Eight Common Predatory Lending Schemes
Predatory lending is far more prevalent in refinancing than in
the purchase market. One reason is that buyers tend to look for
mortgages from established and recognized lenders, many of whom
are bound by rules put forth by Fannie Mae, FHA, or the Veterans
Administration. If they don't follow the rules, they cannot sell
their loans on the secondary market.
Another is that real estate brokers, determined to protect their
sale, will wave borrowers away from loans that don't pass their
own "smell test". Nonetheless, buyers can be taken in and should
be alert to the possibility of predatory lending.
1) Agressive Sales and Advertising Techniques
There's nothing wrong with advertising, it's essential to build
a business. But predatory lenders go over the top. Some target
specific neighborhoods or demographics, which is called
"red-lining" or "steering" and is definitely illegal.
Be very careful when you see ads targeting specific
neighborhoods, ethnic groups, or demographics. A good rule of
thumb is that if the loan wasn't originated by you, you may be
being targeted so keep your radar on.
2) Lending to People Who Can't Afford the Loan
This is a tactic of which both home buyers and refinancers need
to be aware. A legitimate lender does not want to foreclose on
its borrowers and has many safeguards in place to maximize the
ultimate recovery of the capital that is lent. A predatory
lender plans on being well out of the picture before things go
wrong.
Predatory lending practices in this category include overstating
income, falsifying debt levels, or pushing borrowers into a
higher interest rate in order to increase the lenders
commission. A good rule of thumb is that if a lender ever asks
you to sign or say something that isn't the truth, run don't
walk for the nearest exit!
3) High Rates
As is discussed at length in Mortgage Secrets Revealed, the
interest rate on your loan is determined by many factors. Most
are totally out of your control since the market determines
underlying rates. However, your credit-worthiness, income, and
the amount of your downpayment will all affect your final rate.
The bad guys will sometimes convince borrowers that they are a
worse risk than they really are, thus justifying a higher
interest rate and/or higher fees. A good rule of thumb is that
if things seem strange or the rates seem high, ask. If the loan
officer can't give you a good reason, get a second opinion with
another loan officer.
4) High Fees, Points, and Padded Costs
Everyone has to make a profit and mortgage companies and brokers
have every right to levy charges that will compensate them for
the service they provide. However, fees should be reasonable and
they should be fully disclosed and explained.
It's tough for a borrower to crack the code on this category of
deceptive lending. A good rule of thumb is whether you feel
comfortable and feel like the loan officer is earning their
money. If it seems too high, get a second opinion and see if the
fees are comparable. Do be careful, since lenders can say
anything and jack it up later. Ultimately, nothing is as
important as feeling like you can trust your loan officer.
5) Steering
Unethical lenders may steer borrowers away from fair and
reasonable products and toward those with higher rates and fees.
This may be because the lender gets a referral fee for doing so,
or they might be referring to a company that is financially
linked to their own, sharing in the higher profit margins.
Generally speaking, most loan officers have a lot of products
available. They should spend time with you determining what
kinds of loans you're comfortable with and what is most
appropriate for your situation. They should present you with two
or three options and let you decide. If you feel like you're
being pushed into a loan that you're not comfortable with, stay
away!
6) Bait and Switch
Just like the advertised special at the applicance store which
is "sold out" when you arrive the next morning, mortgages that
seem to be too good to be true tend to be just that; once you
accept them, they disappear. There is always a good explanation,
but somehow the switch always comes after the loan officer has
hooked you with a non-refundable application fee or an
appraisal.
You won't hear this from mortgage brokers in the industry, but
in cases like this the best thing you can do is bring your
original Good Faith Estimate and demand that they explain why
the fees changed. If the explanation doesn't seem right or
you're not comfortable, back out and ask for any fees you've
already paid back. If they balk, just mention the Department of
Real Estate and they should be much more helpful...
7) Home Improvement Scams
These are particularly ugly schemes, usually targeting the
elderly or those with lower incomes. In a nutshell, someone
comes to the door offering to do work to the house that needs to
be done, and they'll refinance the house at the same time so it
won't cost any money out of pocket. However, the work is usually
done poorly and the refinance is typically a rip-off.
Remember what we said earlier about people coming to the door?
Always be wary when someone comes to the door offering a
refinance or other work done that you don't feel is necessary.
8) Undisclosed PrePayment Penalties
A prepayment penalty requires that the borrower pay a fee
(usually a certain number of months interest) if he/she pays off
the mortgage before the due date. There is usually a specified
period of time from the origination date when prepayment
penalties apply. Prepayment penalties are now illegal in some
states, but in states where they are legal they should be fully
disclosed.
I would say two things in this situation. First, make sure you
read your loan documents carefully. If no prepayment penalty was
mentioned and you see something about one, be careful! Two, if a
prepayment penalty is part of your loan and the loan officer has
told you about it, know that it's a subprime loan. Be sure the
term is the same as what the loan officer told you and that it's
a period of time you're comfortable with.