Horror stories about victims of predatory lending are everywhere in the media these days. Abusive or “predatory” lenders target people who are “house rich, but cash poor,” that is, consumers who have built up a lot of value in their homes, but do not have much available cash. The types of loans offered usually have sky-high interest rates and fees.
Predatory lending is a set of lending practices that takes unfair advantage of consumers. Consumers end up taking out loans that they cannot afford, have deceptive or unclear terms in them, or which cost more than necessary and may ultimately lead to the loss of one’s home. Most predatory loans occur in the sub-prime market, but not all sub-prime lending is predatory.
Consumers need to be aware of predatory lending practices when searching for a loan. The Better Business Bureau urges consumers to be aware of the variety of predatory lending practices that are occurring with some lenders in the industry:
- Equity stripping occurs when a loan is made based on the equity in a property rather than on a borrower’s ability to repay the loan. These loans usually result in the lender acquiring the borrower’s home and any equity the borrower had in the home.
- Packing is the practice of adding credit insurance or other “extras” to increase the lender’s profit on a loan.
- Flipping occurs when a lender induces a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time.
- Traps are terms within the loan that will likely force the borrower to refinance or enter into foreclosure. Traps include balloon payments, negative amortization, prepayment penalties and mandatory arbitration.
How can you tell if a lender is a scammer? The BBB offers the following “Dos” and “Don’ts” to help you protect yourself and your home:
- Do business with lenders that you haven’t checked out.
- Be rushed into signing a loan because it is a “Limited Time” offer. A lender in a hurry to get the loan should serve as a warning sign to take extra care to make sure that the loan is being properly structured.
- Sign documents with blank lines. Be sure that every space is filled in on the loan application before you sign it.
- Lie on your loan application. When you apply for a mortgage loan, every piece of information that you submit must be accurate and complete. Lying on a mortgage application is fraud and may result in criminal penalties.
- Pay upfront fees without an explanation. Do not pay sizeable upfront fees. Reputable brokers and lenders do not charge high upfront fees.
- Check out the reliability of the company with the BBB (www.bbb.org).
- Shop around for the best loan for your situation.
- Borrow only the amount you need and can afford to pay back.
- Review all documents or have someone you trust review them for you.
- Know that you generally have three days to cancel loans signed on your home.
- File a complaint with the BBB (www.bbb.org), your state’s attorney general office or your local Department of Consumers Affairs, if you think you are the victim of a predatory loan.