Soon, the piper may have to pay the piper: class actions against sub-prime lenders could be just around the corner.

Fair-lending laws mandate that loans only be made when there is a high likelihood of repayment, one of the reasons it can be so hard to get a loan.

A slew of lenders rode the housing wave by creatively granting risky loans to under-qualified candidates.

One of the driving force in the numbers on yesterday’s big sexy graph, “Graph: States Hit Hardest By Foreclosure Spree” came from a great scams perpetuated on the American public: marketing option-ARM mortgages to people who shouldn’t have them.

Reports the NYT,

“Payment-option ARMs are perhaps the best example. Such loans allow borrowers to choose whatever monthly payment they wish, even if it means paying back less than the loan’s nominal interest rate. In such cases, the loan amount actually grows until a certain point, at which time the loan shifts to a mandated monthly payment, often at much higher interest rates.”

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“Payment-option ARMs had historically been the province of those who could depend on big annual bonuses to pay down loans they neglected most of the year. But more recently such mortgages have grown popular with borrowers who could not afford to buy a house unless they cut corners on the initial payments.

Many of these borrowers essentially bet that the value of their houses would climb quickly enough that they could use the accumulated equity to refinance with a more affordable loan. The recent housing slowdown has curbed such plans….

…Jean Constantine-Davis, a senior lawyer at the AARP Foundation, said that lenders sometimes qualify borrowers based on their ability to pay the lowest rate on an adjustable loan, not the maximum rate, while other lenders do not require adequate evidence that a borrower can repay. Such situations, she said, can serve as grounds for a lawsuit.”

— BEN POPKEN

Storm Clouds Over Risky Loans [NYT]

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