Unit 7.1 different kinds of fraud text 1. Home equity fraud and home renovation repair schemes

While more than $100 billion will be spent on home remodeling and repairing this year, you should be aware that home remodeling contractors ranked just behind car salespeople and auto mechanics in generating many consumer complaints.

Be especially cautious about using your home as security for a home improvement loan. If you fail to repay the loan as agreed, you could lose your home.

Old homeowners are popular targets of fraudulent home repair financing schemes because they’re likely to live in older homes that need repair and are less likely to undertake home repairs themselves. In addition, old homeowners are more likely to be vulnerable to high pressure pitches.

An elderly couple with an outstanding balance on their mortgage of less than $1000 met three men who presented themselves as representatives of a licensed mortgage banker and arranged for a home improvement loan secured by a mortgage on their residence. The proceeds of the loan were used to construct a fifty-foot decorative fence.

After the refinancing required to pay for the fence, the couple owed $85,000 at 17.99% interest. In addition, the lender charged them $4,200 in pre-paid finance charges and the mortgage broker charged a fee of $6,800. These fees were deducted from the proceeds of the loan.

Another couple was approached by home improvement contractors and encouraged to take out a mortgage they could not afford. One was legally blind and the other was deaf. They were both house-bound. The work was never completed and the couple defaulted on the mortgage payments. The kindly lender agreed to convert the loan into a reverse mortgage so that the couple could stay in their home until they died.

An 88-year-old woman signed several home improvement contracts totaling over $17,000 for extensive roofing, gutter and chimney work. When she had faced some problems after the work was performed, she hired a consultant.

The consultant reported that she was overcharged for each item, that unnecessary and shoddy work was performed, and that in many instances, they failed to perform any of the work specified and paid for in the contracts.

"Predatory home equity lenders target the most vulnerable homeowners – the elderly and people in financial or personal crisis – for high-cost loans secured by their homes. "These subprime lenders appear to care little about a borrower’s ability to pay, so long as they have enough home equity to secure the new loan. The lenders are able to prey on homeowners because mortgage transactions are often very complicated and difficult to understand. These practices are among the most abusive forms of consumer exploitation.

There are some examples.

The loans often are interest-only balloon loans in which, after making payments for the term of the loan, you still owe the entire amount of the loan principal. These loans are often secured by your home and typically are made based on the worth of the home rather than on your creditworthiness or income.

Loan Flipping

A lender calls to talk about refinancing, and using the availability of extra cash as bait, claims it’s time the equity in your home started "working" for you. You agree to refinance your loan.

After you’ve made a few payments on the loan, the lender calls to offer you a bigger loan for, say, a vacation. If you accept the offer, he refinances your original loan and then lends you additional money. In this practice the lender charges you high points and fees each time you refinance, and may increase your interest rate as well.

If the loan has a pre-payment penalty, you will also have to unknowingly pay that as well each time you take out a new loan.

The "Home Improvement" Loan

This abuse involves contractors who obtain your consent for a loan with high rates and fees through the use of deception or coercion.

For example, the contractor and you may agree on a price for certain work but then, after beginning work on the home, the contractor may then present you with loan documents from the lender indicating higher rates and fees than those that were agreed upon.

You are then pressured to sign the papers as drafted – especially when faced with the untenable prospect of leaving the improvements unfinished.

Credit Insurance Packing

The lender may tell you that credit insurance comes with the loan, making you think that it comes at no additional cost. If you notice the added cost and object, the lender may even tell you that if you want the loan without the insurance, the loan papers will have to be rewritten, that it could take several days, and that the manager may reconsider the loan altogether.

Mortgage Servicing Abuses

Fraudulent lenders also deceive borrowers during the loan period with:

• phony charges of inflated monthly payment amounts;

• overdue balances, service fees, and advances;

• adding phony charges to the loan principal that were disclosed only at pay-off and only after accruing large amounts of interest;

• withholding some loan proceeds while forcing you to make monthly payments for the entire loan amount;

• foreclosing on borrowers who were in compliance with their loan terms, and by failing to release its liens on title to borrowers’ homes even after the loans were paid off.

So you see the ways swindlers use to deceive people are different and especially old people suffer from these operations.