MOMENT OF CLARITY: A CENTRIST APPROACHTO MORTGAGE LENDING

YusufYusuf*

INTRODUCTION .............................................. 268I. CURRENT FAIR LENDING LAWS ....................... 271

A. Community Reinvestment Act ................. 271B. The Fair Housing Act ....................... 273C. The Equal Credit Opportunity Act ................ 276D. Truth-in-Lending Act . ....................... 277

II. SUBPRIME LENDING: THE FOUNDATION FOR A LENDER

BASED APPROACH TO MORTGAGE LENDING ........... .280

III. LENDER BASED APPROACH TO MORTGAGE LENDING .. 282A. Predatory Lending.......................... 284

IV. THE BORROWER-BASED APPROACH TO FAIR LENDING. 288A. Bybee's Borrower-Based Model . ................ 289

i. Clear and Comparable Loan Offers ........... 289

ii. Reduce Complexity........................... 290

iii. Maximize Access to a Variety of Lenders....... .290

B. Borrower-Based Fair Lending Tools ............... 291i. The Loan Price Tag .................... 291ii. The Reverse Auction .................... 293iii. Loan Comparison Report................. 294

V. DODD-FRANK WALL STREET REFORM AND CONSUMER

PROTECTION ACT: OVERVIEW AND KEY PROVISIONS

RELATED TO PREDATORY MORTGAGE LENDING ....... .296

A. Title XIV - Mortgage Reform and Anti-PredatoryLending Act ............................. 296

VI. CENTRIST APPROACH TO MORTGAGE LENDING: POLICY

RECOMMENDATION ................................... 298CONCLUSION................................................. 301

* Editor-in-Chief, Cardozo Public Law, Policy & Ethics Journal. J.D. Candidate, BenjaminN. Cardozo School of Law, 2014. B.A. Binghamton University. This Note is dedicated to mymother, three siblings and nephew. I am eternally grateful for their love, guidance and support.

267

268 CARD OZO PUB. LAW POLICY & ETHICS j

INTRODUCTION

Ms. Jade,' a 71-year-old, received a phone call from a mortgagebroker who promised her that he would refinance her two existingmortgages, provide her with $5,000 in extra cash, and lower hermonthly mortgage payments. Ms. Jade needed cash to repair herkitchen, so she agreed to meet. The broker visited her at her home,where Ms. Jade maintains that he gained her trust by claiming that heliked her as a person and wanted to help senior citizens because his ownfather had recently died of cancer.

Later, the broker returned to Ms. Jade's home to have her sign themortgage loan papers. Ms. Jade testified that she could not read thedocuments carefully because she suffers from vision problems and has alimited education. She signed the documents based on the broker'spromises and representations that the loan would provide her with cashto repair her kitchen and lower her monthly mortgage payments. Ms.Jade received a $90,100 mortgage with an annual percentage rate of14.819. The mortgage loan contained a fifteen year balloon note thatrequired a final payment of $79,722.61 (which would be due when shewas eighty-six years old). Ms. Jade paid ten percent of the loan amount,or $9,100, as a broker's fee. The monthly payment increased to approx-imately eighty percent of her monthly income.2

Ms. Jade was baited into refinancing her home. The prize: theprospect of improving her home. The broker, recognizing her need,pounced on the opportunity to make a commission on a loan he knewshe would likely be unable to pay. While her testimony does not con-firm whether she defaulted on her loan, Ms. Jade's home equity wasstripped and she likely defaulted.

1 Ms. Jade's identity and story has been slightly altered to maintain privacy. See U.S. DE-

PARTMENT OF HOUSING AND URBAN DEVELOPMENT AND U.S. DEPARTMENT OF TREASURY,

CURBING PREDATORY HOME MORTGAGE LENDING: A JoINT REPORT 18 (June 2000), availa-ble at http://www.huduser.org/Publications/pdf/treasrpt.pdf.

2 Id at 18-19. HUD and Treasury take no position on the truth or accuracy of witness

testimony. The agencies only report here testimony that was presented by borrowers at the

regional forums and documentation some of those borrowers provided to the Task Force. A few

examples from the testimony presented by victims of predatory lending at the HUD-Treasury

Task Force's regional forums provide a flavor of the kinds of deceptive and manipulative sales

techniques reportedly used, as well as some of the specific terms and oppressive features con-

tained in predatory loans.

[Vol. 12:267

MOMENT OF CLARITY

The immediate cause of the 2008 financial collapse was the simul-taneous mortgage default of thousands of homeowners.3 The inabilityof homeowners to make monthly payments may have several explana-tions, but what became apparent in the aftermath of the financial crisiswere the abuses prevalent in the mortgage lending industry. Deceptiveand abusive lending practices included; inflated property appraisals,large mortgage brokers fees, abusive prepayment penalties, risky and ir-responsible loan products, fraud in servicing the loan products, and inef-fective underwriting standards.' Mortgage lending is intended to be agive and take process: the borrower provides financial information to beevaluated and the lender takes on the risk of financing a mortgage loanin exchange for receiving principal and interest payments. However, therecent exposure of abusive lending practices indicates that mortgagelending was structured in favor of financial institutions and notconsumers.

To protect consumers in the de facto one-sided relationships preva-lent in the mortgage industry, Congress passed Fair Lending Laws: theFair Housing Act, Community Reinvestment Act, Truth-In-LendingAct, and the Equal Credit Opportunity Act.5 These laws proved futilein protecting consumers under the prevailing mortgage lending scheme.The approach to mortgage lending during the period leading up to thefinancial crisis can be classified as a "Lender-Based approach." Provi-sions and terms within mortgage lending agreements were geared to-wards maximizing lending institution profits, rather than lender'sassessment of risk in financing home loans.

In contrast to the Lender Based approach is a proposal to shift thefocus of lending in favor of the borrower to account for predatory lend-ing practices. In Fair Lending 2.0: A Borrower Based Solution to Discrim-ination in Mortgage Lending, Jared Ruiz Bybee proposes a solution todeceptive lending practices in the U.S. mortgage market.' The frame-work gives borrowers the tools to understand and compare loan offers,reduce the complexity of loan products, and enhances the ability of bor-

3 Vikas Bajaj, As Defaults Rise, Washington Worries, N.Y. TIMES, Oct. 16, 2007, http://www

.nytimes.com/2007/10/16/business/16lend.html.4 Christopher K. Seide, Consumer Financial Protection Post Dodd-Frank: Solutions to Protect

Consumers Against Wrongfiul Foreclosure Practices and Predatory Subprime Auto Lending, 3 U.PUERTO Rico Bus. L.J. 219, 233 (2012).

5 Id.6 See generally Jared Ruiz Bybee, Fair Lending 20: A Borrower-Based Solution to Discrimina-

tion in Mortgage Lending, 45 u. MICH. J.L. REFORM 113, 144 (2011).

2013] 269

270 CARD OZO PUB. LAW POLICY &r ETHICS J

rowers to receive loan offers from a variety of potential lenders.7 Bybeesignals an important consideration that was overlooked prior to the cri-sis: the current fair lending laws focus only on restricting and punishingthe lender rather than empowering the borrower.'

Bybee refers to "subprime loans"9 as the inferior and more expen-sive loan products that were the weapon of choice for deceptive lend-ing."o Subprime loans are indeed different than prime loan mortgagesbut they both provide a means to homeownership." While Bybee setsforth plausible arguments and establishes a framework that juxtaposes aLender-Based approach to mortgage lending, he overlooks the impact ofTitle XIV of The Dodd-Frank Wall Street Reform and Consumer Pro-tection Act (hereinafter "Dodd-Frank").1 2 Dodd-Frank seeks to provideconsumer protection to the areas that current Fair Lending Laws over-looked or could not address. Title XIV empowers the borrower by elim-inating tools used by lenders for exploitation. Mortgage lending shouldremain a give and take process between borrower and lender and Dodd-Frank is the foundation of returning to this ideal.

This Note proposes a model that works within the new Dodd-Frank regulatory scheme. It proceeds in five parts. Part I discusses theCurrent Fair Lending Laws, presenting a brief history and description ofeach law. Part II explains subprime lending and discusses how it wasused as a conduit for predatory lending practices. Part III sets forth theLender Based approach to mortgage lending and discusses the lendingpractices that overpowered and defrauded borrowers. Part IV discussesthe Borrower-Based approach to mortgage lending. This section dis-cusses the purpose behind the approach, the tools proposed to shiftmortgage-lending practices in favor of the borrower, as well as the in-creased burden on a consumer this approach may have during the mort-gage lending process. Part V presents my policy recommendation of"Disclosure Plus," which seeks to educate borrowers prior to and duringthe financing of their home. Emphasis is placed on the Department of

7 Id.8 Id.

9 "Subprime lending" refers to the practice of extending credit to borrowers under termsthat are less favorable than given to borrowers with excellent credit histories. Ngai Pindell, TheFair Housing Act at Forty: Predatory Lending and the City As Plaintiff J. AFFORDABLE HOUSING

& COMMUNITy DEv. L., 169, 172 (Winter 2009).10 Id

I Pindell, supra note 9, at 169.12 See Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[Vol. 12:267

MOMENT OF CLARITY

Housing and Urban Development participation in the education of bor-rowers and the creation of a certification agreement to gauge borrowerunderstanding. Ultimately, this Note seeks to ensure that financinghomeownership, the most important transaction of a consumer's life, isa fully understood and agreed-upon process between a borrower and alender.

