Predatory lenders promise loans that are "too good to be true" and pressure
borrowers to take them on the spot. Here's a few things you or your family and
friends should know about spotting and avoid predatory loans:
How to Spot a Predatory Loan
*Balloon payments.
*High interest rates.
*Monthly payments you can't afford.
*Penalties for early pay-off of the loan.
*Unauthorized refinancing of your loan.
Abusive Practices: 7 Signs of Predatory Lending
1. Single Premium Credit Insurance
Credit insurance premiums should not be financed into the loan up-front in a
lump-sum payment. One type of credit insurance, credit life, is paid by the
borrower to repay the lender should the borrower die. The product can be useful
when paid for on a monthly basis. When it is paid for up-front, however, it does
nothing more than strip equity from homeowners.
2. High Fees
The borrower should not be charged fees greater than 3% of the loan amount
(4% for FHA or VA loans). Points and fees (as defined by HOEPA) that exceed this
amount (not including third party fees like appraisals or attorney fees) take
more equity from borrowers than the cost or risk of subprime lending can
justify.
3. Prepayment Penalties
Subprime loans should not include prepayment penalties, for the following
reasons:
Prepayment Penalties Haunt Many Refinancers
Prepayment penalties trap borrowers in high-rate loans, which too often leads
to foreclosure. The subprime sector should provide borrowers a bridge to
conventional financing as soon as the borrower is ready to make the transition,
though prepayment penalties are designed to prevent this from happening.
Prepayment penalties are hidden, deferred fees that strip significant equity
from over half of subprime borrowers. Prepayment penalties of 5% are common. For
a $150,000 loan, this fee is $7,500, more than the total net wealth built up
over a lifetime for the median African American family.
Only 2% of borrowers accept prepayment penalties in the competitive
conventional market, while, according to Duff and Phelps, 80% in subprime
do.
4. Yield-Spread Premiums
Brokers originate over half of all mortgage loans, and a relatively small
number of brokers are responsible for a large percentage of predatory loans.
Lenders should identify -- and avoid -- these brokers and refuse to pay
yield-spread premiums -- fees lenders rebate to brokers in exchange for placing
a borrower in a higher interest rate than the borrower qualifies for.
5. Steering
Lenders should make sure that borrowers get the lowest-cost loan they qualify
for. As Fannie Mae and Freddie Mac have shown, subprime lenders charge prime
borrowers who meet conventional underwriting standards higher rates than
necessary. HUD found that steering has a racial impact since borrowers in
African-American neighborhoods are five times more likely to get a loan from a
subprime lender -- and therefore pay extra -- than borrowers in white
neighborhoods.
6. Mandatory Arbitration
Increasingly, lenders are placing pre-dispute, mandatory binding arbitration
clauses in their loan contracts. These clauses insulate unfair and deceptive
practices from effective review and relegate consumers to a forum where they
cannot obtain injunctive relief against wrongful practices, proceed on behalf of
a class, or obtain punitive damages. Arbitration can also involve costly fees,
be required to take place at a distant site, or designate a pro-lender
arbitrator.
7. Flipping
Flipping of borrowers occurs through repeated fee-loaded refinancings. One of
the worst practices is for lenders to refinance subprime loans over and over,
taking out home equity wealth in the form of high fees each time, without
providing the borrower with a net tangible benefit.
How to Avoid a Predatory Loan
*Always shop around.
*Ask questions.
*If you don't understand the loan terms, talk to someone you trust to look at
the documents for you.
*Don't trust ads promising "No Credit? No Problem!"
*Ignore high-pressure sales tactics.
*Don't take the first loan you are offered.
*Remember that a low monthly payment isn't always a 'deal.' Look at the TOTAL
cost of the loan.
*Be wary of promises to refinance the loan to a better rate in the
future.
*Never sign a blank document or anything the lender promised to fill in
later.
To get help, contact one of these national organizations. National
Organizations for Predatory Lending Issues
-ACORN (Association of Community Org's for Reform Now)
-AARP
-Better Business Bureau
-Consumer Federation of America
-Consumer.gov (US Consumer Gateway)
-Consumers Union
-Credit Union National Association (CUNA)
-Federal Reserve Board Consumer Information
-Federal Trade Commision, Consumer Protection
-Habitat for Humanity International
-National Association of Attorneys General
-National Association of Consumer Advocates
-National Consumer Law Center
-US Public Interest Research Group (PIRG)
http://www.educationcenter2000.com/national_organizations
Mr. Kenneth M. DeLashmutt is a recognized authority on the subject of
predatory lending practices and is a Predatory Lending Defense Specialist. He
has more than 10 years experience in the area of consumer protection related to
predatory mortgage lending practices and debt resolution.
Mr. DeLashmutt has provided financial, operations and regulatory consulting
services nationwide to financial institutions, and regulatory agencies as well
as real-estate and financial services organizations for over ten years.
Areas of Expertise include: Banking Operations & Administration; Lending
Policies, Custom & Practice; Credit Administration; Bankruptcy and
Foreclosures; Trust & Fiduciary Issues / Operations; Insurance Coverage?s /
Claims Disputes; Insurance Bad Faith; Real Estate Transactions; Consumer
Protection Litigation; Foreclosure Defense
