SECOND MORTGAGE FRAUD

What is Second Mortgage/Home Improvement Fraud?

     Homeowners often receive solicitations of many different kinds. They may be offers for home repairs and improvements, loans for debt consolidation or other credit needs. Such solicitations are made door-to-door (most often by home improvement contractors and salespersons), over the phone, by mail, and through television and newspaper ads.

     Many of the loans offered are secured with the equity in the borrower's  home (also known as a second mortgage). Even though a consumer qualifies for one of these loans it does not mean that they can pay the loan. Older Americans who borrow against their homes should be aware that if they fail to make the required payments on the loan, whether because of loss of income, ill health, or because the contractor has failed to complete the repairs as agreed, their home can be taken away in foreclosure. And while some companies offering these services are reputable, many others are only interested in how much money they can make and will say and do anything to achieve their goal.

     They bear little or no risk in these ventures since the homeowner's property is their ultimate security.

     There are, however, important steps that a homeowner can take to avoid becoming a victim of second mortgage fraud, which ultimately could lead to foreclosure.

Dealing With Home Improvement Contractors & Finance Companies

     Do's...

       Be especially careful if responding to home solicitations; many  solicitors are experienced sales people who can be very skilled and persuasive at selling you things you don't need or want.

       Always get at least two written estimates for home repairs and improvements from professionals of your own choosing. Each estimate should describe the work, the price, the responsibility for cleaning up, and the hourly rate for any additional work.

       Make sure that any contractor you choose is licensed and registered by the appropriate licensing agency.

       Get references for the contractor and speak to those references about satisfaction and any problems that arose; if possible, take a look at work performed by that contractor.

       Read or have an attorney or someone you trust read everything before you sign.

       Keep a copy of everything you sign.

       Monitor all work regularly to be sure it meets contract specifications.

     Don'ts...

       If you don't want the service being offered, don't let yourself get talked into it, even if you think agreeing would get that person off your back.

       If the contractor or seller tries to get you to sign on the spot by saying it's a one-time offer, don't accept.

       If you have any doubts about whether you need the service being offered, get a second or third opinion and estimate from professionals of your own choosing.

       Never sign a contract or any piece of paper without reading it carefully and fully understanding what it obligates you to do; if possible, get an attorney to review it and advise you before signing.

       Do not make or authorize final payment to the contractor or sign a certification of satisfactory completion until proper inspections are made and you are satisfied with the product.

Financing Home Repairs, Improvements Or Consumer Purchases With Equity In Your House

     Should you need credit for whatever purpose, apply through a bank first; bank loans are likely to cost less than loan products offered by finance  companies.

     Avoid going to a lender the seller or contractor refers unless given a choice of lenders who are independent from the seller or contractor; find out if a broker's fee will be paid for this referral and exactly how much.

     Be sure you understand your obligations under the loan, especially if you are using your home as collateral, including:

How much is the total principal and amount financed, and how was it        calculated?

       What is the annual percentage rate (APR)?
       How much will monthly payments be?
       What is the loan term -- i.e., how long will I have to pay it off?
       Is there a lump-sum or balloon payment and, if so, for how much and when is it due?

     Only sign loan papers after you thoroughly understand and agree to all terms, consulting an attorney, if necessary.

What should I do if I signed a contract but have changed my mind?

     If you don't think you need the services contracted for, whether you don't believe you got a good deal or it's just not affordable, there might be time left to back out of the deal. Where a home solicitation occurred, federal and most states' law give you three (3) days to cancel the contract without penalty. You must cancel in writing and mail the notice of cancellation no later than the third day after signing the contract.

     Upon signing the contract, a cancellation form should be provided to you by the contractor. If none was provided, simply write a brief letter stating that you wish to exercise your right to cancel, sign and mail it.

     Federal truth-in-lending law also provides 3 days (which may be extended to 3 years in some cases) to cancel loans secured by a consumer's home.

What should I do if I think I am a victim of mortgage fraud?

     Anyone victimized by an unscrupulous contractor and/or predatory lender should consult an attorney immediately. An attorney may be able to help by finding defenses against any lawsuit brought by the contractor.

PAYDAY LENDING

Payday Loans Provide Quick Easy Credit At a Steep Price

Check cashers, stand-alone companies, and banks are making small sum, short  term, very high rate loans that go by a variety of names: "payday loans," "cash  advance loans," "check advance loans," "post-dated check loans" or "delayed  deposit check loans." Typically, a borrower writes a personal check payable to the lender for the amount he wishes to borrow plus the fee. Fees for payday  loans are typically a percentage of the face value of the check or a fee per $100 loaned. Under the federal Truth in Lending Act, the cost of loans must be  disclosed as both a finance charge (in this case the fee) and as an annual  percentage rate (APR), the standard cost of credit to the borrower on an annual  basis.

In a payday loan, both the lender and the borrower know that sufficient funds  to cover the check are not available when the check is tendered. The check  casher agrees to hold the check until the consumer's next payday, usually up to two weeks. At that point, the consumer can either redeem the check with cash or  a money order, permit the check to be deposited, or renew the loan by paying another fee. Payday lenders charge the same fee to roll-over the loan although the transaction costs for a renewal are not comparable.

