» Senate bills seek to rein in predatory mortgage lenders,
Watson, two colleagues seek to rein in lenders, put a stop to scams.
The small, often handwritten signs are common sights at busy intersections in Austin and El Paso: “House for Sale. No credit needed. $10k down.”
But answering such advertisements is one way unsophisticated buyers come in contact with unscrupulous lenders who specialize in a practice known as “predatory wraparound mortgages,” according to legal aid attorneys and banking regulators.
Three lawmakers — state Sens. Kirk Watson, D-Austin, Judith Zaffirini, D-Laredo, and José Rodríguez, D-El Paso — recently proposed legislation to rein in the practice. Their bills would increase licensing and disclosure requirements for wrap lenders, and also beef up enforcement provisions.
So-called “wrap loans” are legal in Texas. When done legitimately, a home is sold with an existing lien still on it. The buyer uses a wrap lender to take out a second, higher-interest loan that “wraps” around the existing one. The idea is that the wrap lender uses the higher-interest payments from the second loan to pay off both over time.
But under wrap scams, a predatory lender purchases a home with a lien on it from an oftentimes desperate seller but, after reselling the home under a wrap loan, doesn’t use the higher payments to retire the previous debt.
For the new buyer, the result typically is foreclosure and loss of the home because payments on the first lien are never made, or because the first lien contains a “due on sale” clause that allows the original lender to demand immediate payment of the full principal if the house is sold.