Nevada is one of about half of the states in the country which has legislated against predatory lending arising in home-loan financing. A borrower seeking a loan modification should be aware of what predatory or unfair lending practices are in order to work with an attorney to bring leverage to bear in negotiating a loan modification and to prevent home foreclosure.
Most commonly in the context of subprime loans, lenders employ unscrupulous methods such as teaser rates and pay option loans which are responsible for a substantial portion of foreclosures in America.
Many of these abusive tactics target borrowers who, in reality, could actually qualify for a regular prime loan. It's estimated that about 50 percent of subprime, refinanced loans could have been prime loans and saved homeowners thousands in interest and fees.
What is predatory lending?
Chapter 598D, et seq., of the Nevada Revised Statutes, "Unfair Lending Practices," offers guidance in order to recognize acts which are considered predatory, such as when lenders:
(a) Require a borrower, as a condition of obtaining or maintaining a home loan secured by home property, to provide property insurance on improvements to home property in an amount that exceeds the reasonable replacement value of the improvements.
(b) Knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including, without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the home loan.
(c) Finance a prepayment fee or penalty in connection with the refinancing by the original borrower of a home loan owned by the lender or an affiliate of the lender.
(d) Finance, directly or indirectly in connection with a home loan, any
credit insurance.
The federal Office of the Comptroller of the Currency has issued an advisory letter of practices that also may constitute unfair or deceptive acts, including:
* Loan "flipping" frequent refinancings that result in little or no economic benefit to the borrower and are undertaken with the primary or sole objective of generating additional loan fees, prepayment penalties, and fees from the financing of credit-related products;
* Refinancings of special subsidized mortgages that result in the loss of beneficial loan terms;
* Packing of excessive and sometimes hidden fees in the amount financed;
* Using loan terms or structures such as negative amortization to make it more difficult or impossible for borrowers to reduce or repay their indebtedness;
* Using balloon payments to conceal the true burden of the financing and to force borrowers into costly refinancing transactions or foreclosures;
* Targeting inappropriate or excessively expensive credit products to older borrowers, to persons who are not financially sophisticated or who may be otherwise vulnerable to abusive practices, and to persons who could qualify for mainstream credit products and terms;
* Inadequate disclosure of the true costs, risks and, where necessary, appropriateness to the borrower of loan transactions;
* The offering of single-premium credit life insurance; and
* The use of mandatory arbitration clauses.
In Nevada, predatory lending is a misdemeanor but civil penalties are equally compelling. A lender may be held liable to a borrower in an amount equal to the sum of three times the amount of actual damages sustained plus costs and attorney's fees attendant to bringing an action. A court may also cure any existing default and cancel any pending foreclosure.
What's more, the borrower has a defense against the unpaid obligation
of the home loan to the extent of any amount awarded by a court.
The federal Truth in Lending Act is also consequential in instances of lender failure to sufficiently disclose loan finance charges relating to non-purchase money home-secured loans.
In addition to actual and statutory damages, the federal law gives a
right to rescind the transaction for up to three years, in some cases, for material violations of the act. Rescission voids the security interest (i.e., in Nevada, a deed of trust) in the home and discharges the obligation to pay interest or other finance charges. Rescission is an indisputably effective defense to foreclosure.
Finally, the failure to fight foreclosure results not only the loss of the home, a borrower may as well be subject to a deficiency judgment, a monetary award in an amount representing the difference between the extant loan balance and the amount earned by way of the trustee's sale. In Nevada, the lender has six months from the date of the foreclosure sale to file a collection action.
Michael Radmilovich, an attorney with Sutton Law Center in Reno, has more than 15 years experience in real estate law. Contact him at 824-0300.
