While predatory mortgage lending is less common than it used to be, there are still bad actors who take advantage of the average person’s lack of personal financial knowledge. Here’s what you need to know about predatory lending and the steps you can take to protect yourself.
What is predatory loan?
Predatory mortgage lending is an unfair practice that benefits lenders and hinders their ability to pay off debtors’ debts. Predatory loans are often devastating to victims. They can hurt your credits badly, destroy your finances, and make it much more difficult for you to get out of debt or save money.
Examples of predatory lending practices
Here are the common predatory lending practices you may encounter when buying a mortgage. If you notice any of these warning signs, consider at least the possibility of switching your lender or reporting your lender.
High interest rate
Before applying for a mortgage, research your current mortgage interest rates and understand what you can expect. If the offer appears to be very low compared to the typical rate, there is probably a catch.
If you don’t know the rate, check out the loan estimate in detail. This is a 3-page document that you must receive within three days of submitting a loan application that shows the estimated interest rate on your loan, monthly payments, and total closing costs. If you see that there is a difference from what you promised to the lender, ask about them.
In addition to looking for unusually high interest rates, we also review the APR for your loan. This is the percentage that explains the total annual cost of a loan, including fees. If you think this is high or your mortgage points aren’t applied as agreed, please mention it to your lender.
Excess or hidden fees
The home buying process includes costs beyond the mortgage, including closing costs. Simply charging these fees is not an example of predatory lending in most cases, but lenders may charge them an excess price.
Apart from making more money from borrowers, the looters can also charge fees that do not serve their real purpose. Be aware of items that sound vague in your loan estimates, such as “administration fees” and “commitment fees.”
Prepaid penalty
A prepayment penalty is a fee lender’s request when you repay a mortgage before the end of the loan term or the expected maturity date. Federal law limits prepayment penalties for most mortgages, so if your loan includes one, make sure your lender is clear why it’s there.
Lenders must also disclose advance penalties for claims. But that doesn’t mean that predatory lenders will make it easier for you to find or understand disclosures.
Balloon payment
Balloon payments are temporary mortgage payments that are usually charged after a certain period of time. Often, you start with a loan with low interest rates and low payments, then get hit with a ton of balloon payments. If you can’t pay for it, you could lose your home.
In some cases, predatory lenders offer to refinance their loans with a new mortgage at a fixed rate. However, this process involves more fees pocketed by lenders who are in the circumstance in the first place.
Lone Packing
Packing a loan occurs when a lender packs unnecessary financial products into a mortgage. One example is credit or mortgage protection insurance, where you pay a mortgage upon death. If you did not ask for the product but the fees for it appear in your statement, ask about it.
Loan Flip
When a lender refinances your loan for a higher interest rate and longer term loan, you will experience loan flipping. Refinancing is often legal and beneficial, but the goal of refinancing is usually to save the borrower money. A predatory lender can move you to a more expensive loan and simultaneously move the fee profits from refinance. Lenders who recommend refinancing multiple times should always be vigilant.
Negative amortization
Unless you are willing to take a loan that will allow you to pay off the interest first, your monthly payment should shave off the interest and some of your main balance on your loan.
Predatory lenders will benefit from negative depreciation or benefit from interest coverage because their monthly payments are too small and that has occurred. When that happens, interest continues to deteriorate and you end up paying heavily in the long run.
Your lender should provide you with a depreciation schedule that shows you the amount of interest and principal balance you are paying back during your loan period.
There is no credit check
If the lender promises to extend the offer without checking your credit history or uses terms such as “guaranteed approval,” it will pilot it. The lender will perform a credit check to assess his ability to pay off the mortgage on reasonable terms. If the lender skips this step, he will be given a loan he cannot afford and may be trapped in a debt cycle that could lead to foreclosure.
Access to your bank account
Lenders cannot legally enforce the provision of a bank account number, but they can offer to help set up automated payments from their account. Predatory lenders can use this to force payments freely, empty their bank accounts, and leave overdraft fees.
How to protect yourself from predatory loans
Finding predatory lending practices isn’t always easy, but you can follow these steps to protect yourself.
- Compare mortgage fees and fees. Buying mortgage and refinance fees can help you understand what’s typical. If you are struggling to find an attractive rate, remember that your credit score may require work.
- Seek guidance from an expert. Talking with a certified housing counselor or taking a home buying class is mostly inexpensive or free, but can help you feel ready to find unusual lending practices. Here’s how to contact a housing counselor:
- Read the review. Check out the Consumer Financial Protection Bureau (CFPB) complaint database and lenders on the Better Business Bureau website.
- Keep up with the news. A simple Google search from lenders may raise recent news about lenders’ unpleasant practices, but what you find isn’t always validated.
- Make sure your lender is authorized. Your lender and your lender must be approved by your state. If you can’t provide proof of your license, it’s best to find another lender.
- Do not sign documents with blanks. Be aware of mortgage documents with blank areas that lenders will fill out later. A predatory lender can fill the blank with unfairly high interest rates or other conditions, putting you at a disadvantage.
- Don’t hurry to sign. When completing your loan document, avoid lenders trying to run through the process. A predatory lender will do this to confuse you or trick you into signing documents you don’t fully understand.
How to Report a Predatory Loan
If you believe you are a victim of predatory lending practices, contact the CFPB and your state consumer protection organization. CFPB has a portal where you can send complaints. You can also contact your organization by phone on weekdays at 855-411-2372.
Be vigilant when it comes to taking away mortgages and other types of loans. While marauders are not as common as they once were, there are still some disgraceful businesses.
