WHAT YOU SHOULD KNOW ABOUT
PREDATORY LENDING

How not to be a victim

Predatory lending occurs when unfair and deceptive sales practices are used in the origination of mortgage loans.  Predatory lending almost always occurs in the context of refinancing a current loan with a new loan.

Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, even home improvement contractors. Their schemes often target people who have small incomes but substantial equities in their homes.  Low-income seniors are often prime targets of predatory lenders.

Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics. Their advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer. They may target minority communities by advertising in a specific language, or target neighborhoods with high numbers of elderly homeowners, or homeowners with little access to credit.

 

Predatory or abusive lending practices can include:

• Using bait and switch tactics to lure consumers in, then changing the terms of the loan.
• Using slick and deceptive sales presentations to confuse the borrower about the terms of the loan.
• Loaning money without regard to the borrower's ability to repay.
• Repeatedly refinancing a loan within a short period of time and charging high points and fees with each refinance.
• "Packing" a loan with single premium credit insurance products, such as credit life insurance, and not adequately disclosing the inclusion, cost or any additional fees associated with the insurance.
• Charging excessive rates and fees to a borrower who qualifies for lower rates and/or fees offered by the lender.

You may not realize that loan products or lending practices are predatory until you compare them to similar offerings and practices of other lenders. Your loan situation may not seem abusive until you get to the closing table. If any fees or charges differ from those that were previously disclosed, delay closing until you understand all terms of the loan.

Avoiding borrowing pitfalls:

Shop around. Talk to several lenders to find the best loan for which you qualify. Understand the best loan terms available in the marketplace and when comparing the APR (annual percentage rate – a measure of the cost of the loan that includes both the interest rate and other loan fees) of loans from different lenders, beware that the APR can be manipulated by changing the timing of certain loan costs.

Understand the loan terms. Compare loan terms from different lenders. If you're confused, ask a nonprofit housing counselor or a lawyer to review the information with you.  Beware of slick sales presentations that confuse you or that don’t answer your questions.

Find out whether the payment you are being quoted includes payments for taxes and insurance.  If your current loan payment includes such payments, but the new loan doesn’t, you are comparing apples and oranges.

Find out about Prepayment Penalties. Know if the loan you are offered has a prepayment penalty.  A prepayment penalty should be a choice, not a requirement.

Say NO to "easy money." Beware if someone tells you your credit problems won't affect your interest rate. 

Make sure documents are correct. Be cautious of someone who offers to falsify income information so you can qualify for a loan. Do not falsify information or sign documents that you know to be false.

Make sure documents are complete. Don't sign documents that have incorrect dates or blank spaces that should be filled in. Be wary of promises that a lender will "fix it later" or "fill it in later."

Ask about additional fees. Question any items you didn't ask for. Beware if you're told that single premium credit insurance is required to get a loan, or that buying it will help get the loan approved. Making the credit decision conditional on insurance sales is illegal.  Review every fee and compare different lenders' fees to ensure the most competitive loan terms.

IF YOU'RE NOT SURE, DON'T SIGN. Talk to an attorney, consumer credit counseling agency or nonprofit housing counselor.