PREDATORY MORTGAGE LENDING: A PROFESSIONAL PERSPECTIVE by Luke Erickson

1. PREDATORY MORTGAGE LENDING:A PROFESSIONAL PERSPECTIVEbyLuke Erickson

2. Background Homeownership has been encouraged over the years. Homeowners are thought to be more productive and more stable citizens. The political environment encourages homeownership

3. There is a lot more money available for home loans than there was 20 years ago(Engel & McCoy). Deregulation Increased technology Secondary market International investing

5. Primary Market (Engel & McCoy, 2001) Traditional loans Minimal fees Standard interest rates Requires 20% down Customers generally have steady employment and good credit. These loans primarily originate with banks (depository institutions).

7. Subprime Mortgage Market Non-traditional loans Higher than average fees Higher than average interest rates Often does not require a substantial down payment Customers usually have bad credit and unsteady employment. These loans primarily originate with non-depositories (non-banks).

8. Predatory Lending Banks used to red line Certain lenders today actually green line those populations (Lord, 2005) Target individuals who are naïve, or not particularly financially savvy, and lack connections to the prime market (Engel & McCoy, 2001). Deception, unethical procedures, and hard sell tactics are used to trick and trap these borrowers Disproportionately benefit the lender, and harm the borrower (Engel & McCoy, 2001).

11. How does mortgage fraud fit in?(Federal Bureau of Investigation, 2005) Fraud is illegal activity. There are two kinds of fraud. Fraud against the lender Fraud against the borrower

13. HUD/Treasury joint report (2000), predatory lending is difficult to define and therefore difficult to regulate and control.

14. Purpose of this Study To define and describe predatory mortgage lending in Utah. Qualitative research study, Interviews with 12 full-time mortgage professionals from around the state of Utah.

15. Objectives 1. Conceptualize a definition of predatory mortgage lending. 2. Determine the extent or magnitude of predatory loans in Utah. 3. Identify the common characteristics of borrowers who end up with these loans. 4. Identify the major factors behind the existence of high cost and abusive home loans. 5. Document specific predatory practices seen in home loans. 6. Determine optimal strategies for reducing predatory mortgage lending in Utah.

16. METHODOLGY AND PRODEDURES

17. Qualitative research paradigm Unlike quantitative data, numbers are not the objective of this research. The goal was to collect highly detailed and descriptive data (Rubin & Rubin, 2005).

18. Sampling 12 full time mortgage professionals 4 consumer advocates 4 industry advocates 4 neutral participants 182 years of collective experience

19. Interviewing 7 Main Questions Follow-ups and probes Two pilot interviews

20. Data Recording Procedures Written notes Key verbal responses Initial concepts and themes Other thoughts and reflective notes Interviews were also audio recorded Later transcribed into text

21. Data Analysis Procedures Read through interviews individually. Assigned content to major categories Using NVivo7 computer program organized material by topic Identified subtopics, arranged content accordingly

22. RESULTS

23. Definition Targeted practices that intentionally exploit the vulnerabilities of borrowers. In use and description it was much more than that. Predatory lending is misunderstood. Meaning is often associated with the perceptions of those who use it Can sometimes carry negative connotations, attacking implications, or stigma.

24. On the inadequacy of the term predatory lending one branch manager complained: “I don’t like the term predatory lending. There’s something about that term that really bothers me as a lender. But I don’t know a better term for it. And that’s the term everybody is using, but it’s such a broad paintbrush that I wish someone would come up with a better definition for it, and figure that out.” The conclusion is that the term predatory lending serves as more of an obstacle to common understanding, than a tool

25. Unfair Lending The term unfair lending was used throughout the remainder of the study to refer to all instances of predatory, abusive, fraudulent and harmful lending Unfair lending as defined by participants is one or more of the following: a) a transaction without a fiduciary duty or having the borrower’s best interest in mind, b) a transaction the borrower does not completely understand for any reason including age, language barrier or lack of financial savvy, c) a transaction that has no beneficial use or results in harm to the borrower, d) a loan that delivers the lender excessive profits, and e) a loan that the borrower does not have the ability to repay.

