Source: https://www.cpmlegal.com/news-publications-Combating_Predatory_Lending_in_California.html
Timestamp: 2019-04-19 06:26:20+00:00

Document:
Predatory lending has become an insidious financial problem in recent years for thousands of Californians. In any real estate loan, the loan terms and consequences must be adequately disclosed and, more importantly, financially feasible for the borrower. Through "flipping" and "packing," predatory lenders avoid these two requirements, reaping massive benefits while causing financial ruination for the consumer.
Fortunately for consumers, the California Legislature has recognized the growing problem of predatory lending by adding Division 1.6 to the Financial Code(2), effective July 1, 2002. This law specifies what constitutes predatory lending and expressly prohibits certain acts. In discussing predatory lending practices in California, this article will demonstrate the potential impact of the new law, and what remedies are now available to those affected by these practices. .
Unlike most prime loans, subprime mortgage loans are generally based on the equity in a borrower's house instead of his or her ability to make the scheduled payments. Therefore, problems meeting scheduled payments frequently arise due to the borrower's lack of liquidity, a problem obviously foreseeable, yet ignored, by the lender. When this occurs, the predatory lender encourages the borrower to refinance the loan into another unaffordable loan, thus increasing the loan amount owed, primarily due to new finance fees. This "refinancing" severely decreases the borrower's equity in his or her home and is a common practice referred to as "loan flipping."
One of the most potent tools used by predatory lenders to keep borrowers defenseless is the prepayment penalty. According to Standard & Poor's, subprime loans contain prepayment penalties 80% of the time, while prime loans only 2% of the time.(3) Since it is lower income individuals who are targeted by predatory lenders, the threat of thousands of dollars in prepayment penalties obviates the lenders fear of the borrower prepaying the balance through a more affordable prime loan. The prepayment penalties trap the individual in a long-term unaffordable loan that can only be refinanced by the lender who misrepresented the loan terms in the first place.
Subprime lenders state that they serve a very important function, mainly providing credit to borrowers with imperfect credit histories. However, it is this exact premise, the supposed benevolence of subprime lending, on which predatory lenders rely to justify their practices, thereby blending financially feasible subprime lending into predatory lending. Financial Code § 4970 is California's remedy to this problem.
Second, when applying for a loan, keep an eye out for common misrepresentations that are indicative of predatory loans. For example, the lender states that the loan has the flexibility of an open line of credit, or the lender requires credit insurance, claiming it is the only way the borrower will qualify for the loan. Next, the consumer should ask to see the lender's published rates on fees and points.
Finally, the consumer should look for terms and conditions that will trap him or her into the loan. As discussed above, prepayment clauses are indicative of a predatory loan. The reasoning behind prepayment clauses is to keep borrowers from refinancing into a prime loan once they learn the financial reality of their current loan. Furthermore, when a borrower is offered a loan that is "asset based"(10), he or she should demand to be told what affect such a loan could have on the asset's equity.
1. Niall P. McCarthy is a named partner with Cotchett, Pitre & McCarthy in Burlingame, California. He gratefully acknowledges the work of Brian Baker, Seattle University School of Law, Class of 2003, for this article.
2. Cal. Fin. Code § 4970 et seq.
3. Silver, Josh, American Banker, Protect Homeownership As We Move Against Predators, June 28, 2002.
4. See California Reinvestment Committee, www.calreinvest.org/campaigns.
5. To be a "covered loan", the loan must be secured by the equity in one's house. Also, the original principal balance of the loan cannot exceed $250,000 in the case of a mortgage or a deed of trust. Finally, the annual percentage rate for the loan at its inception must exceed by more than eight percentage points the yield on Treasury securities bearing a comparable period of maturity or the total points and fees paid at closing exceed 6 percent of the total loan amount. For a more thorough definition, see California Financial Code § 4970(b).
7. Cal. Fin. Code § 4979.5.
8. Cal. Fin. Code § 4978.
9. California Business & Professions Code § 17200 et seq. prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Business & Professions Code § 17200 et seq not only offers restitution and disgorgement, but also injunctive relief.
10. "Asset based" loans are those that clearly cannot be repaid with the borrowers liquid cash. See Independent Banker, Gunning For Black Hats, October 2000.

References: § 4970
 § 4970
 § 4970
 § 4979
 § 4978
 § 17200
 § 17200