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February 21st, 2007

If it sounds too good to be true…

It could be predatory lending

Whether it is through the use of print media, bill boards, radio spots, television adds or the internet, we are constantly bombarded by lenders too numerous to count who promise us a better financial future if we merely take out home equity loan or mortgage with them. Unfortunately, some of these lenders prey on cash strapped borrowers promising them financial freedom by giving them more flexible payment options (in effect, giving the homeowner and not the bank control over the how much they need to pay), while in effect selling them a financial product that can erode their equity and in the end cost them their home. These lenders participate in what has been labeled “Predatory Lending.”

Predatory lending is not something that can be easily defined, primarily because whether or not a specific practice rises to the level of predatory lending is different from individual to individual and property to property. “[B]ut may experts agree that it is the result of “misleading, tricking and sometimes coercing someone into taking out a home loan (typically a home equity loan or mortgage refinancing) at excessive costs and without regard to the homeowner’s ability to repay.”

However, predatory lending can also take on a very insidious form, such as where a lender persuades a homeowner to refinance a loan by emphasizing a particular feature of the loan (i.e. an interest only option) that the homeowner finds favorable for his current financial situation, while failing to point out the other provisions of the note (i.e. limits on the interest only payments, negative amortization, pre-payment penalties, etc.) that had the borrower been fully informed of, he would have most likely declined the loan.

The devil is in the details.

A family that finds itself financially distressed; that is, a family that has acquired more consumer debt then what they can comfortably meet with their current income, has already demonstrated the tendency for making poor financial decisions. And it is precisely this type of borrower that the predatory lender targets.

Mortgage brokers know that when someone has their back up against a wall is presented with an offer to significantly reduce their monthly payments, they will be blinded by the prospect of having additional money at their disposal at the end of each month. (Imagine having extra money added to your budget each and every month and all you have to do is agreed to refinance your current mortgage!) As such, these borrowers either won’t spend the time to review the details of their loan, or they simply adopt an attitude that the only thing that matters is that they get financial relief today; thus the details of their loan simply don’t matter.

Predatory lenders rely on the fact that the borrower is looking for a quick fix to their financial woes and won’t ask a lot of questions about the product being sold to them. (Don’t kid yourself, a mortgage broker gets paid a commission when he gets you to commit to a mortgage and some of the products that they sell carry a much higher commission then others.)

Avoiding Predatory Lending

There are several ways to protect yourself from Predatory Lenders, which include:

Fully understand what you are signing.

The surest way to protect yourself from predatory lenders is to know and fully understand the terms and conditions of the loan documents that you are being asked to sign, before you sign them. Don’t limit your inquiry to just what your monthly payments will be, consider the total cost of the loan, then check with other lender’s.

Don’t rely solely on the representations of the mortgage broker; remember this individual stands to make thousands of dollars in commissions if you take out a loan with him. Rather, considering hiring a real estate attorney to review the loan documents and explain their financial impact.

Talk to your existing lender.

Be careful of lenders who solicit you to refinance your home mortgage, or with those that you are unfamiliar of. If you believe that it is in your best interests to refinance your existing mortgage, talk with your current lender to see what programs that it may have available for you. Your lender may even look at absorbing some of the cost associated with the refinancing to keep you as its customer.

Examine your other options.

Remember when obtaining a home equity loan you are pledging your home as collateral and if you can’t make the mortgage payments, you stand to loose the property in foreclosure. If you are having problems making your current mortgage payments, what makes you think that entering into a new home mortgage or borrowing more money is your answer? Perhaps you need to re-examine your financial wellbeing and consider selling your home and eliminating your existing consumer debts before taking on new obligations.

Take your time in making a decision.

Don’t succumb to pressure tactics used by mortgage brokers to get you to make a quick decision. The loan you take out against your home can have consequences for you and your family for the next thirty years. Take your time, understand the terms of the loan instrument, seek advise from others, don’t be panicked into making such an important decision.

Don’t be afraid to change your mind.

Under the Truth in Lending Act, all borrowers who refinance their home mortgages have a period of three (3) business days to rescind the loan for any reason what so ever. Thus, you have the ability to re-think what you have signed and in effect do a “do over.”

This rescission period has it’s drawbacks. Keep in mind that there days is not a lot of time, and since the borrower will not received their first payment statement until thirty (30) days or more after the mortgage documents are executed. Thus, they won’t necessarily see the effects of their actions until well after the rescission period has expired. Unfortunately, by the time the borrower sees how the loan actually impacts them financially, it is too late to rescind the mortgage.

What’s at risk.

Keep in mind that when you take out a home equity loan you are pledging the ownership of your home to ensure your compliance with the note terms. Simply put, if you fail to maintain the payments as agreed you stand to loose your home.