I. CURRENT FAIR LENDING LAWS

A. Community Reinvestment Act

The Community Reinvestment Act (hereinafter "CRA") wasadopted on October 12, 1977 to encourage depository institutions tohelp meet the credit needs of the communities where they operate, in-cluding low and moderate income neighborhoods.13 CRA was enactedto curb "redlining," the discriminatory mortgage lending practice wherelenders refused to make loans to certain geographic areas based on theracial or ethnic composition of the area.14 Along with these generalobligations, the CRA outlines specific obligations a financial institutionmust maintain.1 5

Part of CRA's obligation requires federal banking regulators to dis-close to the public written CRA evaluations and ratings for individuallending institutions.1 The evaluation scale ranges from outstanding,satisfactory, need to improve, and substantial non-compliance. Legisla-tors hoped that publication of the CRA evaluations of lending institu-tions would: (1) exert pressure on regulators to improve the quality ofthe examinations and curb rating inflation; and (2) provide the publicand lenders alike with a better understanding of the underlying per-

13 12 U.S.C.A. § 2901 (West 1977).14 Allen J. Fishbein, The Community Reinvestment Act After Fifteen Years: It Works, but

Strengthened Federal Enforcement Is Needed, 20 FORDHAM URB. L.J. 293 (1993).15 The first obligation is for the financial institution to delineate its community. The sec-

ond obligation is to prepare a CRA statement that must include: (1) a statement setting out the

boundaries of the local community; (2) a list of the specific types of credit the financial institu-tion is prepared to extend; and (3) a description of its efforts to ascertain the credit needs of itscommunity, the efforts to meet those needs, and the record of success in that regard. Thirdly,

the financial institution must maintain a public file containing the CRA statement, commentson the CRA statement, responses to these comments, and the CRA performance evaluationprepared by the financial institution's supervisory agency. Lastly, CRA requires the financialinstitution to provide a public notice in the lobby of each office indicating the nature of theinformation in the public files and that the public policy may obtain copies of this information.

Id at 297.16 Id. at 297.

2013] 271

272 CARDOZO PUB. LAW POLICY 6- ETHICS J [Vol. 12:267

formance standards employed by the regulators in assigning the CRAratings.' 7 Unfortunately, the preliminary findings showed that effectivepublic disclosure of CRA ratings had little effect in shaming institutionsto improve their standards to receive better grades.'"

The strength of CRA is in its public disclosure offering. It allowsborrowers to make sound decisions as to which institution they choosebased on the reports.' 9 American Banker, a banking trade daily, sur-veyed consumers to determine the impact of a lender's community rein-vestment record on their choice of a lending institution. Amongminority consumers, half of those surveyed said they would be influ-enced in where they banked by a lender's CRA record.20 However,there is evidence that banks artificially inflate their statistics by purchas-ing high-interest loans held by predatory lenders operating in minoritycommunities.21 Despite evidence of artificial inflation, banks used the"holder in due course doctrine" 2 2 to insulate themselves from impunityand defenses such as: fraud in the inducement, lack of consideration orunconscionability. 23

Critics cite the lack of an enforcement mechanism and CRA's con-tinued focus on banks and assessment area lenders rather than the per-

17 Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No.

101-73, 103 Stat. 183.

18 Over the course of the first twenty-four months that the CRA public disclosure was ineffect (July 1, 1990 to June 30, 1992), about two-thirds of all lenders were examined for CRA

purposes (9,520 out of approximately 14,400 covered by the law). Of the lenders rated, 929(9.7%) were rated as outstanding; 7,565 (79%) as satisfactory; 939 (9.8%) lenders were rated asneeding to improve; and 87 (.9%) banks were judged to be in substantial non-compliance. Theresults represented an approximate 11% "failure" rate (needs to improve or substantial non-compliance). Fishbein, supra note 14, at 301-02.

'9 Id.

20 Id. at 304.

21 "In order to appear more involved in minority communities, large lenders often purchasethe high-interest loans held by predatory lenders operating in those communities. Representa-tive Joseph P. Kennedy of Massachusetts stated, "[w]e may be looking at some sort of perverseincentive under CRA for banks to purchase [predatory] loans in minority communities to fulfillCRA obligation." Frank Lopez, Using the Fair Housing Act to Combat Predatory Lending, 6GEO. J. ON POVERTY L. & POL'Y 73, 109 (citing Steve Marantz, U.S. Panel to Hold Hear-ing on Second Mortgage-Bank Ties, BOS. GLOBE, May 8, 1991, (Nat'l Section), at 19).

22 A "holder in due course" is one who takes the debt instrument for value in good faith andwithout notice of a potential defense or claim to it. U.C.C. § 3-302 (1977). A person or entityin that position, under most circumstances, is free from defenses by a party with whom the newowner has not dealt. U.C.C. § 3-305 (1977)

23 Lopez, supra note 21, at 83.

MOMENT OF CLARITY

formance of non-bank lenders. 24 An enforcement mechanism would bein line with CRA's purpose of encouraging depository institutions tohelp meet the credit needs of the communities in which they operate. Ashift by CRA that assesses the performance of non-bank lenders in asimilar fashion as banks would help maintain uniformity in the regula-tory scheme.25 Instead the lack of penalties stunts the purpose of CRAand perpetuates loose bank regulation. Banks have found loopholes tocomply within the CRA regulatory scheme and non-bank lenders havecontinued to loan within minority communities without regulation.2 6

B. The Fair Housing Act

The Fair Housing Act (hereinafter "FHA") was enacted with theaim of providing protection to those persons who had historically beenthe victims of housing discrimination on the basis of their race, color,religion, or national origin.27 Under the FHA it is, "unlawful for anyperson or other entity whose business includes engaging in residentialreal estate-related transaction to discriminate against any person in mak-ing available such a transaction, or in the terms or conditions of such atransaction, because of race." 28 In 1988 the FHA was amended to in-crease the options for housing discrimination victims to combat dis-criminatory policies.2 9

The FHA has been used as a tool to challenge disparate impactlending, the practice of lending that does not expressly discriminate but

24 William Apgar, Amal Bendimerad & Ren S. Essene, Mortgage Market Chan-nels and Fair Lending: An Analysis of HMDA Data, JOINT CTR. FOR Hous. STUDIES OF

HARVARD UNIvERsrrY, at 42 (2007), http://www.jchs.harvard.edu/publications/finance/mm07-2 mortgage-marketchannels.pdf.

2 5 Id26 The fact that independent mortgage banks, the very segment of the market most engaged

in the rapid expansion of higher-cost non-prime lending, fall out of the CRA framework ...denies many of the nation's most vulnerable borrowers equal access to the benefits of federaloversight that are widely present in the lower priced prime market." Id. at 58.

27 Lopez, supra note 21, at 92.28 42 U.S.C. § 3605(a) (1988).29 That law proscribes housing practices that discriminate on account of race, color, national

origin or religion, but it fails to provide an effective enforcement system to make that promise areality. This bill seeks to fill that void by creating an administrative enforcement system, whichis subject to judicial review, and by removing barriers to the use of court enforcement by privatelitigants and the Department of Justice. H.R. REP. No. 100-711, at 13, (1988) reprinted in1988 U.S.C.C.A.N. 2173, 2174.

2013] 273

274 CARD OZO PUB. LAW POLICY & ETHICSJ. [

has a discriminatory effect on minority borrowers.30 Disparate impacttheory "allows plaintiffs to prove discrimination by demonstrating thatthe lenders' policies, though facially neutral, have an unjustifiably dispa-rate impact on minority borrowers that resulted in unlawful discrimina-tion under federal law."3 1 To prove a disparate impact claim a plaintiffmust present prima facie evidence of discrimination of a practice or pol-icy that has a disproportionately adverse impact on a protected group.3 2

A plaintiff must: (1) identify a specific practice or policy adopted by adefendant; (2) demonstrate a disparate impact on a protected group;and (3) show a causal relationship between the challenged practice andthe alleged disparate impact.3 3

For the first element, a plaintiff must point to a specific discrimina-tory practice or policy that allegedly has a disparate impact on a pro-tected class.3 In cases alleging discretionary pricing policies, plaintiffsmust prove that subjective criteria, unrelated to creditworthiness, playeda part in determining a potential borrower's eligibility for credit. 35 Thepractice or policy element of a prima facie disparate impact claim islikely to be met in any case where a lender or broker's policies or prac-tices enable the race of the borrower to affect the terms of the borrower'sloan. 6

The second element requires a plaintiff show the policy or practicehas "a significant adverse or disproportionate impact on members of aprotected group." 37 The most common method used to establish thedisparate impact element is to provide statistical evidence that revealsdisparities between the protected groups and others.3

' Discriminatorylending cases generally utilized statistical studies of the Home MortgageDisclosure Act (hereinafter "HMDA").39 For the third element, a plain-

30 Jamie Duitz, Note, Battling Discriminatory Lending: Taking A Multidimensional ApproachThrough Litigation, Mediation, and Legislation, 20 J. AFFORDABLE Hous. & CuTy. DEV. L.101, 112 (2010).

31 Id32 Duitz, supra note 30, at 113.33 Id34 Id35 Id36 Id37 Duitz, supra note 30, at 114.38 Id39 The HMDA provides a portion of the ammunition in combating discrimination in the

lending process. The purpose of HMDA:"[I]s to provide the citizens and public officials of the United States with sufficientinformation to enable them to determine whether depository institutions are filling

[Vol. 12:267

MOMENT OF CLARITY

tiff must allege a causal connection between the defendants' purporteddiscriminatory practice or policy and the disparate impact.4 0 Plaintiffswill need to ensure that they have sufficient proof of causation to pre-vail.4 ' Once the plaintiff has established that the practice has a dispro-portionately adverse effect on a protected class, the burden shifts to thedefendant to show that the policy is justified.4 2 The defendant mustprove that the practice serves a legitimate "business necessity," andthat there is no alternative non-discriminatory policy that could servethe same purpose.

By providing victims with the opportunity to challenge discrimina-tory lending practices, the FHA can aid in changing the behavior ofpredatory lenders. Under a predatory lending claim, the court may or-der a consent decree requiring the defendant's employees (lending insti-tution) to sign a nondiscrimination statement, mandating record-keeping to enable judicial monitoring and requiring fair housing lawtraining for employees.4 5 These remedies may seem minor but the de-terrence effect may benefit future minority borrowers. Along with thepossibility of forcing predatory lenders to educate their employees andkeep records of their loan statistics, FHA remedies include the threat ofpunitive damages. Punitive damages under the FHA were previouslycapped at $1,000 but this limitation was removed after a 1988 amend-ment.4 6 The threat of punitive damages may not have as large of animpact on a predatory lender who includes judgments in their operatingcosts. 47 Despite the ability for predatory lenders to fight the impact ofthe FHA, it remains the best option to counter rampant predatory lend-ing practices.

their obligations to serve the housing needs of the communities and neighborhoods inwhich they are located." 12 U.S.C.A. § 2801 (West 1975).

