Predatory Lenders 6/2010
What is Predatory Lending?
Predatory lending means imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics, taking advantage of borrowers' lack of understanding of extremely complicated transactions. Predatory loans turn the dream of homeownership into a nightmare, in the worst instances ending in foreclosure. The damage done by predatory lenders is increased by the fact that predatory loans are made in such concentrated volume in poor and minority neighborhoods where better loans are not readily available. The loss of equity and foreclosure can devastate already fragile communities. Predatory lenders often advertise their loans to homeowners in financial need – people who have fallen behind on property taxes, need money for medical bills or need costly home repairs. Instead of offering a fair loan, these lenders use aggressive salespeople whose loans carry high interest rates, high fees, and unaffordable repayment terms.
How to spot a Predatory Lender?
Be suspicious of anyone who offers you “bargain loans,” whether they mail or email you an offer, call you on the phone, or come to your door. Avoid salespeople who promise “No Credit? No Problem.” A bad loan is a costly mistake. Beware of offers that are only “good for a very short time.” Be suspicious of anyone who contacts you first – most good mortgage lenders or credit companies don’t solicit business over the phone or just show up on your doorstep. Avoid lenders who call you and promise guaranteed, low-interest loans, who take applications over the phone, or who offer next-day approval if you pay them some money today. Say “No” to lenders who ask for up-front fees “to cover the first payment and other expenses.”
How to avoid Predatory Lenders
Shop around. If you need a loan, start by asking local banks, credit unions, or mortgage companies. Whether you borrow for home repairs, medical expenses, or to consolidate your debt into a single monthly payment, compare the total costs of the loan as well as interest rates. Points and fees are complicated. Study them until you understand them. Be cautious: A loan with a lower monthly payment is not always the better deal; it may have a high balloon payment that is due in a few years.
Ask questions until you understand everyting. Before borrowing money, know exactly what the lender is offering. You have a legal right to have – in writing – the total cost of the loan, the annual percentage rate, the monthly payments, and how long you have to pay back the loan. Ask the lender to explain all fees and points. When you borrow money, it is important to compare more than the monthly payment. Remember that credit insurance – such as life insurance to pay off the loan if the homeowner dies – can have a very high premium and only protects the lender, not you. Once you’ve narrowed down your choices to a few lenders, check with the Idaho Attorney General's Consumer Protection office and ask if there have been complaints against the companies.
Avoid “balloon” payments. One way that lenders make loans sound very good is to make the monthly payment small but then require a big balloon payment at the end of the loan period. Some loans have you wait to repay the entire loan amount until the loan term ends. Predatory lenders may promise to help you refinance when it comes time to pay it off, but use caution. This promise may be just a way for the lender to charge you higher fees and closing costs. Predatory lenders make money by charging excessive fees every time they refinance the loan and they’ll encourage you to refinance often. In the worst case, you can end up owing more money than the house is worth.
Read everything carefully
Whenever you borrow money, don’t sign anything you don’t fully understand. Always assume that any paper you sign is a contract. You can insist on changing anything in a contract that you don’t like or can’t agree to. If the lender won’t change the contract to your satisfaction, get a loan somewhere else. Some predatory lenders dramatically change the loan terms at the last minute from what you thought you were promised. Before you sign the loan papers, ask a lawyer or trusted friend to go over them with you. Don’t sign a document with blank spaces; all spaces should be filled in before you sign.
You can change your mind
You can back out of getting a loan any time before you sign. Stop the loan process if a new development surprises you until you get answers you need. If you’ve already signed a contract that uses your home as security, the Truth in Lending Act allows you to change your mind, for any reason, within three business days of signing the contract. If you change your mind, put it in writing and mail to the lender.
Consider reverse mortgages
If you are 62 or older, a reverse mortgage may be better than getting a home equity loan. A reverse mortgage, which is based on the equity you have built up in the house over time, gives you money that you don’t have to repay until you move, sell the house, or die. Since a reverse mortgage uses the equity in your home, you need to consider your options carefully. For instance, if your home does not continue to grow in value after you take out a reverse mortgage, you may have less of an estate to leave your heirs.
Get More Information
If you would like more information about Predatory Lenders and how to avoid them, visit the U.S. Office of Housing and Urban Development (HUD) online at: http://www.hud.gov/offices/hsg/sfh/pred/predlend.cfm.