Don't get hooked by predatory lending
What is Predatory Lending?
Predatory lending is fraudulent, deceptive and unfair lending practices. It takes place by drawing on borrowers’ vulnerabilities and fears. Predatory lending is frequently directed to those with challenges making informed decisions, specifically older adults, families with limited means, minorities, immigrants, individuals with bad or no credit, and individuals with disabilities. It hurts borrowers with debts they cannot repay, homes they cannot afford, repossession or foreclosure, and damaging credit history.
Predatory lending may initially hide in appealing disguises that attract the very victims who should be most wary. They can appear to be their victims’ allies against hostile financial forces: “No credit, no problem,” “We finance everyone,” “We’ll take care of everything for you!” The best thing to remember is, “If it sounds too good to be true, it probably is!
The best way to avoid predatory lending is through knowledge. Although there are laws designed to protect consumers against this damaging practice, the practice still exists, and knowing what to look for in home mortgage or repair loans is key.
Typical ELEMENTS OF PREDATORY LOANS
Predatory loans come in all shapes and sizes, but there are certain elements that are typically found in them.
High interest rates: A loan interest rate that is much higher than the interest rate offered by insured banks and credit unions is a tip-off that a loan might be predatory. The best way to avoid higher interest rates is to shop around to at least three lending institutions to compare offers. Keep in mind that lower credit scores will pay higher interest rates.
Unusually high "points," fees, and other closing costs: Compare the loan interest rate to the disclosed Annual Percentage Rate (APR). The greater the difference between the two indicates higher fees.
Requiring credit life insurance with loans: Loans requiring borrowers to finance credit life insurance as a condition of approval are likely to be predatory.
Mandatory arbitration clause favoring lenders: Loans containing provisions that disputes between borrowers and lenders must be arbitrated by parties chosen by the lenders should be carefully considered. This may be a sign of the lender hiring arbitrators that favor the lender.
Loans for much higher amounts than required: Lenders promising loans for much higher amounts than required should be approached with caution. Lenders make their money based on the amount borrowed. Why borrow more that you need? Paying interest on unnecessary borrower money only is in the favor of the lender. Look for “Loan-to-value” ratio (how much is being borrowed compared to the value of the property) greater than 100 percent of the property’s value.
Refinancing lower-interest rate loans at higher rates: Borrowers who refinance lower-rate home mortgage loans at higher rates may fall victim to predatory lending. Be cautious of an attractive lower monthly payment by extending the repayment timeframe. Look at the overall cost of the loan.
Loans that turn “unsecured” debts into “secured” mortgage debts: Refinancing unsecured debt (credit cards, “signature” loans, etc.) by securing them with a real estate mortgage must be approached carefully. Remember that loans secured by your home (or other asset) and in default can be foreclosed upon (or repossessed).
Prepayment penalties: Loans having “prepayment penalties” (extra charges for paying off the loan before its maturity date) should be avoided. Prepayment penalties are predatory and indicate that there are likely to be other harmful loan features.
Inflated or fraudulent appraisals: Appraisals that are intentionally inflated to show a much higher home value than the property is worth are associated with predatory loans. A reputable lender will not offer loans more than the property is actually worth.
Predatory Lending Behavior
Predatory practices also come in all shapes and sizes, but here are some recognizable predatory behaviors:
- Being contacted by companies at home, without having requested a call.
- Being asked to sign blank forms that will be filled in later.
- Willingness of company representatives to falsify loan.
- applications, particularly information about income.
- “High-pressure” sales presentations with “one-time” offers.
- Planning loan closings at places other than in lender offices (such as in the home, in a vehicle, at a restaurant, etc).
- Other names (“phantom” signers frequently unknown to borrowers) are added to documents to make loans seem more affordable.
- Changing loan terms at closing.
- Itemizing duplicate services then charging separately for them (“unbundling”).
- Forging important, key loan documents.
- “Flipping” of home loans, meaning repeated refinancing of mortgage loans. There are reasons to refinance, but frequent refinancing offers may indicate a predatory practice.
IMPORTANT MORTGAGE DOCUMENTS FOR BUYING OR IMPROVING RESIDENCES
Documents required by federal law, depending on the type of loan, are:
- Loan estimate (replaces the Good Faith Estimate and initial Truth-in-Lending disclosure).
- Closing disclosure (replaces the final Truth-in-Lending disclosure and HUD-1 Settlement statement).
- Notice of right to cancel (in certain mortgage loan transactions).
- Transfer of loan servicing statement.
- Private mortgage insurance disclosure for loan consummated after July 1, 1999.
- Controlled business arrangement disclosure (if applicable).
- Section 32 HOEPA notice (if HOEPA loan) for high-cost mortgages.
Documents required by Pennsylvania law, depending on type of loan, are:
- Loan note.
- Written broker agreements.
Other important documents:
- Cancelled checks from real estate transactions.
- Copies of written agreements between home improvement contractors and lenders, mortgage brokers and lenders, lenders and any assignees, and lenders and trustees (if applicable).
- Residential loan applications.
- Rate sheets provided by lenders and brokers.
- Underwriting guidelines.
OTHER RESOURCES TO HELP PREVENT PREDATORY LENDING
Pennsylvania Department of Banking and Securities
1.800.722.2657 | www.dobs.pa.gov
Pennsylvania Office of Attorney General
1.800.441.2555 | www.attorneygeneral.gov