepayment penalties, and prohibition on balloon payments. Several states, cities and counties have also passed similar predatory lending laws to combat this problem. In fact, given the increased occurrence of predatory lending, legislation is being introduced to expand the number of loans subject to HOEPA.
The above measures are helping to try to reduce the occurrence of predatory lending. However, at least with respect to the poor, elderly, and minorities, the ability to get access to such information let alone any sort of legal assistance is very difficult. Moreover, these measures do not prevent predatory lending from happening in the first place. In addition, the variations between the current predatory lending laws at the federal, state, city and county levels, makes it is very difficult for lenders to keep track of these laws and ensure compliance with them. This problem is becoming increasingly worse as more states, cities and counties adopt their own version of such laws.
While the effects of predatory lending are most directly felt by the individual applying for a loan, lenders are also significantly affected by it, especially wholesale mortgage companies who purchase loan pools or individual loans that have originated elsewhere, such as by mortgage brokers and mortgage bankers. In the secondary market, purchasers and assignees can be held liable for all claims on loans in their possession. Penalties for predatory lending violations include substantial monetary penalties such as repayment of twice the amount of all interest, fees, discounts and charges as well as court and attorney fees to the borrower. In addition, violations of predatory lending laws can result in the temporary or permanent suspension of business privileges of the lender, such as the ability to sell to quasi-governmental agencies (e.g., Freddie Mac and Fannie Mae) in secondary markets or the ability to sell certain types of loans. In some cases, lenders can lose their licenses and face imprisonment. Moreover, given the ever changing state of the law in this area, the time and costs required by a lender to stay abreast of new developments, as well as understand all of the variations of the state, city and county laws that currently exist is becoming prohibitive, especially for smaller lenders.
There is, therefore, a need for a system and method for automatically detecting any instances of predatory lending during the closing of a loan regardless of its geographic origin.
USPTO Backgrounds
USPTO Backgrounds