40 Duitz, supra note 30, at 115.41 Id.42 Id43 Bybee, supra note 6, at 131.44 If the defendant is unable to formulate a business necessity reasoning, there is also the

statute of limitations concern that affects a plaintiffs claim. Under the FRA the court mustdeterminate the point upon which the statute begins to toll before it can consider whether ornot the claim is barred. See Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982)(where court held that in order to meet the broad remedial intent of the FHA in eliminatingsystematic discrimination a claim for continuing violations commences at the time of the lastoccurrence of the discriminatory practice).

45 Duitz, supra note 30, at 11.46 Id.47 Id

2013] 275

276 CARD OZO PUB. LAW POLICY & ETHICS J [

C. The Equal Credit Opportunity Act

The Equal Credit Opportunity Act (hereinafter "ECOA") waspassed in 1974 with the purpose of prohibiting creditors from discrimi-nating in consumer credit transactions. It creates a private right ofaction against creditors who may be engaging in discriminatory credittransactions. 9 ECOA was enacted to protect women, minorities, andthe elderly from credit transaction targeting.5 o ECOA is used againstcreditors who violate its antidiscrimination provisions.5 1 In order to es-tablish a prima facie case of discrimination under the ECOA, plaintiffmust show that he or she (1) is a member of a protected class; (2) ap-plied for credit from defendant; (3) qualified for the credit; and (4)despite being qualified, was denied credit while the defendant continuedto extend credit to others who were similarly qualified.5 2 The burdenthen shifts to the defendant to articulate a legitimate nondiscriminatoryreason for the denial. 5 3 The plaintiff bears the final burden of demon-strating by a preponderance of the evidence that the articulated reasonfor the denial was a mere pretext for discrimination.54

An allegation of predatory lending that may survive a motion todismiss would allege that the creditor discriminates by targeting neigh-borhoods primarily composed of minorities and imposes predatorycredit terms on them.5 5 The defendant may try to rebut the prima faciecase of discriminatory lending by showing that its alleged discriminatory

48 15 U.S.C.A. § 1691 (West 2010). It was a created as a federal statutory response to thetargeting of women, minorities, and the elderly by overreaching creditors and sellers. James L.

Buchwalter et al., Cause ofAction Under Equal Credit Opportunity Act [12 U.S. CA §f 1691 et

seq.] in Connection with Predatory Home Mortgage Loans, 48 CAUSES OF AcioN 2d 1, §2

(2011).4 9 Id50 15 U.S.C.A. § 1691a (West 2010). The term "creditor" is defined to include any person

who regularly arranges for the extension of credit or any assignee of the original creditor who

participates in the decision to extend credit. Id.51 Id

52 James L. Buchwalter et al., supra note 49, at §8. The burden then shifts to the defendant

to articulate a legitimate nondiscriminatory reason for the denial. The plaintiff bears the final

burden of demonstrating by a preponderance of the evidence that the reason for the denial was a

pretext for discrimination.53 Id.54 Id55 Id. See also Johnson v. Equity Title & Escrow Co. of Memphis, LLC, 476 F. Supp. 2d

873, 881 (W.D. Tenn. 2007) (where the court held that Plaintiffhas sufficiently alleged Defen-dant's substantial participation in a scheme to discriminate in residential real estate related trans-actions in violation of § 3605 of the FHA).

[Vol. 12:267

MOMENT OF CLARITY

action was in fact a neutral, business-based reason. The defendant mayraise the defense that it is not a lender within the statute. The non-lender defense may apply if the defendant purchased the loan on thesecondary market, and under the ECOA they are not required to givenotice of substantial changes in the loan terms.56 Courts have beenswayed by this argument to the detriment of borrowers seeking legalredress under the ECOA.57

While the landscape for coverage under ECOA appears to providesufficient protection for aggrieved borrowers, it lacks the necessary preci-sion to provide protection and legal redress in the current mortgage-lending environment. ECOA coverage does not extend to appraisers,homeowners, mortgage insurers, and secondary market participants whoare not part of the loan when it is originated. In addition to the Act'slimited coverage, the ECOA does not require lenders to collect and re-port data on their housing finance decision and fails to address otherareas of lending discrimination.59

D. Truth-in-LendingAct

The Federal Truth-in-Lending Act (hereinafter "TILA") was passedin 1968 to require all sellers and lenders of credit to make clear andconspicuous disclosure of all costs in a credit transaction as well as anyadvertisement that includes credit terms.6 0 The constraints of a truth-in-lending credit transaction apply when the following four conditionsare met: (1) the credit is offered or extended to consumers; (2) the offer-ing or extension of credit is done regularly; (3) the credit is subject to afinance charge or is payable by a written agreement in more than four

56 The mechanics of how a party who was not the original lender but has acquired title ofthe loan is explained in Section III of this Note.

57 See In re Simmerman, 463 B.R. 47 (Bankr. S.D. Ohio 2011) (where the court held thatan assignee who does not participate in the decision to extend credit to a borrower, but insteadonly obtains the loan through an assignment after the origination, is not a "creditor" subject toliability under ECOA).

58 Stephen M. Dane, Eliminating the Labyrinth: A Proposal to Simplify Federal MortgageLending Discrimination Laws, 26 U. MICH. J.L. REFORM 527, 548 (1993). See also Markham v.Colonial Mortgage Serv. Co., 605 F.2d 566, 571 (D.C. Cir. 1979) (where the court held that areal estate agent and mortgage broker who did not participate in the loan approval decision werenot liable under the ECOA).

59 Other areas include: lenders directly targeting borrowers, the location of lender branches,availability of loan products for minority borrowers.

60 5A New York Forms Legal & Bus. § 9A:2.

2013] 277

278 CARDOZO PUB. LAW POLICY d& ETHICS J.

installments; and (4) the credit is primarily for personal, family, orhousehold purposes."'

The purpose of TILA reflects a focus on: stabilizing the economyby increasing the informed use of credit, enabling consumers to shop forfavorable credit terms, and protecting against inaccurate and unfair bill-ing to consumers. 2 In order to accomplish this goal, when consumersuse their home as collateral in a credit transaction, they are entitled to atruth-in-lending disclosure statement, finance charges, annual percent-age rates of interest, and a three-day period to rescind credit transac-

63 hmonrttions. The homeowner is also entitled to receive all finance, interest,closing costs, brokerage fees, and other charges associated with the

64transaction.TILA coverage also prohibits certain unfair terms in home im-

provement and home equity loans with high interest rates. 6' This pro-tection is limited to loans with annual percentage rates greater than tenpercentage points over Treasury securities rates of comparable maturity,or with points and fees exceeding eight percent of the loan amount or$400, whichever is greater.66 The use is further limited to victims ofpredatory lending practices.

61 12 C.F.R. § 226.1(a). See 12 C.F.R. % 226.2(a)(11) ("consumer" defined), (17) ("credi-tor" defined).

62 See 15 U.S.C.A § 1601(a) (West 1998). The Truth-in-Lending Act was enacted to "as-sure a meaningful disclosure of credit terms so that consumers will be able to compare morereadily the various credit terms available to them and avoid the uninformed use of credit."Deutsche Bank Nat'l Trust v. West, 881 N.Y.S.2d 362 (Sup. Ct. 2009) (citing Fiorenza v.Fremont Inv. & Loan, 2008 WL 2517139 (S.D.N.Y. 2008)).

63 Lopez, supra note 21, at 83 ("[This] provision is designed to provide a cooling-off periodduring which the consumer may reconsider the transaction or "shop" around to make sure therates are comparable to other lenders in the marketplace . . . . Once the notice of rescission is

given, the lien on the consumer's home becomes void."); Deutsche Bank Nat. Trust v. West, 881N.Y.S.2d 362 (Sup. Ct. 2009) (citing Fiorenza v. Fremont Inv. & Loan, 2008 WL 2517139,(S.D.N.Y. 2008)).

64 Lopez, supra note 21, at 84 ("If the lender violates the consumer rights enumerated underTILA, the consumer may be eligible to enjoin foreclosure, collect actual damages, collect statu-tory damages (between $100 and $1,000) or recover attorney's fees."). See 15 U.S.C.A. § 1640(West 1998).

65 15 U.S.C.A. § 1640 (West 1998).66 15 U.S.C § 1602(B)(ii) ("A 'point' is a fee equal to 1 percent of the loan amount. A 30-

year, $150,000 mortgage might have a rate of 7 percent but come with a charge of 1 point, or$1,500." Each point is an additional cost for the borrower.). Mortgage Points, BANKRATE (Apr.1, 2005), http://www.bankrate.com/finance/mortgages/mortgage-points.aspx.

67 See generally Edward L. Rubin, Legislative Methodology: Some Lessons from the Truth-in-Lending Act, 80 GEO. L.J. 233 (1991). In assessing TILA's benefits for consumers, the authorposits: "Nor were consumers well served by this errant legislation. Its disclosure provisions were

[Vol. 12:267

2013] MOMENT OF CLARITY 279

The difficulty for borrowers who are subject to predatory loans istheir inability to understand the disclosures they are provided. A TILAstandardized disclosure may include the eight terms listed below, butmust include the first four.68 The single page TILA disclosure includes:(1) the annual percentage rate (hereinafter "APR") of the loan;69 (2) thefinance charge;7 o (3) the amount financed;7 1 (4) the total of all pay-ments that will be made on the loan; 7 2 (5) the number and amount ofmonthly loan payments, exclusive of taxes and the amount of any bal-loon payments;73 (6) the amount of any late charge; (7) whether creditinsurance is required and at what price; and (8) whether a borrower"may" or "will not" have to pay a prepayment penalty if she pays theloan off early.74 Understanding all of the terms offered in a TILA dis-closure requires a working knowledge of hundreds of terms that manyborrowers do not understand and are not properly explained either.75

The lack of borrower understanding is of no fault to the borrower butrather points to TILA disclosures failure to illuminate a borrowersunderstanding.

not telling them what they needed to know, whether one identifies their needs as their expresseddesires, the prerequisites for economically rational behavior, or the determinations of theirelected representatives." Id at 238.

