Save the Dream :
Ohio's Foreclosure Prevention Effort
Predatory Lending
Predatory lending occurs when a mortgage loan with unwarranted high interest rates
and fees is set up to primarily benefit the lender or broker. The loan is not made
in the best interest of the borrower, often locks the borrower into unfair terms,
and tends to cause severe financial hardship or default. To determine if a loan
is predatory in nature, ask yourself these questions:
- Does your past credit history justify the high rate and fees charged?
- Is the loan being made on the basis of your ability to repay the loan and not solely
on the value of the property?
- Have the loan’s terms been fairly represented and explained to you?
- Does the type of loan and the loan services provided meet your need and interests?
If you answered “NO” to any of these questions, there is a possibility the loan
is predatory in nature. In order to avoid falling prey to these abusive practices,
you must be a smart and informed shopper.
What is Predatory Lending?
In communities across America, people are losing their homes and their investments
because of predatory lenders, appraisers, mortgage brokers and home improvement
contractors who:
- Use false appraisals to sell properties for much more than they are worth.
- Encourage borrowers to lie about their income, expenses, or cash available for down
payments in order to get a loan.
- Knowingly lend more money than a borrower can afford to repay.
- Charge high interest
rates to borrowers based on their race or national origin and not on their credit
history.
- Charge fees for unnecessary or nonexistent products and services.
- Pressure borrowers to accept higher-risk loans such as balloon loans, interest-only
payments, and steep pre-payment penalties.
- Target vulnerable borrowers to cash-out refinance offers when they know borrowers
are in need of cash due to medical, unemployment, or debt problems.
- "Strip" homeowners' equity from their homes by convincing them to refinance again
and again when there is no benefit to the borrower.
- Use high-pressure sales tactics to sell home improvements and then finance them
at high interest rates.
What Tactics Do Predators Use?
- A lender or investor tells you that he or she is your only chance of getting a loan
or owning a home. You should be able to take your time to shop around and compare
prices and houses.
- The house you are buying costs a lot more than other homes in the neighborhood
but isn't any bigger or better.
- You are asked to sign a sales contract or loan documents that are blank or that
contain information that is not true.
- You are told that the Federal Housing Administration insurance protects you against
property defects or loan fraud. It does not.
- The cost or loan terms at closing are not what you agreed to.
- You are told that refinancing can solve your credit or money problems.
- You are told that the only way you can obtain a good deal on a home improvement loan
is if you finance or refinance
with a particular lender.
Tips to Avoid Predatory Lending
- Only deal with licensed mortgage lenders, mortgage brokers and loan officers operating under and
subject to federal and/or state regulators. To determine if your broker of lender is
licensed by the State of Ohio, contact the
Ohio Division
of Financial Institutions.
- Read and get copies of everything you sign in connection with your mortgage.
- Beware of “bait & switch” tactics where the lender or broker makes an offer with
one set of terms and then pressures you to sign a loan with more expensive rates
and hidden costs.
- DO NOT sign blank forms. Forms should be completely filled out with no blank boxes
or spaces.
- Make sure your monthly payments are affordable, and that you are NOT comparing apples
with oranges when looking at the old vs. the new payment. Be sure that if the escrow
of taxes and insurance has been part of your old payment, it is included in your new payment
when comparing price savings.
- Make sure the rate and terms quoted by your lender and/or broker are given to you
in writing and do not vary significantly from those presented at closing.
- DO NOT shop based solely on lower monthly payments. Payments may be lower if the
loan has a balloon payment or a variable rate.
Unless you expect falling mortgage rates, a higher income, or a better credit rating
in the future, these loans eventually cost you more.
- Beware of door-to-door home improvement offers where the contractor offers to find
you the necessary financing to make the improvements.
- DO NOT fall for scams from out-of-state businesses claiming to arrange mortgage
loans for an advanced fee or with the advanced purchase of special loan insurance.
Sending them a money order to a post office box or mail drop will likely be the
last time you see your money.
- Never falsely state or allow others to falsely state your income. You won’t have
your dream home very long if you can’t afford to make the payments.
- Borrow only what you need and can afford
to pay back. If you need $5,000 to pay for a home improvement, there is usually
little sense refinancing your existing mortgage and paying $6,000 in closing fees
to arrange the loan.
- Remain current on your present mortgage
obligations until closing and disbursement of new loan proceeds. If you are
paying other debts off as part of the loan, remain current on them as well. Falling
behind on your current debt while waiting to get your new loan will hurt you in
the long run.
- Understand that if you consolidate your credit card debt and other consumer debt
into your mortgage or home equity line of credit to have one lower overall monthly
payment, nonpayment of the loan could cause you to lose your home. Also, any monthly
savings will disappear if you accumulate credit card debt again.
- Know your credit rating and qualify for the loan you deserve. There is no reason
to pay high rates and fees if you can qualify for better terms.
Remember:
If a deal to buy, repair or refinance a house sounds too good to be true, it usually
is! HUD-approved housing counselors can help you be a smart consumer.
Sources: HUD,
Ohio Department of Commerce, Division of Financial
Institutions