Unfortunately, many individuals who have been the victims of predatory lending practices end up loosing their homes, destroying their credit and ruining their lives. So when it comes to refinancing your home don’t rush into the decision. It is important that you take your time, ask questions, insist on answers in writing and if you are not absolutely 100% certain about the all the terms and conditions of your loan, hire an attorney to help you.

The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.

This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.

Philip J. Vacco, Attorney at Law ©
counsel1@ameritech.net
(815) 254-3460

FDIC Consumer News – Summer 2002, FDIC Consumer News is published by the Federal Deposit Insurance Corporation, www.fdic.gov/consumers/consumer/news/cnsum02 .

January 19th, 2007

Senior Advice part III

Putting your children’s names on your assets, can cost you more than you think.

Part III of a three part series.

In the prior issues of Senior Advice, we discussed many of the potential pit-falls that face widows and widowers who seek to avoid the probate process by adding their children’s names as joint owners of their assets. These problems included: the creation of gift and capital gains tax consequences for your loved ones, exposing your assets to your children’s liabilities and the potential for losing control of your assets all together.

Although the practice of placing your children’s names as joint owners of your assets, can work well for small estates. With larger estates, the practice is neither practical nor recommended.

However, there is a simple method by which you can avoid the probate process, side-step potential gift tax consequences, provide your heirs with a “step-up” basis for your assets (i.e. eliminate much of the capital gain consequences), insure that your property is passed to your children quickly and easily, and not lose control of your assets during your lifetime!

The use of Living Trusts

A Living or “Inter vivos” Trust is a document that once properly drafted and funded allows you to exercise total control over your assets during your lifetime, provides for the management and allocation of your assets for your benefit during any period of legal disability that you may suffer, and provides a means of transferring those assets to your named beneficiaries following your death, at such times and in such amounts as you determine, without the need for probate.

Generally, a Living Trust is a document that outlines how the property you transfer to the Trustee is to be managed and allocated both during your lifetime as well as upon your death. Typically in a revocable trust, you would nominate yourself as the Trustee (thus retaining control of all your assets during your lifetime) to manage and allocate the funds held in trust. A well drafted trust should also provide for a successor trustee who can act in your place in the event that you should ever become legally incompetent. This “successor” trustee can either be another person of your choosing; a child or close family friend for example; or a financial institution that professionally manages trust assets for a fee such as a bank.

Probate Can be Avoided.

Upon your death, your trust continues to function as a separate legal entity until your assets have been completely distributed to those individuals you have directed. Since, the trust continues to function after your death, those assets that were transferred to the trustee are not considered part of your probate estate. As such, it is not necessary to utilize the probate process in order to complete the transfer of these assets to your beneficiaries.

In addition to avoiding probate, trusts are an immensely useful tool for protecting your loved ones once you are gone and seeing that your goals or wishes are carried out.

That is, with a trust you can see that your assets are not distributed to your children until certain pre-conditions are met. Thus, moneys can be withheld from being distributed until the beneficiary obtains a college education or reaches a desired age such as 25 or 30 (without a trust, assets are distributed to beneficiaries who have reached legal age, i.e. 18). In fact the restrictions you may place on how your money is actually distributed are almost unlimited. Trust are private documents so your wishes are not made public, whereas, by law you will must be filed clerk of the court and made a part of the public records.

Down Side

Like everything else there are some down sides to a living trust that must also be considered.

First, there are the up front costs. When your assets are probated, the expenses of administrating the estate are paid from the estate itself. Thus you don’t see or feel their effect. However, when you create a trust you must pay for the services up front; depending on the type and complexity of the trust instrument these fees can be $1,500.00 or more.

Even once created, a trust is no good unless you transfer you assets into it. Too often I see a client who paid good money to have a trust drafted for their benefit but never had any assets transferred into it. Without assets the trust is worthless.

Finally, trusts can be written either too broadly or too narrowly, creating unanticipated consequences and or hardships for your beneficiaries.

All in all, the use of a Living Trust is a powerful, easy and convent estate planning tool which should be considered by anyone with larger estates, or where there is a need to protect love ones with special needs.

The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.

This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.

Philip J. Vacco, Attorney at Law ©

(815) 254-3460

January 12th, 2007

Senior Advice part II

Putting your children’s names on your assets, can cost you more than you think.

Part II of a three part series.

In the last issue of Senior Advice, we noted that while owing property jointly can automate the process of transferring assets among individuals, and avoid the expense and time associated with probate, the use of joint ownership, carries with it many unsuspecting consequences, including but not limited to: gift taxes, capital gain taxes, exposure to the liability of others and loss of control. In this issue we will examine how adding your children as joint tenants can place those assets at risk and result in your loss of control.