68 15 U.S.C. § 1638(a)(5).69 Lauren E. Willis, Decision making and the Limits of Disclosure: The Problem of Predatory

Lending: Price, 65 MD. L. REv. 707, 747 (2006). Annual percentage rate is the annual rate thatis charged for borrowing (or made by investing), expressed as a single percentage number thatrepresents the actual yearly cost of funds over the term of a loan. This includes any fees oradditional costs associated with the transaction. Annual Percentage Rate-APR, INVESTOPEDIA,

http://www.investopedia.com/terms/alapr.asp#ixzz2MXF3QX5S (last visited Dec. 3, 2013).70 Willis, supra note 69, at 747. Finance charge is a fee charged for the use of credit or the

extension of existing credit. Finance Charge, INVESTOPEDIA, http://www.investopedia.com/terms/f/finance charge.asp#izz2MXFKdAAK4charge definition (last visited Dec. 3, 2013)

71 Willis, supra note 69, at 747.72 Id

73 Id Balloon payments occur at the end of a fixed-rate loan term when regular monthlypayments do not fully amortize the loan principal, thus requiring the borrower to pay the re-maining balance in a lump sum. CURBING PREDATORY HOME MORTGAGE LENDING, http://www.huduser.org/publications/pdfltreasrpt.pdf (last visited Jan. 15, 2014).

74 Willis, supra note 69 at 748. A prepayment penalty is a penalty assessed against a bor-rower who repays his/her loan before the end of the loan term. Prepayment can occur as theresult of the mortgage borrower moving, refinancing the loan, or paying on an accelerated basis.For lenders, a prepayment penalty is designed to reduce the risk of prepayment and compensatethe lender for any cost resulting from prepayment. HUDUSER, supra note 73.

75 Willis, supra note 69, at 751.

280 CARDOZO PUB. LAW POLICY c ETHICSJ. [

Even if the terms of the loan are fully understood, targets of preda-tory lenders generally have few borrowing options.7 6 TILA is only thebeginning of disclosure, and as the established framework for protectingborrowers, it actually leaves borrowers open to predatory lendingpractices.

II. SUBPRIME LENDING: THE FOUNDATION FOR A LENDER BASED

APPROACH TO MORTGAGE LENDING

Subprime lending refers to the practice of extending credit to bor-rowers under terms that are less favorable than given to borrowers withexcellent credit histories. In the subprime market, lenders evaluate thecreditworthiness of a borrower by establishing various risk classificationswith associated pricing parameters. There is no standard set of creditrisk assessment criteria. Subprime borrowers typically evaluate potentialborrowers': (1) credit history; (2) debt-to-income ratio;78 and (3) thecombined loan-to-value ratio7 9 for home equity loan and other mort-gage debt on the property.80 Given the lack of standardization for sub-prime lending, borrowers are often exploited for the purpose ofproviding them with a loan. As a result of the rampant exploitation bylenders, the purpose and benefits of subprime lending are oftendiscounted.

Subprime loans have been discounted and have a poor reputationgiven the association with broker greed and profit seeking aspirations.Subprime lending has a purpose beyond being a mechanism for profitmaximization. Subprime loans are loans to borrowers with "weakenedcredit histories that include payment delinquencies and possible moresevere problems such as charge-offs, judgments, and bankruptcies.""There are three different types of products offered to subprime borrow-

76 Lopez, supra note 21, at 84.77 Ngai Pindell, supra note 9, at 172.78 Definition of Debt-To-Income Ratio, INVESTOPEDIA (debt-to-income ratio refers to a

lender's ability to gauge a borrower's ability to make the monthly payments on a loan. It isbased on the percentage of a borrower's monthly pretax income that goes to debt payments).http://www.investopedia.com/terms/d/dri.asp (last visited Dec. 3, 2013)

79 Id. (loan-to-value ratio is the value of the house and the total money borrowed against it).80 Buchwalter, supra note 49.81 Edward Pinto, THREE STUDIES OF SUBPRIME AND ALT-A LOANS IN THE U.S. MORT-

GAGE MARKET, AMERICAN ENTERPRISE INSTITUTE 19 (2009), available at http://www.aei.org/

files/2011/02/09/Pinto%20Government-Housing-Policies-in-the-Lead-up-to-the-Financial-Crisis-3-Memoranda-2.5. 11 -rev.7.25.1 1.pdf.

[Vol. 12:267

MOMENT OF CLARITY

ers with each possessing their own inherent risks.82 Initially, borrowersand lenders used subprime loans for home improvements, debt consoli-dation, and as an alternative source of consumer credit. 3 Subprimeborrowers do not fit the criteria of standard prime loan underwritingguidelines. As a result of the risk that lenders incur, they charge higherinterest rates.8

1 Subprime lending can be good for banking organiza-tions from a social responsibility standpoint, but the public good mustbe managed with institutions' need to generate profits.

There are no industry wide standards for underwriting subprimeborrowers, so each institution may have different value measures to as-sess the ability for a borrower to repay their loan. The connection be-tween credit rating agencies like Fitch, Inc. and Standard and Poor's,and financial institutions has uncovered some of the factors used to as-sess subprime borrowers. 6 While no one factor is determinative, in theFitch underwriting matrix, borrowers are graded from "A+" to "D."Within the matrix, FICO Score, loan-to-value (LTV), prior delinquentloan payments and bankruptcy are taken in to consideration.

There is a general skepticism to the quality of underwriting in thesubprime market. More specifically, financial institutions do not all usethe matrix used by Fitch," and a lot of underwriting depends on an

82 See KENNETH TEMKIN, JENNIFER E. H. JOHNSON & DIANE LEVY, SUBPRIME MARKETS,

THE ROLE OF GSEs, AND RISK-BASED PRICING 4 (2002).1. Home purchase and refinance mortgages targeted to borrowers with poor credithistories. Refinance mortgages account for a larger share of these loans: over 80percent of loans originated to borrowers are for refinance purposes. In a majority ofcases, borrowers refinance mortgages for an amount greater than the unpaid principalon the original mortgage, thereby taking "cash out" of the transaction; 2. Alt A mort-gages, typically originated to borrowers who cannot document all of the underwritinginformation in their application. Alt A loans can either be used to purchase a home orto refinance an existing mortgage. These borrowers have FICO scores similar to thosein the prime market; 3. High loan-to-value (LTV) mortgages, originated to borrowerswith relatively good credit, but with LTV ratios that sometimes exceed 150 percent.These loans are refinance mortgages. Id.

83 Id84 Joseph A. Smith, Jr., The Federal BankingAgencies'Guidance on Subprime Lending: Regula-

tion With a Divided Mind, 6 N.C. BANKING INST. 77 (2002).8 5 Id.86 Fitch, Inc. uses a matrix of willingness to pay and ability to pay. Fitch uses this matrix to

determine default probabilities of loans underwritten with different standards when rating mort-

gage-backed securities with subprime collateral. Standard and Poor's used a similar matrix in its

assessment of subprime mortgage backed securities. TEMKIN ET AL., supra note 82, at 17.87 Id. at 18.88 Id. at 19.

2013] 281

282 CARDOZO PUB. LAW POLICY & ETHICSJ. [

underwriter's discretion. It therefore becomes difficult to assess if dis-criminatory steering is occurring if an institution has guidelines that areloosely followed and loan decisions made are ultimately discretionary.Underwriting discretion makes it difficult to make a case for subprimelending as an acceptable mortgage option. Regardless, underwriting dis-cretion is required because the central question asked and answered dur-ing underwriting is, "can the borrower repay the loan?"

As a result of the higher risks and costs associated with subprimeloans, the total cost for the borrowers is generally higher than the cost ofloans by traditional lenders." The cost is instituted to offset the inher-ent risk that lenders incur by dealing with subprime borrowers ratherthan a prime borrowero who is more likely to repay the loan debt. Thebenefits of subprime lending and the home financing opportunities thatit opens up are minimized when there is lender exploitation. There is afine line between subprime lending and predatory lending; as a resultthe two are often conflated.

III. LENDER BASED APPROACH TO MORTGAGE LENDING

The purpose of the next two sections is to establish the differencebetween a mortgage lender and borrower based approach to mortgagelending. A lender-based approach has not been officially classified butcan be viewed as a combination of predatory lending practices thatmarginalize a borrower's ability to comprehend the terms of a loan,price shop, and understand the securitization process. This section pro-ceeds by explaining the motivation behind a lender based approach andthen identifies and explains the tools used to perpetuate the balance ofpower in favor of mortgage lenders.

The changes in home-mortgage markets have shifted the purposeof lending from assessing a borrowers ability to repay their mortgage togetting as many loans in a securitization pool to be sold on the secon-dary market as possible.91 The effect of the shifted lender motivation

89 Buchwalter, supra note 49 (costs that increase a subprime loan include, but are not limitedto, interest, origination fees and closing costs often at the discretion of the lender).

90 Definition of Prime Loan, QFINANCE, http://www.qfinance.com/dictionary/prime-loan(last visited Dec. 22, 2013) (defines a prime loan as a loan to a borrower who has no obviousfinancial difficulties, a good repayment record on debt incurred and is seen as most likely goingto repay their debt).

91 Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and EconomicsofPredatory Lending, 80 TEx. L. REV. 1255, 1271 (2002).

