Predatory Lending

What Is Predatory Lending?

Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected. Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors. Their schemes often target people who have small incomes but substantial equities in their homes.

Products themselves are not predatory. For example, a loan with a variable interest rate can be a very good financial tool for many borrowers. However, if the borrower is sold a loan with a variable interest rate disguised as a mortgage loan with a fixed interest rate, the borrower is the victim of a bait and switch or predatory lending practice. In short, this type of conduct is nothing more than mortgage fraud practiced against consumers.

Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics. Their advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer. They may target minority communities by advertising in a specific language, or target neighborhoods with high numbers of elderly homeowners, or homeowners with little access to credit.

The Importance of Disclosures

Within three days of filling out a loan application, your mortgage broker or lender must provide you with a written document giving you most of the information you will need to know about the loan.

These disclosures are required to be provided at two major points in the mortgage transaction. Disclosures made at the very start, or point of origination, are designed to give the borrower advance notice of the loan program and the costs associated with the program. Disclosures made at the end, or loan closing, are designed to confirm for the borrower that they are receiving what they expected. If disclosures are not provided, do not do business with this lender or broker.

Common Predatory Lending Practices

• Equity Stripping: The lender makes a loan based upon the equity in your home, whether or not you can make the payments. If you cannot make payments, you could lose your home through foreclosure.
• Bait-and-switch schemes: The lender may promise one type of loan or interest rate but without good reason, give you a different one. Sometimes a higher (and unaffordable) interest rate doesn't kick in until months after you have begun to pay on your loan.
• Loan Flipping: A lender refinances your loan with a new long-term, high cost loan. Each time the lender "flips" the existing loan, you must pay points and assorted fees.
• Packing: You receive a loan that contains charges for services you did not request or need. "Packing" most often involves making the borrower believe that credit insurance must be purchased and financed into the loan in order to qualify.
• Hidden Balloon Payments: You believe that you have applied for a low rate loan requiring low monthly payments only to learn at closing that it is a short-term loan that you will have to refinance within a few years.

Predatory lending can include any one of these lending practices. Check with a WHC Counselor to see if your particular loan is predatory.

• Excessive interest rates and / or high fees Failing to disclose the true terms of the loan
• Approving a loan with payments higher than the borrower can afford to pay
• Pressuring a borrower to sign documents when they don't understand the terms of the loan
• Flipping or frequent refinancing of a loan
• Only offering loan products that have a significantly higher APR to seniors, people of color, or those with poor credit
• Excessive and undisclosed yield spread premiums
• Prepayment penalties
• Single Premium Credit life insurance added to the loan
• Balloon payments (a lump sum due at the end of the loan)
• Loan is based on equity rather than the borrower's income
• Misrepresentation of loan terms (ex: turning a 10% loan to 20% at the time of closing)
• Charging high hidden costs
• Hiding ties to a loan broker in order to secretly charge you commission

How to avoid being a victim of predatory lenders

• Take a free homebuyer education class. Call WHC to find one in your area
• Repair your credit before you apply for a loan
• Shop around. Compare loans and rates
• Do not give in to any pressure tactics
• If you are refinancing know that you have 3 days after you sign to change you mind
• Have a trusted and educated friend, family member or non-profit help you review your loan documents
• DO NOT deposit ANY cash with a lender until you are sure of the deal and know the refund policy

A good lender:

• Will explain your loan in every day language
• Will not pressure you to sign quickly or rush you through paperwork
• Will explain the costs and services you are getting
• Does not change the loan or terms at closing
• Lets you decide how much you need to borrow
• Uses rates and fees that relate to the risk of the borrower
• Fully describes the terms of the loan
• Does not encourage or close a loan that has monthly payments that exceed the borrower’s ability to pay
• Lets you know you have options and refers you to a better loan if warranted

Resources for help

Please call Washington Homeownership Center today to talk
confidentially about your situation and to receive referrals to appropriate agencies.

Useful links to more information on predatory lending:

http://www.dfi.wa.gov/cs/predlending.htm

http://www.dontborrowtrouble.com/
http://www.hud.gov/offices/hsg/sfh/buying/loanfraud.cfm

http://www.responsiblelending.org/index.cfm

Contact WHC for any questions or concerns you have relating to predatory lending practices and we will help refer you to an agency that can help you.

If you believe you have been a victim of predatory lending or mortgage fraud, contact:

The Department of Financial Instituions at 1-877-746-4334.

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