Predatory lending occurs when a mortgage loan with unwarranted high interest rates and fees is set up to primarily benefit the lender or broker. The loan is not made in the best interest of the borrower, often locks the borrower into unfair terms, and tends to cause severe financial hardship or default. To determine if a loan is predatory in nature, ask yourself these questions:
- Does your past credit history justify the high rate and fees charged?
- Is the loan being made on the basis of your ability to repay the loan and not solely on the value of the property?
- Have the loan’s terms been fairly represented and explained to you?
- Does the type of loan and the loan services provided meet your need and interests?
If you answered “NO” to any of these questions, there is a possibility the loan is predatory in nature. In order to avoid falling prey to these abusive practices, you must be a smart and informed shopper.
What is Predatory Lending?
In communities across America, people are losing their homes and their investments because of predatory lenders, appraisers, mortgage brokers and home improvement contractors who:
- Use false appraisals to sell properties for much more than they are worth.
- Encourage borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan.
- Knowingly lend more money than a borrower can afford to repay.
- Charge high interest rates to borrowers based on their race or national origin and not on their credit history.
- Charge fees for unnecessary or nonexistent products and services.
- Pressure borrowers to accept higher-risk loans such as balloon loans, interest-only payments, and steep pre-payment penalties.
- Target vulnerable borrowers to cash-out refinance offers when they know borrowers are in need of cash due to medical, unemployment, or debt problems.
- “Strip” homeowners’ equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower.
- Use high-pressure sales tactics to sell home improvements and then finance them at high interest rates.
What Tactics Do Predators Use?
- A lender or investor tells you that he or she is your only chance of getting a loan or owning a home. You should be able to take your time to shop around and compare prices and houses.
- The house you are buying costs a lot more than other homes in the neighborhood but isn’t any bigger or better.
- You are asked to sign a sales contract or loan documents that are blank or that contain information that is not true.
- You are told that the Federal Housing Administration insurance protects you against property defects or loan fraud. It does not.
- The cost or loan terms at closing are not what you agreed to.
- You are told that refinancing can solve your credit or money problems.
- You are told that the only way you can obtain a good deal on a home improvement loan is if you finance or refinance with a particular lender.
Tips to Avoid Predatory Lending
- Only deal with licensed mortgage lenders, mortgage brokers and loan officers operating under and subject to federal and/or state regulators. Read and get copies of everything you sign in connection with your mortgage.
- Beware of “bait & switch” tactics where the lender or broker makes an offer with one set of terms and then pressures you to sign a loan with more expensive rates and hidden costs.
- DO NOT sign blank forms. Forms should be completely filled out with no blank boxes or spaces.
- Make sure your monthly payments are affordable, and that you are NOT comparing apples with oranges when looking at the old vs. the new payment. Be sure that if the escrow of taxes and insurance has been part of your old payment, it is included in your new payment when comparing price savings.
- Make sure the rate and terms quoted by your lender and/or broker are given to you in writing and do not vary significantly from those presented at closing.
- DO NOT shop based solely on lower monthly payments. Payments may be lower if the loan has a balloon payment or a variable rate. Unless you expect falling mortgage rates, a higher income, or a better credit rating in the future, these loans eventually cost you more.
- Beware of door-to-door home improvement offers where the contractor offers to find you the necessary financing to make the improvements.
- DO NOT fall for scams from out-of-state businesses claiming to arrange mortgage loans for an advanced fee or with the advanced purchase of special loan insurance. Sending them a money order to a post office box or mail drop will likely be the last time you see your money.
- Never falsely state or allow others to falsely state your income. You won’t have your dream home very long if you can’t afford to make the payments.
- Borrow only what you need and can afford to pay back. If you need $5,000 to pay for a home improvement, there is usually little sense refinancing your existing mortgage and paying $6,000 in closing fees to arrange the loan.
- Remain current on your present mortgage obligations until closing and disbursement of new loan proceeds. If you are paying other debts off as part of the loan, remain current on them as well. Falling behind on your current debt while waiting to get your new loan will hurt you in the long run.
- Understand that if you consolidate your credit card debt and other consumer debt into your mortgage or home equity line of credit to have one lower overall monthly payment, nonpayment of the loan could cause you to lose your home. Also, any monthly savings will disappear if you accumulate credit card debt again.
- Know your credit rating and qualify for the loan you deserve. There is no reason to pay high rates and fees if you can qualify for better