[Vol. 12:267

MOMENT OF CLARITY

has caused borrowers to fall prey to loan agreements with informationasymmetries and induce borrowers to commit to predatory loans.92

Motivating mortgage lender's greed to deceive a borrower's abilityto understand a loan is the Securitization of mortgage loans. Securitiza-tion is the process of converting packages of home loans into securitiesthat are backed by collateral in the form of loans. The first step in thesecuritization process is for a lender to make loans to borrowers." Theloans are then bundled and transferred to an entity, often known as a"special-purpose vehicle" (hereinafter "SPY') that passively holds theloans." The SPV adds credit enhancements96 that have the effect ofreducing the risks associated with defaults.97 The SPV then creates andissues the mortgage-backed securities and sells the securities to inves-tors.9 8 By selling a pool of mortgage backed securities, an institutionreceives a large monetary benefit and no longer holds the liability for themortgages. Securitization allows lenders to have access to a constantflow of money and has altered the business of mortgage lending.99

Banks and other lenders do not suffer from liquidity restraints becausethey have more funds available to lend. Securitization has created op-portunities for nonbank lenders to enter the home-mortgage market.Lenders no longer need to be large financial institutions with significantdeposits and capitalization. Thinly capitalized mortgage bankers andfinance companies can now originate loans for the sole purpose of sell-ing mortgage-backed securities.' 00

92 Id.93 Id. at 1274.94 Id.95 Special purpose vehicles are also referred to as a "bankruptcy-remote entity" whose opera-

tions are limited to the acquisition and financing of specific assets. The SPV is usually a subsidi-ary company with an asset/liability structure and legal status that makes its obligations secureeven if the parent company goes bankrupt. Definition ofSpecial Purpose Vehicles, INVESTOPEDIA,

http://www.investopedia.com/terms/s/spv.asp (Jan. 4, 2014).96 Credit enhancements are a method where a company attempts to improve its debt or

credit worthiness. The lender is provided with reassurance that the borrower will honor theobligation through additional collateral, insurance, or a third party guarantee. Credit enhance-ment reduces credit/default risk of a debt, thereby increasing the overall credit rating and lower-ing interest rates. Definition of Credit Enhancement, INVESTOPEDIA, http://www.investopedia.com/terms/c/creditenhancement.asp#ixzz2MVe7RYtd (Jan. 4, 2014)

97 Engel & McCoy, supra note 91, at 1274.98 Id. at 1274.

99 Id. at 1274.

100 Id at 1274.

2013] 283

284 CARDOZO PUB. LAW POLICY & ETHICSJ. V

A. Predatory Lending

Today's home-mortgage market is replete with information asym-metries that predatory lenders have exploited to the detriment of bor-rowers.10 ' The term predatory lending in mortgage markets hasdominated the popular and legal literature in recent years. 10 2 Definingthe term has proven more challenging. For the purposes of this Note, Iwill use Kathleen C. Engel and Patricia A. McCoy's often citeddefinition:

[P]redatory lending [is] a syndrome of abusive loan terms or practicesthat involve one or more of the following five problems: (1) loansstructured to result in seriously disproportionate net harm to borrow-ers, [e.g., loans that contain unaffordable balloon payments], (2)harmful rent seeking, 1o3 [e.g., prepaid credit life insurance], (3) loansinvolving fraud or deceptive practices, (4) other forms of lack of trans-parency in loans that are not actionable as fraud, and (5) loans thatrequire borrowers to waive meaningful legal redress. 104

The frequency and amount of this lending has increased dramaticallyand, as a result, millions of borrowers are unable to repay mortgageloans.

The structure of a loan is key to establishing the rights that a po-tential borrower has with respect to repaying the loan. These rights areaffected when the loan is structured in favor of the lender rather thanbalanced between the lender and the borrower. There are several tools alender may use to structure a loan in his favor. One of these tools is ahigh-yield spread premium. High-yield spread premiums are, "the dif-ference between the interest rate the lender would accept for the loanand the interest rate that the borrower is actually charged."o Lendersare under no obligation to disclose yield-spread premiums.' Whenlenders do disclose these premiums, borrowers often cannot detect them

101 Id. at 1271.102 Pindell, supra note 9, at 174.103 Rent seeking is a practice of when a company, organization or individual uses its resources

to obtain an economic gain from others without reciprocating any benefits back to society

through wealth creation. Definition of Rent Seeking, INVESTOPEDIA, http://www.investopedia.com/terms/r/rentseeking.asp (Jan. 4, 2014).

104 Engel & McCoy, supra note 91, at 1260.105 Jackson v. Novastar Mortgage, Inc., 645 F. Supp. 2d 636, 641 (W.D. Tenn. 2007).106 Engel & McCoy, supra note 91, at 1264.

[Vol. 12:267

MOMENT OF CLARITY

in the array of loan documents that lenders provide. 1o7 Even when bor-rowers know that they are paying yield-spread premiums, they do notunderstand their purpose, or the fact that their interest rates are actuallyhigher.'o0

Yield-spread premiums also fuel the practice of "Steering." Steer-ing refers to side payments lenders pay mortgage brokers for persuadingborrowers to agree to higher interest rates when the lenders in fact arewilling to extend credit to the borrowers at lower rates. Lenders targetunsophisticated borrowers to get them to agree to higher interestrates.' 09 The practice is objectionable for "setting rates based on theperceived financial sophistication of the borrower rather than the risk ofextending the loan.""o This practice is fostered by the separation be-tween the underlying mortgage lender and the person or entity sellingthe loan to the consumer."'

Another predatory lending tool is negative amortization. Negativeamortization is when a borrower's loans scheduled payments are notenough to cover the interest due, causing the outstanding principal toincrease with time. 11 2 Thus, borrowers who make regular payments ac-tually lose equity in their homes as time goes on.

Along with predatory loan structuring tools, lenders exploit bor-rowers when they want to refinance their loans. 13 Refinance and homeequity lending"' make up the bulk of the growth of subprime loans.Refinancing presents a dangerous predatory lending opportunity be-cause of the terms. These loans contain prepayment penalties or exorbi-tantly high interest rates. The added tragedy of these home equity loansis that they affect homeowners who are struggling to pay their original

107 Id.

108 Id. at 1265.

109 Id. at 1363.

110 Jackson, 645 F. Supp. 2d at 641.

111 Pindell, supra note 9, at 174.112 Engel & McCoy, supra note 91, at 1263.113 Refinancing is when a person revises their payment schedule for repaying debt. Definition

ofRefinance, INVESTOPEDIA, http://www.investopedia.com/terms/r/refinance.asp (Jan. 4, 2014).114 Home equity is the value of ownership built up in a home or property that represents the

current market value of the house less any remaining mortgage payments. This value is built up

over time as the property owner pays off the mortgage and the market value of the property

appreciates. Definition of Home Equity, INVESTOPEDiA, http://www.investopedia.com/terms/h/

homeequity.asp#ixzz2MXHItULt (Jan. 4, 2014). When a borrower lends with their home

equity they are doing so with any accumulated value and ownership they have in the property.

They are thus restarting the process of accruing equity in the property once they refinance.

2013] 285

286 CARDOZO PUB. LAW POLICY 6'- ETHICS J. [Vol. 12:267

loans, who are then swindled into newly structured loans on the premiseof making home improvements or receiving extra cash. 15

Lending using your home as collateral spawns another abusivepractice known as "loan flipping," where lenders persuade homeownersto refinance their mortgages repeatedly at extremely short intervals, upto three or four times a year."" Since victims are usually cash-poor, anyprepayment penalties and "refinancing" charges are wrapped into theold principal and then financed.' 17 Predatory lenders manufacture thesesituations by making asset-based loans with payment that the borrowerscannot meet."' When the borrowers default, as is sure to happen, thelenders offer them an opportunity to escape foreclosure by refinancing.Flipping offers a borrower temporary relief in the form of lowermonthly payments by extending the duration of the loans.119 Ulti-mately, borrowers end up owing higher total principal and interest tothe lenders. 12 0 Thus, "loan flipping" results in "equity stripping,"121 as

115 Pindell, supra note 9, at 169, 175. See, e.g., DEPARTMENTS OF THE TREASURY AND

HOUSING AND URBAN DEVELOPMENT, supra note 1, at 20. Example of refinancing affecting a

borrower's financial position:

Ms. H, a widowed 81 year old African-American homeowner who lives in Washing-ton, D.C. testified at the Baltimore forum about her experience. In 1999, she wasinduced by a mortgage broker to refinance an existing $118,000 mortgage loan into anew loan for $129,000. Ms. H testified that the broker persuaded her to take the newloan by claiming it would retire existing unsecured debt, lower her monthly payments,cover her real estate taxes and insurance, and lower her interest rate. None of theseassertions were true. In fact, Ms. H's new loan did not pay off any unsecured debt,raised her monthly payments, did not cover her tax and insurance obligations, and,after a two year period, will significantly increase her interest rate. Moreover, the newloan provided Ms. H with absolutely no other tangible benefit of any kind. Not onlywere no unsecured debts paid off, but she received no cash out from the loan. Themortgage broker, however, made $3,850 as a result of the transaction. The samemortgage broker had originated Ms. H's prior mortgage loan, taken out in 1997.That loan contained a substantial pre-payment penalty if paid off in less than threeyears; thus, Ms. H paid significant sums in the form of a pre-payment penalty, inaddition to her closing costs, on the 1999 refinancing. The mortgage broker's com-bined compensation on the two loans exceeded $12,000. Id.

116 See U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT AND U.S. DEPART-

MENT OF TREASURY, supra note 1, for the loan flipping definition.

117 Engel & McCoy, supra note 91, at 1263.118 Id119 Id

120 Id121 Equity stripping refers to the practice of reducing the overall equity in a property. Defini-

tion of Equity Stripping, INVESTOPEDIA, http://www.investopedia.com/terms/e/equity-stripping.asp (Jan. 4, 2014).

2013] MOMENT OF CLAR[TY 287

owners' home equity declines with each refinancing. Eventually theborrowers leverage all of their equity and default. 12 2

The most blatant forms of predatory lending involve fraud. All ofthe deceptive practices in this category are violations of the existing lawsdiscussed in Section I of this Note. Lending fraud comes in endlessvarieties and is only limited by the ingenuity of the perpetrators. 1 23 Themost notorious deceptions include fraudulent disclosures, failures to dis-close information as required by law, bait-and-switch tactics,12 4 andloans made in collusion with home-repair scams.12 5

Even in mortgages devoid of fraud, lack of transparency may stillbe a problem. In contrast to loans involving fraud, this group of loansinvolves misleading omissions that are currently countenanced bylaw.12 6 Most mortgages require the disclosure of certain loan terms orcosts. However there are loopholes that hinder effective disclosure andcan exploit borrowers.12 7

Under TILA, significant costs are excluded from the finance chargeand APR, meaning that the reported total cost of credit is too low.These exclusions include fees for credit reports, appraisals, inspections

122 Engel & McCoy, supra note 91, at 1263.123 Id. at 1267.124 Bait-and-switch refers to the dishonest marketing tactic in which a marketer advertises a

very attractive price/rate/term that is really a teaser rate meant to attract customers. Once thecustomer comes into the store/office to inquire about the advertised price/rate (the "bait"), theadvertiser will attempt to sell the customer a more expensive product (the "switch"). Definitionof Bait And Switch, INVESTOPEDIA. http://www.investopedia.com/terms/b/bait-switch.asp (lastvisited Jan. 4, 2014); See infra note 126 for an example of bait-and-switch tactic.