26. New findings Term predatory lending itself was an obstacle to achieving common understanding. Distinction between targeted and untargeted abuse.

30. Magnitude Unfair lending in Utah is directly indicated by the default, foreclosure, and bankruptcy rates in the state. Because Utah has ranked in the top ten in each of these categories over the last several years, this indicates that unfair lending in Utah is widespread and rampant (ABI, 2004; Mitchell, 2003; Federal Bureau of Investigation, 2005).

31. Victim Characteristics Investors, the industry itself, and sometimes even co-conspirators in fraud attempts can become victimized to a degree. In the literature, borrowers are nearly always seen as the sole victims in unfair lending (Calem, Hershaff, & Wachtor, 2004; Engel & McCoy, 2001; Lord, 2005; Zimmerman, Wyly & Botein, 2002).

32. Similar to reports in literature, borrowers are more vulnerable due to certain personal and financial attributes, such as being elderly, minority, low-income or bad credit (Newman & Wyly, 2002; Zimmerman, Wyly & Botein, 2002). Unlike the literature, participants also explained that borrowers are generally unprepared mentally and emotionally to enter home loan transactions.

33. Factors Literature - unethical and irresponsible market actors (Engel &McCoy, 2001). Participants agreed, but indicated that irresponsibility and lack of accountability persists on both sides of a transaction. Most “unfair,” “predatory,” or “abusive” acts that occur to victims are actually fully disclosed in the paper work

34. The mortgage lending market is complex and vast Conflicting incentives Market structure Legal jurisdictions Victim redress Literature does address each of these issues to some extent, though they are not emphasized as they were by participants (Engel & McCoy, 2001; Lord, 2005; Sturdevant & Brennan, 1999)

35. Practices According to literature, unfair loans are the result of harmful loan features (Sturdevant & Brennan, 1999). Participants explained that loan features are not in and of themselves unfair but rather become unfair only when misused. Misunderstanding has led several aggressive state legislatures to ban certain lending features (Lord, 2005; Quercia, Stegman, & Davis, 2003). adverse consequences in some states (Downey & Barr, 2006).

36. Reduction Prohibitive legislation in the literature (Engel & McCoy, 2001; Quercia, Stegman, & Davis, 2004). Participants generally disagreed. Free market approach, with increased accountability for their own actions Licensing Increased penalties, More efficient victim redress Mandatory borrower education Jurisdictional boundaries

37. Literature often downplays education (Engel & McCoy, Lord, 2005). Participants emphasized education as the primary method of reducing “Consumer education is paramount.” Homebuyer education courses are encouraged by participants as a short term remedy, as similarly echoed in the literature (Lord, 2005). But this is only a short term solution to a much larger problem.

38. Long term solution extensive exposure to financial education courses in the secondary schools, colleges, and communities Barely discussed in literature (Engel & McCoy, 2001).

39. When asked to rate the importance of financial education one expert replied: [I rate it] a ten, in my opinion, on a scale of one to ten. Everybody has to go get a job, everybody is going to have credit of some kind somewhere or another down the road. . . I don’t know how you manage in life without having some financial literacy. Now Algebra I would say one in ten might use it once they get out of school, but real life finances, everybody.”

40. Conclusions & Implications Predatory Lending can be a confusing term and should be replaced. Predatory Lending in use refers to much more than targeted abuses. Less prohibitive legislation More accountability Financial Education

41. Limitations Opinions of these twelve participants do notnecessarily represent the opinions of the entire lending community of Utah this is an exploratory study to be built upon and is not a conclusive study Chain/snowball sampling Assignment of participants to the categories of consumer advocate, industry advocate, and neutral participant Primary Researcher bias

42. Future Research Supplemental quantitative study Qualitative study to interview victims Financial education Issues of timing Methods Optimal quantity and frequency

43. Special Thanks to my committee, for all their time and patience, To my parents for making the trek down from Idaho today. To my wife Rachel To my friends and colleagues in the program.