The recent federal effort to curtail nontraditional mortgages is a good start addressing the potential risk of easy mortgage money.

However, more consumers who shop the subprime market, where predatory lenders prey, could also use an extra regulatory assist, according to a consumer credit and finance advocate.

"Federal financial regulators took a step toward making the mortgage market safer for borrowers today," said Michael D. Calhoun, president of the Center for Responsible Lending, "although there is much more to do."

Calhoun was referring to the final rules for "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending," designed to curtail the rise in the risky business of so-called "nontraditional" mortgages.

The rules for interest-only, payment-option, piggy-back, stated-income (no-doc) and other types of adjustable rate mortgages (ARMs), as well as some home equity and other home loans, apply only to federally-insured lenders.

Federal rules will be made available to state regulators and Responsible Lending hopes there will be much trickle-down impact on subprime loans and other risky loans not specifically covered by the rule, because so many subprime loans are made by lenders that are not federally regulated.

"It does not apply to state-regulated mortgage companies that make loans but don't take deposits. Almost 60 percent of the loans in the sub-prime market, where people of modest means and with weaker credit ratings borrow, are not subject to scrutiny by the federal regulators issuing these guidelines today," according to Responsible Lending.

Subprime lending rules were addressed most recently in the "Interagency Guidance on Subprime Lending, March 1, 1999" and "Expanded Guidance for Subprime Lending Programs, January 31, 2001" according to the final "Interagency Guidance" for nontraditional loans.

Both nontraditional prime loans and subprime loans give different sets of consumers the opportunity to buy a home or purchase a larger home or both, opportunities that otherwise may have been out of reach.

However, the loans can come with complicated terms that add cost or risk or both to the prospect of owning a home.

Responsible Lending is particularly concerned about subprime loans used in a predatory manner to target those who are both unable to repay them and unaware they are biting off more than they can chew because of limited disclosures and outright fraud.

"Regulators should expand their scrutiny to a much broader piece of the mortgage market -- the more conventional subprime adjustable rate mortgages, or ARMs, whose monthly payments can also sharply rise. They are known as 'exploding ARMs' and like the negatively amortizing loans, lenders have pushed them on borrowers by flourishing low, introductory 'teaser' rates that will sharply rise," says Calhoun.

Responsible Lending says consumers must remain vigilant about avoiding predatory lending tactics and the organization offers these red flags to that end.

• Excessive fees. Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to slip in and disguise. On competitive loans, fees below 1 percent of the loan amount are typical. On predatory loans, fees totaling more than 5 percent of the loan amount are common. Get help scrutinizing the HUD-1 Settlement Statement before signing on the dotted line.

• Abusive prepayment penalties. Subprime loans typically come with higher interest rates than prime loans, so borrowers have a strong incentive to refinance as soon as possible. However, up to 80 percent of all subprime mortgages carry a prepayment penalty -- a fee for paying off a loan early -- compared to only 2 percent in the prime market, according to Responsible Lending. An abusive prepayment penalty is one that remains in effect more than three years and/or costs more than six months' interest. Read the small print. Prepayment penalties must be disclosed.

• Loan flipping. Quickly or repeatedly refinancing a loan without any tangible benefits to the borrower is designed to generate fee income for the lender. It's also an equity drain for the homeowner. Before you refinance to a "cheaper" rate, examine all the costs and benefits.

• Unnecessary products. Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan. Buy nothing that can't be clearly explained to you as a benefit.

• Mandatory arbitration. Contractually removing the borrower's right to a court suit prevents the borrower from seeking legal redress should he or she discover the home is threatened by loans with illegal or abusive terms. Shop around for a loan without mandatory arbitration.

• Steering and targeting. It's a common practice to steer borrowers into subprime mortgages, even when they could qualify for a cheaper prime loan. Watch for aggressive sales tactics steering you to an expensive loan. To know what is expensive and what is fair you must learn the going market rates and how well your credit stacks up.

• Kickbacks to brokers, also known as, yield spread premiums. These are fees the lender pays a broker for making the loan more costly to the borrower. Again, know the market and what a loan should cost based on your credit standing.

Published: October 4, 2006

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.