125 Engel & McCoy, supra note 91, at 1267. See also DEPARTMENTS OF THE TREASURY AND

HOUSING AND URBAN DEVELOPMENT, supra note 1, at 19 ("Ms. M . .. testified [that] . . . ahome improvement contractor came to her door soliciting home repairs. Ms. M. had a leakingroof . . . the contractor pressured her into contracting for additional home repairs that wereunnecessary as a condition to getting a loan. According to Ms. M., the contractor informed herthat he could get her a loan to complete the home repairs even though she had to pay off someother debts. The home improvement contract totaled $36,200. Ms. M. asserted that the con-tractor began gutting her house approximately a month prior to the loan closing and the 3-dayrescission period ended. As a result, Ms. M. felt that she had no choice but to sign the mortgageloan documents in order to pay for the repairs. About a month after the loan closing, thecontractor stopped coming to her house. Ms. M. felt that the contractor did not complete thework as promised . . .. Ms. M. contacted the lender to find out why the contractor stoppedworking on the repairs, and the company indicated that the contractor had been paid in full.").This example highlights the common predatory lending practices of unscrupulous home im-provement contracts in originating predatory loans through aggressive solicitation of unnecessaryservices and collaboration with unscrupulous lenders.

126 Engel & McCoy, supra note 91, at 1268.127 Id. at 1269.

288 CARDOZO PUB. LAW POLICY &r ETHICS J

by lenders, flood certifications, document preparation, title searches,and title insurance, as well as notary fees, recording fees, and govern-ment tax.128

When compared with the prime mortgage industry, the subprimemortgage market does not benefit borrowers in the same way. In theprime mortgage industry, points added to the mortgage generally leadto a reduction in the interest rate. 12 9 Conventional lending norms statethat prepayment penalty provisions go hand-in-hand with reductions ininterest rates.' 30 However, predatory lenders subvert this conventionaltradeoff by layering points or prepayment penalties on top of high inter-est rates on a take-it-or-leave-it basis.

IV. THE BORROWER-BASED APPROACH TO FAIR LENDING

In Jared Ruiz Bybee'sl 31 article Fair Lending 2.0: A Borrower Based

Solution to Discrimination in Mortgage Lending he proposes a borrower-based approach to solving discriminatory lending practices in the U.Smortgage market.13 2 The framework gives borrowers the tools to under-stand and compare loan offers, reduce the complexity of loan products,and enhance the ability of borrowers to receive loan offers from a varietyof potential lenders.' 3 3 The purpose of Bybee's framework is to curbdiscriminatory lending practices and level the playing field for borrowersso that loan decisions are based on creditworthiness rather than their

128 Id129 Engel & McCoy, supra note 91, at 1269. The purpose of this tradeoff is to afford bor-

rowers the option of defraying part of the cost of borrowing by paying a liquidated sum up-front

in points in exchange for lower interest payments in the future.130 Id131 Jared Ruiz Bybee is a public service assistant at the University of Georgia Fanning Insti-

tute. Previously, he served as an Academic Careers Research Fellow at New York University

School of Law, where he focused on current issues in real estate finance and U.S. housing policy.

He also spent nearly four years in private practice as an associate in Schulte Roth & Zabel's real

estate practice group and then in Paul, Weiss, Rifkind, Wharton & Garrison's real estate practice

group. During that time, he drafted and reviewed purchase and sale agreements, merger agree-

ments, credit agreements, joint venture agreements, commercial leases and long-term ground

leases. He also drafted mortgages and legal opinions, coordinated local counsel in a variety of

multistate transactions, and assisted various nonprofit pro bono clients in the acquisition of

development sites. He earned his bachelor's degree and master's degree from Brigham Young

University and his law degree from New York University. Faculty Profiles: fared Ruiz Bybee,

UNIV. GA. LAw, http://www.law.uga.edu/profile/jared-ruiz-bybee (Jan. 4, 2014).132 Bybee, supra note 6.133 Id.

[Vol. 12:267

MOMENT OF CLARITY

skin color.134 The borrower-based model is built on three principles: (1)increase access to a variety of lenders; (2) reduce the complexity of loanproducts; and (3) provide borrowers with the necessary tools to analyze,understand, and compare loan offers. 3 5

A. Bybee's Borrower-Based Model

Bybee's borrower-based approach serves as a model to counter thelender-based approach to mortgage lending outlined above. Below areBybee's borrower-based fair lending tools. The first section outlines theprinciples driving the borrower-based approach and the second sectionproposes the tools used to carry out this model of mortgage lending.

i. Clear and Comparable Loan Offers

As a first principle, a borrower-based approach must create toolsthat permit borrowers to effectively understand and compare one loanoffer to another.' 3 6 Loan products have become increasingly complexand create an impediment to a borrower's ability to understand loanproducts. 1 37 The current lending regime presumes that despite the com-plexity of loan products disclosure will protect the borrower.13

1

Disclosure of loan terms is supposed to allow the borrower to ana-lyze, understand and compare it to other loan offers.' 3 9 From there, theborrower is supposed to be able to make a decision about which loanbest serves his needs.'"o However, disclosure of relevant provisions (loanterm, interest rate, prepayment penalties, etc.) of a loan does not guar-

'34 Id135 Bybee, supra note 6, at 143.136 Id137 Id. at 143-44.138 Id. at 144 (2011) ("[L]aws designed to protect borrowers assume that, no matter how fine

the print or complicated the loan product, disclosure will allow the borrower to understand andrationally analyze the loan offer, compare it to other loan offers she received, and make a wellreason decision as to which loan best serves her needs.").

139 Id140 Id

[F]ederal law governing home lending requires that borrowers be given a stack ofdisclosures, but, with the removal of usury constraints, has few substantive prohibi-tions. Implicit in the disclosure form of regulation is the premise that either: (1) allborrowers are financially knowledgeable wealth maximizers, competent and motivatedto comparison shop for credit, or (2) an informed minority of borrowers fits thisdescription and loan sellers cannot distinguish between the shoppers and the unin-formed and so must offer competitive price term to all. Willis, supra note 70, at 743.

2013] 289

290 CARDOZO PUB. LAW POLICY 6- ETHICSJ. [

antee that borrowers will accept loans that serve their best interests.141

The borrower-based fair lending tools proposed reflect the limits of aborrower's technical, rational, and emotional ability to find and identifythe loan that is in their best interest." 2 These tools are intended toprovide the borrower with information that fits within her identifieddecision-making strengths and choose a loan that is right for her. 43

ii. Reduce Complexity

Current loan products are complex and difficult for the averageconsumer to understand.4 4 The complexity of the loans makes it in-creasingly difficult for borrowers to understand the financial cost oftheir loans when they agree to loan terms.14 ' A borrower-based ap-proach is supposed to reduce the complexity of loan agreements by lim-iting the terms of the agreements to a few simple terms. 14 6 Limiting theterms will not compromise the agreement's effectiveness in conveying aclear picture of the financial consequences of a loan agreement. 14 7 Thereduction of loan complexity is an important principle to facilitate effec-tive price shopping, loan comparison, and borrower knowledge of hisloan transactions.148

iii. Maximize Access to a Variety of Lenders

Along with the clear and comparable loan offers and reduced com-plexity, it is important that borrowers have access to a variety of lend-

141 See Bybee, supra note 6 at 749 ("The current legal regime fails to effectively facilitate price

shopping because it is based on an unrealistic, rational actor model of borrower behavior."); and

Willis, supra note 70 at 707 ("[P]rice shopping for home loans would be extremely difficult inthe subprime marketplace because the timing of the disclosure is late, the information given is

incomplete, and borrowers lack the financial literacy needed to use the information provided.").142 Potential borrowers frequently experience two common subconscious decision making

failures: a desire to minimize the "cognitive effort and resources spent on decision making" as

well as the negative feelings that may result from decision-making. Such tendencies can "short

circuit" a person's rational analysis of a loan offer and lead them to make a decision based only

on few relevant factors. For example, a borrower might focus solely on the introductory

monthly payment amount, or rely too heavily on a friendly salesperson's assessment of what is in

the borrower's best interest. Bybee, supra note 6, at 144.

143 Id.

144 Id.'45 Id.146 Id

147 Id. at 145.148 Id

[Vol. 12:267

MOMENT OF CLARITY

ers." 9 Borrowers should have a greater interaction with the lendingmarket and the ability to compare mortgage offers. In areas where bor-rowers have limited access to lending institutions, there must be a pushto bridge the access gap to a variety of lenders. The temptation forindependent brokers to exploit a borrower's lack of choice, in an area oflimited access to financial institutions, is high because they know that amotivated homeowner will accept any lending option presented.' It isat this point when there is a lack of choice, thus minority borrowers maybe steered towards subprime and other costly loan products. 5 1

B. Borrower-Based Fair Lending Tools

The three principles outlined above are integral in establishing thetools that guide the borrow based approach to mortgage lending. Thissection outlines the tools proposed to effectuate the borrower-based ap-proach. Two of the tools used are by Fair Lending scholar Lauren Willisand the third is uniquely Bybee's. 152 These three tools encompass theborrower-based approach to mortgage lending that Bybee suggests willlevel the playing field in favor of borrowers.

i. The Loan Price Tag

The first tool proposed is a "Loan Price Tag." Its function is tosimplify loan products to four simple terms that borrowers can use toeffectively choose a loan. 15 3 The terms used for the loan price tag wouldbe: (1) total loan proceeds;154 (2) total up-front fees, points, and costs(whether financed or not financed);' 5 5 (3) maximum monthly payment;and (4) loan length in years.156

For the Loan Price Tag to be used for price shopping, all of thefigures would have to be in a format that borrowers understand.'5 7 Thefirst three figures would be expressed as a dollar amount rather than a

149 Id150 Id151 Id

152 Id. at 146.153 Willis, supra note 70, at 821.154 Loan proceeds refer to the net amount a lender gives to a borrower. THE LAW DicTION-

ARY, http://www.thelawdictionary.org/loan-proceeds (Jan. 4, 2014).155 Willis, supra note 70, at 821. Taxes and insurance should be included next to the maxi-

mum monthly payment figure. Borrowers need to account for taxes and insurance so as tounderstand their total monthly payments associated with their home loan. Id

156 Id.157 Id

2013] 291

292 CARDOZO PUB. LAW POLICY &'r ETHICSJ. [

percentage because consumers have an easier time grasping dollars ratherthan percentages.' 5 8 The total proceeds and total costs would be di-rectly comparable to another loan's price shopping disclosures.' 9 Com-paring figures on two Loan Price Tags would highlight the relevance ofnumbers and give users the opportunity to understand loan terms ascompared to a lender.