Exposure to Liability. It is important for you to keep in mind that when you add the name of your child to your assets, you are in fact making a present day gift to that child of one half interest in the asset. This “gift” gives your child an immediate legal interest in that property.

As a result of possessing this interest in your assets, if you child is ever sued and a judgment is rendered against them, the judgment creditor can go after the interest your child has in what you thought was “your” property in order to satisfy the judgment.

Thus, while adding your children to the title of you home will avoid the need to rely on the probate process in order to transfer the home to them upon your death; if your son or daughter were to have a judgment levied against them, you can find yourself forced to sell your other assets or refinance you home in order to save it from the claims of their creditors.

Loss of Control. Another problem inherent with joint tenancy is that you can loose control over your assets during your lifetime. As we noted in the first article of this series, most individuals experience with jointly held assets is as the result of their marriage.

Considering the special relationship that exists between a husband and wife, where decisions are made together for a common goal, this form of ownership generally works very well. However, your children’s interest in your property may; and often does, conflict with your own. These conflicting interests can result in your loss of control over your property.

Take the example of adding a child’s name to your stock certificates. Again, assume that the purpose at the time of making the transfer was to provide a convenient means of passing ownership of the stock to your child upon your death. However, if during your lifetime your circumstances change (say you remarry) and you believe that it is appropriate to re-title your stock, you will not be permitted to remove your child’s name from this asset without his or her written authorization.

This need to acquire your child’s signature to dispose of your property becomes even more acute if your child becomes disabled or incompetent. Under these circumstances, you cannot dispose of what were once your own assets without first going to probate court to have your son or daughter declared incompetent. Even then you cannot dispose of “their” portion of the asset without court approval.


In the next addition of Senior Advice we will discuss how you can protect your assets, avoid probate, and still retain complete control of your assets.

The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.

This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.

Philip J. Vacco, Attorney at Law ©

(815) 254-3460

January 5th, 2007

Senior Advice part I

Putting your children’s names on your assets, can cost you more than you think.

Part I of a three part series.

Most married individuals, who have jointly owned property, are familiar with the concept of “joint tenancy.” (Joint tenancy is a form of property ownership that automatically transfers complete ownership of a jointly held asset to the survivor upon death.)

It is this unique feature; that is, the right of survivorship, that provides a simple and efficient means of transferring property upon one’s death without the need or costs associated with probate. Thus, when you and your spouse own a home, stock, mutual fund, bond, certificate of deposit or other asset jointly, then upon your spouse’s death, his/her interest in these assets transfers to you immediately and automatically.

Unfortunately, this method of conveying property to a named survivor works so well, that many widows and widowers make the mistake of relying on joint ownership as the sole means of transferring their assets to their children without realizing the financial and legal pitfalls that are inherent in placing their children’s names as joint owners of their assets.

The unforeseen problems that can arise by adding your children to your assets as joint owners include: gift taxes, capital gains taxes (i.e. loss of stepped up basis), exposure of assets to the child’s liabilities, and loss of control. In this article we will discuss the gift tax consequences associated with adding your children as joint owners of your assets.

Gift Taxes. One of the reasons that joint ownership works so well between spouses is that the Internal Revenue Service exempts all transfers of assets between spouses from the affects of the gift tax. Unfortunately, this exemption does not extend to your children.

Thus, if you seek to avoid the probate of your assets by adding your child as a joint owner, in the eyes of the IRS you have made a gift of one half of the value of the asset to your child. If the value of the interest being transferred exceeds $11,000.00, you will either have to pay a gift tax on the transfer, or use part of your applicable exclusion to avoid the tax.

Capital Gain Taxes. Another problem associated with using joint tenancy to transfer your assets is that the person receiving the gift receives it with your original basis. Thus, upon your death, while the property will transfer to the survivor without probate, they receive one half of the asset with your original basis. Now, when they sell the asset, they will have a larger “profit” to report and pay a capital gains tax on that portion of the sale that was a gift to them. (Assume you purchased a home for $100,000.00. Following the death of your spouse you decide to add your child as a joint owner to insure that title passes to him/her without the need of probate. If the home is sold by your child following your death for $250,000.00, your child will have to pay a capital gains tax on $75,000.00 of the sale as the result of your earlier gift.) If your assets have substantially increased in value, this can result in a large tax burden for your children.

All of these problems, as well as others, can be avoided or minimized with appropriate estate planning.


In the next addition of Senior Advice we will discuss how adding your children’s name to your assets can result in you loosing control.

The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.

This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.

Philip J. Vacco, Attorney at Law ©

(815) 254-3460

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