Predatory Home Loan Practices Act
For years potential home buyers have had to proceed with caution when shopping for a mortgage or seeking to refinance a pre-existing mortgage. The possibility of becoming a victim of predatory lending practices was a very real fear. Sadly, too many borrowers are regularly deceived by unethical lending practices. One state has done something to change that. With the passing of the Predatory Home Loan Practices Act (PHLPA), Massachusetts seeks to help its residents obtain reasonable home loans without having to fear predatory lending.
The Facts
Predatory lending is typically levied against individuals with low credit scores who only qualify for subprime mortgage loans. The goal is to convince the borrower to refinance or purchase a home when the only financial benefit is to the lender. Some predatory lending tactics include excessive mortgage fees, prepayment penalties and requiring home insurance policies beyond those required by the state. The PHLPA was signed into law in August of 2004 and regulates the income requirements and documentation requirements a buyer must meet in order to qualify for financing. The PHLPA strictly prohibits the structuring of a loan to a borrower without the "reasonable belief" that a borrower will be able to successfully make payments on the loan.
Features
The new regulations that PHLPA sets forth require lenders to more closely scrutinize a potential borrower's finances in order to decide whether or not that buyer can afford to purchase the property. The monthly payments set by the lender cannot exceed 50 percent of the borrower's gross monthly income. In the event that the borrower opts for an adjustable interest rate, payments on the mortgage may never be more than twice as much monthly as previous payments were. If the borrower needs to extend or modify payments on the loan in order to avoid foreclosure, the lender is required to assist the borrower in doing so without charging fees for the service.
Benefits
The benefits of PHLPA are substantial for consumers. By restricting the amount of fees a lender can charge, especially loan origination fees, more families are able to afford to purchase a home. Of those families that make home purchases, less will suffer foreclosures due to the restrictions placed on payment increases. In the event a family needs to sell a home, the lack of prepayment penalties will make it easier and more affordable to quickly sell the property and purchase something else. Helping homeowners avoid foreclosure also benefits the local government. Areas with a high number of foreclosures suffer more of an economic blow due to individuals lacking the money to effectively contribute to local businesses. Over time, businesses may leave the area or close down entirely--adding further injury to the local economy.
Drawbacks
Although designed to protect borrowers, PHLPA limits the financing options available. In addition, certain companies who had previously bought Massachusetts mortgage packages are now refusing to do so. The reasoning behind the decision is that the companies do not want to place themselves in legal jeopardy should the courts decide at any time that the original mortgage agreements were in violation of PHLPA regulations. If enough companies refuse to pick up mortgages on the secondary market, lenders will be forced to hold on to the mortgages and thus be left with less money to lend. This will hinder the economy in Massachusetts by limiting the amount of home loans a lender can distribute.
Significance
PHLPA is significant because it is the first time a state government has stepped into the private mortgage financing market in order to help protect consumers. The success or failure of PHLPA's economic impact will help determine the actions other state governments choose to take to limit predatory lending and prevent foreclosures.
