Mrs. Chen, age 72, owns her home free and clear. Over the past four years, her MLO has encouraged her to refinance three times, each time extracting $15,000 in cash and rolling $4,000–$6,000 in closing costs into the loan. Her current balance is now $78,000. What predatory practice is being described, and what regulation most directly addresses the harm caused?

Question

Accepted Answer

Loan flipping; addressed by HOEPA and its prohibition on refinancing without a net tangible benefit to the borrower This scenario describes loan flipping — the repeated refinancing of a borrower's loan primarily to generate fees for the originator, with minimal or no benefit to the borrower. Each refinance added debt (closing costs rolled in) and extracted equity from Mrs. Chen. HOEPA (Home Ownership and Equity Protection Act), as amended by Dodd-Frank, directly prohibits refinancing a high-cost or covered mortgage without a net tangible benefit to the borrower. While equity stripping (A) is also occurring, the repeated-refinancing pattern specifically defines loan flipping. Steering (C) involves directing borrowers to less-favorable loan products based on compensation — a different violation. Prepayment penalties (D) are a separate concern not central to this scenario.

Drill 2,078 more questions like this, free

More Ethics practice questions

Free practice by category