The Haircut Devisees
Predatory lending practices are not necessarily exclusive to a high rate charged to the borrower. It can be discovered as lower rate and higher cost or vice versa. The cost of the loan must be tied to a par rate calculated off the corresponding treasury plus margin over the current treasury at time of funding.
In Alt “A” and prime it’s simply whatever the market will bear. A predatory practice can include a competitive rate at abusive price levels measured by points and fees. One trick of trade is to “pack” the borrowers’ funding and disbursements schedule to reduce the net effect of the amount needed t wire in and settle. Lenders have a curtailment or haircut that is required in every funding. It is the difference or shortfall off what their warehouse commercial bank lines will provide at closing. Therefore a lender will post from 200 to 300 basis points per loan closing so for every $100,000 the lender originates and settles it must post $2,000. For a loan in excess of $1.0 million that can total $20,000 in out of pocket funds assuming the loan funds at par. (The note rate)
The special trick of the trade is to charge the borrower the two points arbitrarily and to avoid the haircut. Therefore by charging two points on every borrower loan, the advance is 100.00- 2.00% or funds request at 98% of the note face value. Here the lender avoids its hair cut and when it sells the loan- it makes an extra $2,000 to $20,000 to boot. But it’s the borrower is left paying the points
Avoid the “haircut”.