Predatory Lending: Practices and Identifiers

EQUITY STRIPPING

Borrower:

• Needs money
• Has equity in the home
• Does not have much monthly income

Lender:

• Might tell borrowers they can get a loan though they don't have enough income to keep up with monthly payments.
• Might tell borrowers to "pad" their income on application forms.
• Forecloses on home when borrower cannot keep up with monthly payments.
• Takes the home and strips borrowers of equity they have built over many years.

The "HOME IMPROVEMENT" Loan

Door-to-door or phone call offering home improvement work:

• Contractor may stop by consumer's home or call
• If the home improvements are not affordable to the consumer, contractor offers to arrange financing through a specific lender
• Contractor begins work

Consumer is then asked to sign papers:

• The papers could be blank
• The lender could rush the customer to sign before reading the papers
• Contractor may threaten to leave work unfinished if consumer doesn't sign

Once the contractor is paid by the lender:

• Contractor might not have any incentive to finish the work
• Contractor might not finish work to the consumer's satisfaction

LOAN FLIPPING

Repeated refinancing of a loan in a short period of time to get additional fees from the borrowers.

Borrower:

• Needs money.
• Has had their mortgage for a long time.

Lender:

• Calls with ideas about refinancing, using the availability of extra cash as a lure.
• After borrower refinances and makes a few payments: Lender calls to offer a bigger loan or to refinance the borrower out of loan due to an undesirable feature lender put into original loan.
• If borrower accepts the offer: Lender refinances the original loan and lends additional money, charging high points and fees each time the borrower refinances.
• May increase the interest rate when refinancing.
• Charges a pre-payment penalty each time a new loan is taken (if the loan has a pre-payment penalty).

Borrower:

• Now has extra money but has a large debt, stretched out over a longer period of time.
• May find the extra cash is less than the additional costs and fees charged for the refinancing.
• Pays interest on the extra fees charged in each refinancing.
• If borrowers eventually cannot pay the monthly payments, they could lose their homes.

LOAN PACKING

Lender charges for 'padded' or overpriced:

• Closing costs
• Recording fees
• Broker fees
• Appraisal fees
• Unnecessary credit insurance
• Borrowers are often unaware of the real costs of these services.

MORTGAGE SERVICING ABUSES

After getting a mortgage:

• Borrower receives letter from lender saying monthly payments will be higher than expected.
• Lender says payments include escrow for taxes even though borrower has arranged to pay these separately.
• Lender may tell borrower late fees are being charged, even though mortgage payments were actually made on time.
• Lender may tell borrower that property insurance has not been maintained, forcing lender to buy more costly insurance at borrower's expense.

SIGNING OVER THE DEED

If borrower is having trouble paying the mortgage and lender is threatening to foreclose on the home:

• Borrower may be contacted by another lender offering to help refinance.
• New lender may ask borrower to sign over deed to the property to lender, saying this is a temporary measure to prevent foreclosure.
• Refinancing may never come through.
• New lender now has deed to the property and could sell it to someone else.
• Borrower would not get any money from this sort of sale, because borrower no longer owns the home.

Adapted from the Federal Trade Commission web site: Home Equity Scams: Borrowers Beware.