South
Shore Mortgage’s Statement on Predatory Lending
South Shore
Mortgage is using Fannie Mae and Freddie Mac’s Automated Underwriter to help
expand the products they offer to borrowers who have blemished credit
histories. The Automated systems will recommend approval of a mortgage with a
credit-risk pricing adjustment only if such an adjustment is warranted after a
comprehensive assessment of all of the risk factors present in the loan
application. In fact, these systems recommend approval many applicants who have
slightly impaired credit without requiring a credit-risk pricing.
Our goal is
to work to reduce consumer costs, break down barriers to homeownership, and
serve as a catalyst for financing options. An important component of this goal
is to expand the availability of lower-cost mortgage products to consumers who
have blemished credit histories and limited savings. Historically, many of
these families have relied on the sub-prime market to meet their financing
needs. While many families have been well served by that market, far too many
have had to pay higher costs than necessary and, even worse, have experienced
abusive lending practices.
Prospective
borrowers are encouraged to seek loan counseling prior to obtaining a mortgage,
and the US Department of Housing and Urban Development can provide you with a
list of loan counselors in your area (see http://www.hud.gov/consumer/ or http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm
for more information, or contact HUD at 1-888-466-3487).
South
Shore’s Established Practices on Predatory Lending
·
Borrowers Should Not Be Steered to Inappropriate Products.
"steering" a borrower toward a mortgage with a
higher interest rate and/or fees even when the borrower could qualify under a
less costly financing alternative; approving a mortgage based solely on the
value of the property without considering whether the borrower has the ability
to repay the debt (which could result in the borrower's losing his or her
home); multiple refinancing of a mortgage without any real economic benefit to
the borrower (for example, a refinancing that has no appreciable effect on the
mortgage interest rate, payments or term, but which results in the borrower's having
to pay another round of fees that worsen his or her financial position);
charging excessive fees and points (which can result in the
"stripping" away of the borrower's equity in the property); failing
to disclose prepayment premiums to the borrower or using them as a method to
prevent a victim of "steering" from being able to refinance to a
lower-rate mortgage; and charging a higher rate of interest after a mortgage
goes into default.
·
Lenders Should Determine That All Borrowers Have the Ability
to Repay Their Loans.
A lender's credit decision should be based
primarily on the repayment ability of the borrower. Regardless of the underwriting method
the lender uses, the lender's underwriting of the mortgage confirms that, at
the time of loan origination, the borrower can afford to make the mortgage
payments. This determination of the borrower's ability to repay is reached by
relating the borrower's income, assets, and liabilities to the proposed
mortgage payment. The willingness to purchase mortgages made to borrowers who
have blemished credit histories, notwithstanding their higher credit risk, is
still predicated on the use of underwriting standards (either Fannie Mae,
Freddie Mac or the lender's) that confirm that the borrower has a reasonable
ability to make the mortgage payments and is likely to do so in a manner that
will enable him or her to successfully maintain homeownership.
·
Fees and Rates.
Fees and rates should be representative of the
associated credit risks and/or costs and services associated with the
origination of the loan and properly disclosed. Loan fees must be proportionate
to the costs of origination and the credit risk presented to the borrower. Mortgages are not eligible for origination
if the total points and fees charged to the borrower are greater than 5% of the
mortgage amount, except when this limitation would result in an unprofitable
origination for the lender (for example, because of the small size of the
mortgage). Under this guideline, points and fees include origination fees,
underwriting fees, broker fees, finder's fees, and charges that the lender
imposes as a condition of making the loan -- whether they are paid to the
lender or a third party. Points and fees that do not have to be counted against
this limitation include bona fide discount points, as well as fees paid for
actual services rendered in connection with the origination of the mortgage,
such as: attorneys' fees, notary's fees, and fees paid for property appraisals,
credit
·
Insurance Bundling.
Lump-sum insurance products, such as credit life
insurance, disability insurance, home warranties, etc., should not be a
condition of the loan. Credit
life insurance policies are life insurance policies that a borrower may
purchase to provide benefits that can be applied toward repayment of a mortgage
loan should the borrower die before the loan is paid off. Although some
borrowers choose to obtain credit life insurance policies, no borrower should
be required to purchase such policies as a condition of obtaining a mortgage. A
mortgage is not eligible for origination if the borrower obtained a prepaid
single-premium credit life insurance policy in connection with the origination
of the mortgage, regardless of whether the premium is financed in the mortgage
amount or paid from the borrower's funds. This prohibition does not apply to
credit life insurance policies that require separately identified premium payments
on a monthly or annual basis or to prepaid hazard, flood, or mortgage insurance
policies.
·
Prepayment Penalties.
Prepayment penalties should be fair and fully disclosed.
A mortgage that has a prepayment premium
should provide some benefit to the borrower (such as a rate or fee reduction for
accepting the prepayment premium). The borrower should also be offered the
choice of another mortgage product that does not require payment of such a
premium. The terms of the mortgage provision that requires a prepayment premium
should be adequately disclosed to the borrower.
The prepayment premium should not be charged when the mortgage debt is
accelerated as the result of the borrower's default in making his or her
mortgage payments.
·
Lenders Should Report Borrowers' Payment History to Credit
Bureaus.
Reporting such information enables consumers to
improve their credit profile and have access to more favorable financing. A key factor that affects a
borrower's credit record is the amount of information that the credit
repositories have on hand about the borrower's payment history. Some lenders in
the sub-prime market do not report a borrower's payment history to the credit
repositories or may report only when payments are delinquent. We believe that
it is important for a borrower's entire payment history to be reported to the
credit repositories since that gives a borrower who has a good payment record
more opportunities to obtain new financing (and better mortgage terms) when the
need arises.
To assure that the credit repositories have up-to-date
information about both servicing and origination activity, full-file credit should
be reported for all Fannie Mae or Freddie Mac owned or -securitized mortgages.
Lenders should make sure that they report one of the following statuses each
month for each mortgage that they are servicing for Fannie Mae or Freddie Mac
-- new origination, current, delinquent (30-, 60-, 90-days, etc.), foreclosed,
or charged-off.
·
Escrow Deposit Accounts.
South Shore Mortgage maintains an escrow deposit account for
the monthly deposit of funds to pay taxes, ground rents, mortgage insurance
premiums, and hazard and flood insurance premiums, as long as state law does
not prohibit the establishment of an escrow deposit account for the mortgage.
This protects the borrower from having to pay large annual or semiannual tax
payments or insurance premiums in a lump-sum when they come due, which is particularly
important when the borrower has not appropriately budgeted for these payments.
We understand that some of the multiple re-financings that take place are
attributable to the fact that the borrower initially was not required to have
an escrow deposit account and subsequently could not come up with the funds
needed to make the property tax payment, thus creating the need for a higher
balance refinance mortgage to obtain the funds. We may waive the requirement
for an escrow deposit account on a case-by-case basis, we suggest that such
waivers not be granted to borrowers who have blemished credit histories and few
cash reserves since these borrowers may have difficulties in making the
required tax and insurance payments in a lump-sum.