Predatory Lenders

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Predatory Lenders

I. How to spot a predatory lender
II. How to protect yourself from predatory lenders

Individuals with poor or no credit often have difficulty qualifying for home mortgage loans that offer the best interest rates and lowest overall cost. These loans are considered prime and are sought after by most who need a home loan. For those who do not qualify for these prime loans, loans with higher interest rates and other associated costs, commonly referred to as subprime mortgage loans, are often the only option.

Unfortunately, a small percentage of lenders who cater to the subprime market use abusive and in some cases fraudulent practices to take advantage of subprime borrowers. These lenders are often referred to as predatory lenders.

Predatory lenders usually target home owners with low incomes, especially minorities, and the elderly who may have limited knowledge of financing options or few mainstream credit opportunities.

How to spot a predatory lender

Here are some of the tactics used by predatory lenders to rob borrowers of their homes equity:

Excessive Prepayment Fees
High prepayment fees penalize borrowers who pay back their loan early, often to refinance to a loan with lower interest rates. When prepayment fees are excessive they can discourage refinancing and increase the likelihood of foreclosure.

Equity Lending
Some unscrupulous lenders offer loans to individuals who clearly will not be able to keep up with the monthly payments, but have enough equity in their home to cover the loan. The predatory lender expects the borrower to fail to make payments and can foreclose on the home, then sell it for a profit at a public auction.

High pressure sales tactics
Frequent calls are made to elderly or low income home owners with the hope of talking them into taking out a second mortgage, at subprime rates, or refinancing. Confusing language is often used to get the victim to sign for a loan designed to steal as much of the equity from their home as possible.

Frequent Refinancing or "Loan Flipping"
Offers to refinance an existing loan with a sales pitch offering even more money is commonly used.

Loan Fraud
Loan contracts with blank spaces, to be filled in later by a staff member of a predatory lender, make it possible, through fraud, for individuals that don't really qualify for a particular loan to get one. When this happens the likelihood of the borrower defaulting on the loan is higher.

Balloon Payment
If you don't look closely at the terms of your loan you may be stuck with large balloon payment. Some borrowers are lured with low monthly payments, which in some cases only include interest payments, only to find out when it is time to pay back the loan that a large lump sum payment (or balloon payment) is required. You may face foreclosure and the loss of your home if this large payment cannot be made.

Excessive Fees
Additional fees of various types are added to the amount of the loan. In some cases these fees make up 15% to 20% of the loan.

Very High Interest Rates
Interest rates as high as 18% are added to the loan total. Subprime loans typically come with higher interest rates since those who usually receive them are high risk (poor credit history) borrowers. Predatory lenders attach high interest rates that cannot be justified by the risk to the lender.

Costly Insurance
Sometimes, without the knowledge of the borrower, unnecessary or costly credit insurance (e.g. life, employment, health) policies are added to the amount of the loan.

Home Repair Scams
Con artists, pretending to be legitimate home improvement contractors, work with predatory lenders to get vulnerable home owners to pay for unnecessary or expensive repairs using the equity in their homes. Often these con artists arrive at the door steps of the elderly unannounced after a natural disaster.

Next: How to protect yourself from predatory lenders

Updated: Nov 2005