How to Spot and Avoid Predatory Lending
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
*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
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.
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.
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.
*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)
-Better Business Bureau
-Consumer Federation of America
-Consumer. gov (US Consumer Gateway)
-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)
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.