Predatory lending

Recognize the practice and the loan category

Predatory lending exploits borrowers through abusive terms or practices. A high price alone does not establish illegality. New York's high-cost home loan and subprime home loan categories have distinct definitions and protections. Identify the category before applying a rule.

Repayment and refinancing

For a New York high-cost home loan, consider verified current and expected income, obligations, employment, and financial resources other than equity in the securing dwelling. Home equity is not proof of repayment ability.

Both categories prohibit loan flipping: refinancing without a tangible net benefit considering the old and new terms, new costs, and the borrower's circumstances. A lower payment alone does not establish that benefit. Refinancing a qualifying government or nonprofit special mortgage may remove valuable benefits. When that restriction applies, the lender must receive preclosing documentation from a HUD-approved housing counselor or the original lender confirming counseling about the advantages and disadvantages.

Charges and borrower protections

Both categories prohibit financing specified insurance premiums, debt cancellation or suspension charges, and unrelated products. Premiums or debt cancellation or suspension fees calculated and paid monthly are not considered financed. Ordinary settlement fees are distinguished from these prohibited products.

New York high-cost home loans have additional protections:

• Financed points and fees cannot exceed three percent of principal. This is a financing limit, not blanket permission for all charges below it.
• A lender refinancing its own or an affiliate's high-cost home loan with a new high-cost home loan cannot charge points and fees.
• Prepayment penalties are prohibited and unenforceable.
• Payments must be for goods, facilities, or services actually furnished or performed and reasonably related to their value.
• A lender or mortgage broker cannot encourage default on existing debt in connection with the planned high-cost refinancing.

Counseling and remedies

New York high-cost lending requires counseling disclosures and a counselor list at application. A separate caution notice is required within three days after determining the loan is high-cost, but at least ten days before closing. An application does not obligate the borrower to complete the loan.

New York subprime-law violations can support actual damages, equitable relief, and a foreclosure defense. A salesperson recognizing warning signs should refer the borrower to independent counseling and appropriate legal advice.