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The Federal Trade Commission and
other sources urge consumers to watch out for the following common
predatory lending practices:
High Fees:
Ethical brokers and lenders charge reasonable fees for their
services. Unethical ones charge more than what's reasonable. On a
purchase loan or refinance loan, borrowers should avoid paying
fees exceeding 1 percent (not including any discount points) of
the loan to the broker and/or lender.
Lender/broker fees can be called a
number of things: origination, underwriting, document preparation
or commitment fees. The names of the fees don't matter. They're
all just cute names for "lender profit." All told, they shouldn't
add up to more than 1 percent, or $1,000 on a $100,000 loan.
These do not count fees paid to
third-party vendors, such as appraiser or title company, or fees
for environmental endorsements, flood certificates or tax
services. (Without discount points, closing costs on a $100,000
loan including everything typically range from $1,500 to $2,200
and include such items as title work, an appraisal, a survey and
recorder's fees.)
Steering Business to Partners:
Borrowers should watch out for brokers or lenders that steer
customers to particular companies for various closing services.
Most brokers own or have relationships with title companies,
escrow agents or appraisers. While they're allowed to suggest
their sister companies or their buddies, watch out.
At best, these companies may charge you a higher price than you
could get by making a couple of phone calls and hiring your own
title company. At worst, brokers hire companies who will lie for
them in order to let a bad loan go through. (Most predatory
lenders can't work alone; they need someone else, usually an
appraiser or title company, to conspire with them.)
Remember, a title company
settlement agent (also called an escrow or closing agent) is
supposed to be an objective, third-party to oversee the details of
the transaction. How objective do you think he is if he's the
broker's co-worker or drinking buddy?
Under federal law, lenders are
prohibited from requiring customers to use a particular title
company, insurance company or escrow/closing agent, for example.
They are allowed to require their own appraisal or credit
reporting company. If they try to force you to use companies for
any other services, walk away.
Watch Blank
Pages:
Don't sign any blank pages
or forms without numbers filled in. And with the complexity of
mortgage loans and the number of unethical lenders, if you're
uncomfortable or unsure of some issues, consider hiring your own
attorney for a few hundred dollars to review any papers you're
asked to sign.
You should read every word of every
loan document - you'd be surprised what's in there that could hurt
you later. At the very least, pay the closest attention to four
things: your truth-in-lending statement, good-faith estimate of
closing costs, HUD settlement sheet of closing costs and the
actual mortgage note (a multi-page document with the amount
financed and specific terms and restrictions). The note tells your
interest rate; the truth-in-lending form shows the annual
percentage rate when all fees are figured in. If the APR is more
than 0.50 to 0.75 of a percentage point higher than your interest
rate, there may be hidden or unnecessary fees.
Bait and switch:
Brokers tell you key details such
as interest rate and monthly payment. They might even show you
documents with the promised numbers. But when it comes time to
sign the dozens of pages for the loan, the lenders are banking
that you won't realize the numbers have been changed.
Credit
insurance/other fees:
Just as you are ready to sign,
lenders surprise you with additional
fees. They count on you failing to
understand that credit insurance is
different from private mortgage
insurance. If you object, they may tell you that
the insurance comes with the loan
(making it seem free) or try to scare
you by suggesting that refusing to
sign will delay and even jeopardize
the loan.
Balloon
payments:
Lenders may offer to help you
refinance your home,
consolidate bills or avoid
foreclosure by giving you a new loan with an
even lower monthly rate. But many
of these deals require a large
lump-sum payoff, say $70,000,
within a few years.
Loan flipping:
You decide to refinance your home
to get extra cash.
After you have made a few payments,
the lender calls to offer a bigger
loan to pay for, say, a vacation.
You agree, without knowing that each time you
refinance the original loan you
must pay high points, fees and a higher
interest rate. And if your loan had
a prepayment penalty, you'll have to
pay that also.
Home improvement
loans:
A contractor calls, offering a
remodeling project
at a decent price but one you can't
afford. You're told he can arrange
financing. After the project is
started, the contractor asks you to sign
a bunch of papers that may be blank
or that you may be rushed through.
You are warned that if you don't
sign, the work won't be finished. You find
later that the papers were a
high-interest, high-fee home-equity line.
Biweekly
payments:
Lenders set you up with a loan to
be paid every other
week instead of once a month.
Although this type of payment plan can
reduce the finance charge and
length of a loan, predatory lenders charge
you $1,000 for the "privilege" of
paying the loan biweekly. In reality, such
accounts can be set up for free or
a few hundred dollars at most.
Deed signing:
If you are behind on your mortgage,
a "lender" may offer to
help find new financing. But first
you are asked to deed your property
over to him as a temporary measure
to prevent foreclosure. But the
promised loan never comes, and you
no longer own your home.
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