The Loan Price Tag would be a locked price offer for borrowers touse in a short window of time as they shop their loan.1 60 The up-frontcost figure would include every kind of fee and cost such that the totalup-front fee figure added to the total loan proceeds figure would equalthe total loan amount.' 6 ' The aim is to prevent lenders from exploitingmotivated reasoning and decision process framing by giving borrowersthe ability to look at a broad range of possible prices through disclo-sure.12 Disclosure terms would include the maximum monthly pay-ment so that hidden interest rates and monthly payment increases donot fool the borrower into thinking an initial monthly payment willremain constant.163

The Loan Price Tag is fixed on four features for the benefit of theconsumer. Each additional price disclosure improves a consumer's abil-ity to understand the loan transaction. 6 4 The four terms given are goodenough for borrowers to understand and utilize as they price shop for aloan that fits their financial position.'6 5 By structuring loans in simplerand fairly standardized ways, loans could be meaningfully comparedthrough examination of these few features.

The emphasis on standardizing the Loan Price Tag terms requiresthat the four terms fully reflect the price of the loan.' 6 6 Therefore, bal-loon payments, negative amortization and prepayment penalties wouldbe prohibited.'6 7 The ban on these predatory lending tools would lowerthe cost of refinancing to allow borrowers whose creditworthiness has

158 Id

'59 Id.160 Id161 Id at 822.162 Id163 Id.164 Id. at 821.165 Id

166 Id. at 823.167 Id.

[Vol. 12:267

MOMENT OF CLARITY

improved to take advantage of that improvement, rather than stickingthem with an interest rate based on their former creditworthiness.

The simplified disclosure would have to be given no later than oneweek after application and between twenty-five and thirty days beforeclosing, so that the borrower has enough time to effectively price shop

before committing to the loan.16 The borrower should be given thetool in a period in which to shop for a better loan price and to decidewhether to take any loan at all.16 9

ii. The Reverse Auction

Bybee also uses Willis' proposed, "reverse auction competition" inhis borrower-based approach to mortgage lending.o7 0 Reverse auctioncompetition is a system in which there would be a neutral "biddingagent" linking borrowers and lenders.' 7 A lender would give a bor-rower an offer and simultaneously transmit the simplified disclosure,along with all pertinent borrower and loan information, to the biddingagent.17 2 The transmitted information would consist of the lenders cri-

teria for accepting or rejecting a loan.17 3 The terms and supportingmaterials would then be posted on a website that could only be accessedby lenders.'77 Lenders would then submit competing bids to the bid-ding agent, who would transmit them to the borrower.17 5 The processwould be facilitated by either the Department of Housing and UrbanDevelopment or the Federal Trade Commission to reassure borrowers ofthe legitimacy of the process.176

The Reverse Auction process is intended to help borrowers in fiveways. First, borrowers would not be required to undergo multiple itera-tions of the financial strip search.177 They would put together theirmaterials once and then review the lenders' offers on the website portal.Second, borrowers would receive competing offers without expending

168 Id. at 824.169 Id170 Bybee, supra note 6 at 146.171 Id.172 Willis, supra note 70, at 825.173 Id174 Id.175 Id. at 825.176 Id177 Id. See also id. at 775 ("[B]orrowers experience the home loan application process - hav-

ing their credit history pored over, their past financial decisions scrutinized, and the bona fides

of their current desire for credit second-guessed-to be a "financial strip search.").

2932013]

294 CARDOZO PUB. LAW POLICY & ETHICS J2

any time, effort, or expense. It is often the case that borrowers mustspend an exorbitant amount of time searching for a loan that is right forthem. The reverse auction gives them the ability to find a loan on theirown terms. Third, borrowers could shop without challenging thetrusted "friendship" with the first loan broker or officer in the same wayborrowers challenge that relationship by affirmatively shopping on theirown. 178 Fourth, by receiving competing offers, borrowers are aware thatthey do have options and do not have to pick the first loan that isoffered to them.17 9 Finally, by eliminating face-to-face interaction be-tween borrowers and lenders, lenders won't be able to skew a borrower'sloan terms based on an in-person assessment.so

The Loan Price Tag disclosure system would facilitate price compe-tition and the ability for borrowers to shop for better loan terms. Themoney, time and effort required to submit multiple applications to vari-ous lenders in the current market would no longer be a barrier to receiv-ing competing loan offers."'" Although fear of the "financial stripsearch" and of a loan denial due to poor credit history or discriminationwould probably continue to lead borrowers to apply to the lender whoadvertises a guaranteed "yes," that lender would no longer have a mo-nopoly position over the applicant.'8 2 Real price competition woulddisplace the current problems of rent seeking by lenders, price ineffi-ciency, and regressive income redistribution from lower-income borrow-ers to lenders.183 This proposal provides the benefits of locking inprices. The numbers used on the Loan Price Tag would be available to aborrower for thirty days as they shopped their loan. 84

iii. Loan Comparison Report

The last tool for the borrower-based approach is a loan comparisonreport that would be administered by the Department of Housing andUrban Development. It would provide borrowers with a clear and un-derstandable comparison of loans. 1 5 The report would be a graph thatcompares the cost of the loan offered to a particular borrower to loans

178 Id. at 825.179 Id180 Id181 Id182 Id at 827.183 Id184 Id. at 825.185 Bybee, supra note 6, at 147.

[Vol. 12:267

MOMENT OF CLARITY

closed by other borrowers who have similar credit profiles.1 86 It wouldbe an online database compiled of data provided by mortgage origina-tors.18 7 The timeline for disclosing the information on the loan com-parison report would have to occur in advance of the loan closing dateso that the borrower has the opportunity to shop for different loans orback out of the transaction.'

The data would be compiled anonymously and include the overallcredit profile and the basic terms of the loan product that a previousborrower received." 9 The difficulty with compiling data for the loancomparison report is choosing which data should be used as a bench-mark for comparison. Bybee first proposes using the annual percentageratingo90 (hereinafter "APR") as the benchmark but then recognizes thedifficulty that borrowers would have analyzing their percentage.1 9' Ulti-mately Bybee suggests that the loan comparison reporting methodshould be structured similar to EnergyGuide stickers that are on appli-ances. 19 2 The loan comparison report would express a borrower's APRas "much lower than average," "lower than average," "about average,"

"higher than average" or "much higher than average."193 This is keep-ing in line with simplifying disclosure in terms of what consumersunderstand.

The borrower-based approach to mortgage lending is a tripartiteapproach to eradicate bad practices and hold mortgage lenders account-able for past harms. By shifting the nature of competition in the mort-gage lending industry, Bybee has placed all of the decision makingpower in the borrowers' hands. A mortgage transaction is often themost significant event in a borrower's life. It should be a give and take

186 Id.187 Id at 148.188 Id189 Id at 147 ("Upon the approval of a new application for a loan, the lender would be

required to enter the new borrower information into the database. The database would thenpopulate a report and graphic indicating how the cost of the loan product offered to the bor-rower compares to the loan products received by other borrowers. . .the lender should be re-quired to disclose this loan comparison report to the borrower.").

190 12 C.F.R. § 226.22(a)(1) (2011) ("[A]nnual percentage rate is a measure of the cost ofcredit, expressed as a yearly rate, that relates the amount and timing of value received by theconsumer to the amount and timing of payments made.").

191 Bybee, supra note 6, at 148. See also Willis, supra note 69, at 822 ("[O]nly 10% of recenthome loan borrowers understand APR well enough to know that it is higher than the noteinterest rate.").

192 Bybee, supra note 6, at 148.193 Id

2013] 295

296 CARDOZO PUB. LAW POLICY &'r ETHICS J

process between the borrower and the lender. Information should be

given by the lender and processed by the borrower, with any discrepan-cies in understanding clarified.

V. DODD-FRANK WALL STREET REFORM AND CONSUMERPROTECTION ACT: OVERVIEW AND KEY PROVISIONS

RELATED TO PREDATORY MORTGAGE LENDING

In response to the financial crisis, Representative Barney Frank,Chairman of the House Financial Services Committee, presented a pro-posed legislation to the House of Representatives on December 2, 2009.During the same day, Senator Christopher Dodd, Chairman of the Sen-ate Banking Committee, did the same in the Senate.19' These bills be-came the Dodd-Frank Wall Street Reform and Consumer ProtectionAct, which was signed into law by President Obama on July 21, 2010,impacting nearly the entire American financial services industry.

Dodd-Frank contains two sections that largely overhaul the con-sumer lending landscape in the United States and greatly increase thegovernment's level of scrutiny over providers of consumer financial ser-vices. These are: (1) Title X, known as the Consumer Financial Protec-tion Act of 2010,195 which creates the Consumer Financial ProtectionBureau (hereinafter "CFPB"), to provide major structural changes to theregulation and enforcement of financial consumer protections;' 9 6 and(2) Title XIV, known as the Mortgage Reform and Anti-PredatoryLending Act,' 97 which creates new substantive changes for a variety ofconsumer financial products, including mortgage loans.'98 The discus-sion below focuses on Title XIV and the mortgage reform effects.

A. Title XIV - Mortgage Reform and Anti-Predatory Lending Act

Title XIV of the Dodd-Frank Act, also known as the MortgageReform and Anti-Predatory Lending Act, amends the Truth in LendingAct.' 99 Amendments under Title XIV prevent home mortgage lendersfrom receiving compensation for originating a loan based on the specificvariable terms of each loan, other than the principal amount of the

194 Id195 See Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).196 Id. at 5 1001.197 Id. at 5 1001.

198 Id. at § 1400.199 Id.

[Vol. 12:267

MOMENT OF CLARITY

loan. 2 0 0 This provision recalibrates lending to focus on the borrowerand their ability to repay the loan. This recalibration not only benefitsthe borrower but also allows the lender to originate loans by assessing aborrower's ability to repay rather than their ability to generate incomefrom selling the loan.

