What is Predatory Lending? When a Lender Makes Loan a Homeowner Can’t Afford, Says Appeals Court in New Case
Many homeowners who took out mortgages before the economic collapse in 2008-2009 were victims of predatory lending. But the term “predatory lending” is often used without defining what exactly is (and is not) predatory.
A recent decision by the Massachusetts Appeals court, however, has restated the standard for predatory lending.
The test is actually quite simple: Massachusetts law “prohibits the origination of a home mortgage loan that the lender should recognize at the outset that the borrower is not likely to be able to repay.” That is, if the lender should have known that the mortgage was not affordable, the loan is predatory.
If a loan is predatory, then the terms are prohibited under the Massachusetts Consumer Protection Act, called Chapter 93A.
In the case at issue, Morontona v. Nationstar, the bank argued there was no predatory lending because the loan at issue did not have all four characteristics that the Massachusetts Supreme Judicial Court had used in a prior case, Commonwealth v. Fremont Investment and Loan. In that case, the court held that a loan was predatory if the loan had a short introductory interest rate, a high interest rate once the introductory rate expired, a high debt-to-income ratio, and a high loan-to-value ratio.
Rejecting the bank’s argument, the Appeals Court held that those four factors were merely guidelines for that particular case, and that they do not have to be met in all cases so long as the lender knew that the loan would be unaffordable.
In our practice defending consumer homeowners against predatory mortgage lending, we typically review the loan terms, the property value, and the income used on the application. We have seen numerous cases where mortgage brokers and lenders inflated income without the homeowner’s knowledge, or where homeowners were refinanced into unaffordable adjustable-rate loans that were doomed to failure.
The most common way of fighting back against predatory lending is to file a lawsuit seeking reformation of the mortgage terms and an injunction to prevent foreclosure. If you believe you are a victim of predatory lending, contact our office for a free case evaluation.
The decision is here: Morontona v. Nationstar