Although payday lenders typically do not get a credit report on borrowers, they do ask for evidence of an open bank account and current employment. Payday lenders use data base companies, such as TeleTrack and Telecheck to screen out risky  borrowers.

A cash advance loan secured by a personal check is very high priced credit.  The National Consumer Law Center and the Consumer Federation of America reports effective interest rates for payday  loans earlier in the decade of 700 to 2000%. The APR varies depending on the fee  and how long the check is held before being deposited or redeemed. Loans which are renewed over and over because the borrower cannot afford to pay off the principle while  keeping up the fees every 7 to 15 days, carry a steep finance charge. A $100 loan with a $15 fee every two weeks costs 391% APR. This loan, rolled-over three times, costs $60 to borrow $100 for 56 days for the same 391% APR.

Why Payday Lenders Use Personal Checks to Make Small Loans

When payday loans were first offered in the mid-'90s, most state usury or  small loan laws made these transactions illegal. By labeling the transaction as  check cashing instead of lending, companies sought to avoid credit laws. Litigation by Attorneys General and private class action lawsuits have produced  court decisions and settlements confirming that payday loans are subject to  usury, limits small loan caps, and other credit protection laws.

Payday lenders benefit from using personal checks as the loan device although  the transactions do not require that a check be written. In many cases, the  "check" is never cashed, but is returned to the borrower when cash to pay the loan is exchanged for the "check." Loaning money based on personal checks sets up the advantageous comparison in fees between bank bounced check charges and the payday loan fee. A $15 per $100 payday loan fee might look like a bargain  compared to a bank's $25 bounced check charge plus a merchant's fee in addition.  However, the proper cost comparison for payday loans is with other sources of small loans. A 14 day payday loan with a $15 fee costs 391% APR compared to the  typical state small loan interest cap of up to 36% APR. A typical rate for a secured credit card is 24%. Overdraft protection on a checking account costs in range of 18 to 24% plus a small one-time fee.

Use of a personal check makes collection easier for lenders. Also, Many of these lenders have the consumers write the several check in increments of $100 and charge non sufficient funds fees for each check. These charges in many cases are in excess of the amounts it would take to renew the loan until the next payday. Consumers can be frightened into paying up to avoid prosecution for bad check charges or civil litigation for triple damages. Use of the criminal process gives payday lenders a collection advantage that no other creditor enjoys. The Florida Comptroller  brought charges against a payday lender who used fake sheriff's office letterhead for collection purposes. Attorneys in Ohio report that lenders use  the checks without supplying the contract as if they were the victims of bad checks, not a contract in dispute. Holding a borrower's check eases debt collection even when threats are not involved. There is a cost savings to the  lender who can "collect" on the debt by sending the check through the bank  clearing process. Some payday lenders get borrowers to sign authorization to  permit the lender to electronically withdraw funds from the consumer's bank account, using the Automated Clearinghouse system.

Payday Loan Industry

Payday loans are made by check cashing outlets, pawn shops, and other  entities that fill the vacuum left by the majority of mainstream lenders that have left the small loan market. Traditional small loan companies are more likely today to be offering home equity lines of credit than loans for a few  hundred dollars for a short period of time. Although some banks, credit unions,  and small loan companies make relatively small loans, payday lenders have targeted that market. Payday lending has exploded in the last few years.

A seminar at the National Check Cashers Association 1998 convention drew standing room only crowds for check cashers interested in going into payday  lending. As check cashers lose a portion of their traditional business to  electronic delivery of state benefits and federal payments, check cashers are searching for profitable financial services to replace check cashing.

The Market for Payday Loans

The market for payday loans is made up of consumers who have personal  checking accounts, but who are stretched to the limit financially. These consumers are not even living paycheck to paycheck, but are borrowing against  their next paycheck to meet living expenses.

Lenders claim that their customers prefer to borrow from them than to hock their appliances at a pawnshop or to ask their employers for pay advances. Pawnshop loans are always for a fraction of the present value of the used pawned  item, making a pawn transaction a poor comparison. The industry argues that  consumers use payday loans to cover emergencies or unexpected medical bills.

Payday Loans Place Borrowers on a Debt Treadmill

It is not unusual for borrowers to become mired in debt and renew cash advance loans every week or two. Payday loans are structured to make it  difficult for consumers to pay in full at the end of the loan period without needing to borrow again before the next payday. A consumer paying off a loan of  $100 to $300 plus the $15 to $45 fee within a few days often finds it difficult  to make it to the next payday without having to borrow again.

A class action lawsuit filed in Tennessee described borrowers who renewed  cash advance loans 20 to 29 times, paying fees of $19 to $24 per $100 loaned. One plaintiff "rolled over" loans 24 times in 15 months, borrowing a total of  $400 and paying $1,364 while still owing $248. Bank Rate Monitor Online described a Kentucky consumer who borrowed $150 and had paid over $1,000 in fees over a six-month period without paying down the principal. Her solution was to  declare bankruptcy. A Wisconsin news article described a consumer who borrowed more than $1200 from all five payday lenders in her town and was paying $200  every two weeks just to cover the fees without reducing principal.

If you are the victim of a Payday Lender you should contact an attorney to review your options.