The predatory lending practices that have been identified in theLender Based approach to mortgage lending have been suppressedthrough Dodd-Frank Regulation. The definition of "Mortgage Origi-nator" has been expanded to include "any person who, for direct orindirect compensation or gain, or in the expectation . . . takes a residen-tial mortgage loan application; assists a consumer in obtaining or apply-ing to obtain a residential mortgage loan; or offers or negotiates terms ofa residential mortgage loan." 2 0 ' By broadening the definition of mort-gage originator, the regulation appears to encompass all members of themortgage lending business, even those who were not actionable underprevious regulations but were instrumental in the mortgage lendingprocess.2 02

The incentives that once plagued the predatory lending sector havealso been targeted to balance lender and borrower understanding of loanagreements before they are entered into. Steering incentives, equitystripping, excessive fees, mischaracterization of consumer credit history,and yield spread premiums are now considered illegal and prohibited byDodd-Frank.203 In particular, section 129B of Title XIV was createdwith the purpose of assuring that consumers are offered and receiveloans on terms that reflect their ability to repay. Implicit in this purposeis the idea that loans that a consumer receives are understandable and donot contain any deceptive or abusive terms.20 4 Section 1404, of 129B,prohibits steering and is a new subsection of TILA.

There have also been other amendments to TILA under Dodd-Frank. Amendments to TIIA have created a class of "qualified mort-gages" which encourage lenders to move to "plain vanilla" mortgages byguaranteeing that this special class of loans meets the strict new regula-tory guidelines.2 05 In order for a loan to be considered a "qualifiedmortgage," the following criteria must be met: (1) regular payments do

200 See id. § 1403.201 Id. § 1401(A).202 Id203 Id. at § 1401(A), § 1403(1); (3)(A)(i); (3)(C); (3)(D).204 See generally id.205 Id

2972013]1

298 CARDOZO PUB. LAW POLICY & ETHICS J.

not result in negative amortization206 or allow payments to be deferred;(2) no balloon payments; 207 (3) qualifying income and financial re-sources are verified and documented; (4) reliable underwriting standardsare used to determine affordability of the loan; (5) compliance withdebt-to-income ration guidelines and other metrics that confirm a bor-rower's ability to repay the loan; and (6) total points and fees 2 0 8 of theloan do not exceed 3% of the principal amount.2 0 9 The strict regime ofensuring a loan is qualified targets the tools used in the Lender Basedapproach of lending. By rebuilding and reinforcing the regulatory struc-ture, Dodd-Frank recalibrates lending to identify necessary terms thatneed to be disclosed, eliminates bad practices, and reassures borrowersthat they can repay the loans that they agree to. The section belowcontains the policy recommendations that I have proposed to shift themortgage lending approach to the center of the current Lender Basedand proposed Borrower based approach.

VI. CENTRIST APPROACH TO MORTGAGE LENDING:

POLICY RECOMMENDATION

For many potential homebuyers, the lack of cash available to accu-mulate the required down payment and closing costs is the major im-pediment to purchasing a home. Other households do not havesufficient available income to make the monthly payments on mortgagesfinanced at market interest rates for standard loan terms. Financingstrategies, fueled by the creativity and resources of the private and public

206 Amortization is a schedule of periodic blended loan payments, showing the amount ofprincipal and the amount of interest in each payment so that the loan will be paid off over acertain time period. Definition ofNegative Amortization, INVESTOPEDiA, http://www.investopedia.com/terms/n/negativeamortization.asp#axzz2LCj6ny3Z. (Negative Amortization is "an in-crease in the principal balance of a loan caused by making payments that fail to cover the interestdue. The remaining amount of interest owed is added to the loan's principal, which causes theborrower to owe more money.").

207 See Dodd-Frank Act § 1432 ("No high-cost mortgage may contain a scheduled paymentthat is more than twice as large as the average of earlier scheduled payments.").

208 Loan points are also known as loan origination fees and loan discounts. Loan points are afee charged to a borrower by lending institutions for the privilege of obtaining a loan. Lendinginstitutions use loan origination fees to generate income via lending activities. Each point isequivalent to one percent of the amount borrowed. Loan origination fees are usually paid upfront in cash when you obtain a loan or mortgage. Loan Points/ Loan Origination Fees/DiscountFees, ADVANTAGE SorwARE LLC, http://www.invest-2win.com/Points.html.

209 Zachary Best, Nina Simon, & Linda Singer, Breaking Down Financial Refrm, 14 J. CoNSUMER & COM. L. 2, 6 (Sept. 2010), available at http://www.jtexconsumerlaw.com/V14N1/V14N1_Financial.pdf.

[Vol. 12:267

MOMENT OF CLARITY

sectors, should address both of these financial barriers tohomeownership.2 1 0

My policy recommendations for mortgage lending utilize aspectsfrom both the Borrower and Lender Based approach. The Lender Basedapproach is wrought with fraudulent practices in order to increase thevolume of loans originated so lenders can securitize and sell them. TheBorrower Based approach reverses the role of competition and forces thelender to actively compete for a borrowers business. The approach hasits benefits but requires a consumer to acquire a specialized knowledgeof mortgage lending that may be difficult for the majority of Americansto understand. I will reconfigure the Reverse Auction process proposedby Bybee while incorporating aspects of the Loan Price Tag that simplifydisclosure to a few terms. In this section, I will emphasize consumerdisclosure education or "Disclosure Plus." Disclosure Plus requires thatborrowers understand the implications of the terms in their loan agree-ment. This understanding will be acquired by the loan officer that aborrower interacts with or a Department of Housing and Urban Devel-opment created community center that consumers can use as a readilyavailable source while purchasing a home.

Disclosure Plus is a term that goes one step further than the disclo-sure emphasized in current lending law and Dodd-Frank Reform. It ismy proposed theory to address the need to both disclose and educate apotential borrower as to the terms they agree to. Borrowers should re-ceive a standard sheet of loan terms from their loan officer or mortgageoriginator. Similar to the loan price tag, this sheet should include theterms that the bank uses to evaluate the likelihood of a potential loancandidate receiving a loan.2 1 ' These terms would be standardized anddefined with examples relevant to a borrower's financial position. Theterms would be part of the loan process but would require certificationby the borrower that they understand the terms and consequences re-

210 Peter Coy, Bill Clinton's drive to increase homeownership went way too far, BLOOMBERG

BUSINESSWEEK, (Feb. 27, 2008), http://www.businessweek.com/the-thread/hotpropertylarchives/2008/02/clintons drive.html. Implicit in both the borrower and lender based approach tolending is the notion that every American should own a home. Deregulation in the housingmarket facilitated creative lending practices that allowed consumers to purchase a home. Id.The purpose of this section of the power is to use this underlying notion to recommend prac-tices that will allow American consumers to purchase homes only if they are qualified and if theyare, in a manner that is not deceptive or burdensome.

211 This sheet would include, Debt-to-Income, Loan-to-value, FICO score, amortizationschedule, maximum monthly payment, interest rate, and APR.

2013] 299

300 CARDOZO PUB. LAW POLICY 6- ETHICS J

lated to the mortgage they wish to procure. There may be push backfrom lenders because there is no industry standard for underwritingloans. However, the terms that lenders use to evaluate a borrower's abil-ity to pay tend to reoccur and it is the terms, and not the evaluation ofthem, that is necessary to inform a borrower of what he is being evalu-ated on.

Disclosure Plus would require that lenders educate borrowers as tothe myriad of terms and consequences that accompany the agreement.It would slow down the process of financing a home mortgage so thatborrowers do not make a decision they cannot afford and lenders do nottake on unnecessary risk. The incentive for lenders to facilitate the edu-cation of borrowers and certification of their understanding would betied to "Market Disclosure". Market disclosure would be a web portalof anonymous mortgage lender terms of similarly situated borrowers,similar to the Loan Comparison Report in the Borrower-Based ap-proach. Mortgage lenders would be forced to participate in the webportal in order for them to qualify as a mortgage originator. Tyingmortgage lending participation with disclosure education forces thelender to maintain a standard inherent in their lending practices. If aborrower does not feel comfortable with their level of understandingthen they cannot receive a loan.

The success of these recommendations is contingent on a borrowerembracing the significance of the transaction they are entering in to.For many, financing a home is the most important transaction they willundertake. It is important that the steps to financing the dream ofhomeownership are calculated and understood. This is why the rela-tionship with a loan officer is instrumental in facilitating the process. Itis not often the case that a borrower, when shopping for favorable finan-cial terms, finds a lender immediately. The disconnect between findinga loan officer you can trust and developing an understanding of theterms and consequences of a loan agreement can be bridged by estab-lishing HUD regulated education centers. These education centers willserve two purposes: (1) educate consumers when they are in the processor are interested in financing a home purchase; and (2) centralize bor-rower loan documents so that relationships with community lenders canbe facilitated much faster. Rather than processing a borrower's informa-tion through a centralized online process recommended in the BorrowerBased approach, the HUD centers would be a physical loan-processingcenter with internet capabilities as well. Lenders in the area would re-

[Vol. 12:267

MOMENT OF CLARITY

ceive the information and quote borrowers based on their credit profilesand the amount of money they want to borrow.

This center would serve a unique purpose in educating and central-izing borrower information. Borrowers would have to develop a rela-tionship with a loan officer and they will have the numbers and basiclevel of understanding about their mortgage financing transaction. Edu-cating the average borrower is a step overlooked by Dodd-Frank and theapproaches previously set forth in this Note. However, disclosure ofterms can only carry a borrower so far and lender accountability will beimportant to keeping the process honest.

CONCLUSION

Ultimately the recommendations proposed in this Note rest largelyon the implementation of Dodd-Frank. A strong regulatory foundationwill help curb the disadvantageous lending practices that were rampantprior to the economic downturn. With a sufficient foundation in place,borrowers and lenders will be able to reassess their practices so that riskis evenly distributed and understood. A more informed and tailoredmortgage lending process will increase the timeline in which loans areprocessed. However, the security of lenders knowing that homeownerscan repay their mortgages and borrowers feeling secure in the terms andloans they agree to, outweighs concerns of an extended transaction time-line. The mortgage lending industry will certainly need time to adaptto the changing regulatory landscape but the regime that emerges shouldbe stronger.

2013] 301