End to predatory lending will be good for the mortgage industry

Starting what may be a sweeping change throughout the home lending and mortgage industry, banking giant Wells Fargo recently announced major changes in their lending policies for home loans. These policy changes were designed to streamline fees and stem criticism that the company has been targeting customers with bad credit for expensive, subprime loans, a practice known as predatory lending.

The mortgage and home equity loan industry has been booming during the last five years, as investors and consumers have moved their money out of risky tech stocks into real estate. This has been great for the lending industry and the public, as lenders have come up with new and innovative loans that make it possible for just about anyone to qualify for a mortgage. That, in turn, has generated record profits for an industry that has long been regarded as a steady, but unexciting, moneymaker.

With the good comes the bad, however, amid reports and studies that show that some large lenders have been directing some customers who might qualify for favorable, or “prime” loan rates, towards more expensive, or “subprime” loan rates.  Some customers have been steered towards subprime loans because of their race, and others because of their marginal or poor credit reports. 

The new changes at Wells Fargo include a cap on origination fees, a fee often tacked onto loans that really amounts to nothing but profit for the lender. Some borrowers were reporting excessive origination fees that exceeded industry averages. From now on, the fees will cap at $1500. In addition, changes will be made to the prepayment penalties added to loan contracts. With interest rates plunging in recent years, many homeowners have been refinancing their loans, some doing so several times. Many lenders, including Wells Fargo, now include a prepayment penalty that amounts to a fee that the borrower must pay if paying off a loan early through refinancing. The amount of time the penalty is in effect will be reduced to three years and the penalties will range from one to three percent.

A much welcomed addition to their policies will be the ending of mandatory arbitration for disputes. Most arbitration panels consist of people who are predisposed to help the corporation, rather than the customer. Customers may occasionally have an arbitration case, but large companies have them all the time and must repeatedly hire professional arbitrators. Those who do not favor the company over the customer tend not to get rehired, and this, over time, tends to produce a pool of available arbitrators that favor the company in disputes. The ending of mandatory arbitration will help customers in the long haul.

Wells Fargo has taken steps to avoid being labeled as a predatory lender, and perhaps other lenders will follow their lead. The mortgage industry is a profitable one, and there is plenty of room for lenders to make money without having to take advantage of their customers. We hope that this will begin a healthy trend towards more favorable loans for all.