Beasley Allen has a national reputation for excellence in the area of consumer fraud litigation, with individual cases as well as class actions that have been filed throughout the country. An area of fraud that directly affects consumers involves institutions or individuals who take advantages of consumers through predatory lending, mortgage fraud, and so-called payday and title loans.
In an effort to realize huge profits, predatory lenders target consumers who historically do not have access to mainstream lending institutions. This group of consumers includes minorities, the economically disadvantaged, the elderly and the uneducated.
Predatory lenders charge the borrowers higher rates of interest, require credit insurance products, exorbitant up-front fees and often include insurmountable pre-payment penalties. Predatory loans harm borrowers by making it difficult or impossible for them to keep up with their payments.
In recent years, predatory lending has grown dramatically. Wall Street investment banks have played an increasingly important role in raising funds for predatory loans. This secondary market has helped to sustain the growth in the predatory lending industry by enabling lenders to raise funds on the open market to expand their predatory lending activities.
Frequently, we are approached by another hapless victim of predatory lending. Their stories all share a common theme: the dream of owning their own home turned into a nightmare with extraordinary fees and threats of foreclosure.
Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misrepresentation, misstatement, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.
There are two types of Mortgage Fraud: fraud for property and fraud for profit. Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value or there are down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud.
Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators. The borrower’s debts are not fully disclosed, nor is the borrower’s credit history, which is often altered.
Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.
Payday and Title Loans
Payday loans allow individuals to borrow money by using a post-dated check as collateral for a cash loan. Unlike most other forms of credit, to qualify for a payday loan a borrower need only provide proof of income (such as a paystub or verification of government benefits) and a bank account.
In theory, these types of loans are designed to help people meet a small, one-time expense, yet in practice most payday loans are taken out to pay for previous loans. More than three quarters of all payday loans are given to borrowers who are renewing a loan or who have had another payday loan within their previous pay period. Among all borrowers, more than 80 percent conduct multiple transactions each year, and 60 percent of all payday loans go to borrowers with 12 or more payday lending transactions each year.
Payday and title lenders continue to try to avoid regulations in order to gouge the poor by trapping them into a cycle of debt. They sell “easy” loans that are tied to astronomically high interest rates, with no regard for whether or not the borrowers have the ability to pay the loan back. In fact, the system is designed to push borrowers from one loan to the next, borrowing again and again to pay off previous loans, which of course they are unlikely to do.
Some payday lenders charge up to 456 percent interest, in addition to a $17.50 service charge per $100 borrowed, for a two-week period. According to the Consumer Federation of America, the use of payday loans doubles the risk that a borrower will declare bankruptcy within two years, doubles the risk of being delinquent on credit cards, and tends to trap consumers in a perpetual cycle of debt.
Campaign for America’s Future (CAF), which is working to help stop payday lenders, recently shared some statistics from Americans for Payday Lending Reform (a project of People’s Action). These are just a few of those facts:
- Thirty-five states allow payday lending with an average of 300 percent APR or more on a two-week loan. [Philadelphia Inquirer, 6/23/13]
- CFPB: 80 percent of payday loans are rolled over into new loans within 14 days. [Yahoo Finance, 8/13/14]
- CFPB: 60 percent of payday loans are renewed seven or more times in a row, typically adding a 15 percent fee for every renewal. [Times Picayune, 5/8/14]
- CFPB: half of all borrowers took out at least 10 sequential loans. [Cleveland Plain Dealer, 6/13/14]
- Only 15 percent of borrowers were able to repay their initial loans without borrowing again within two weeks. [Cleveland Plain Dealer, 3/26/14]
The only true way to stop payday and title lenders from taking advantage of the poor is to require them to only loan to borrowers who can afford to repay their debt. According to CAF:
“A single unaffordable payday loan is one loan too many. The proposed rule gives a ‘free pass’ to payday lenders to make six bad loans, allowing lenders to sink people into a dangerous debt trap before the rule kicks in. The CFPB was right to base their proposal on the standard that borrowers should be able to repay their loan, but that standard must be on every loan, from the first loan. The CFPB should also enact protections to prevent lenders from stringing people along by ensuring a 60-day break between loans and limiting ‘short term’ loans to 90 total days of indebtedness per year.”