Marie Spodek, GRI, & Jerome Mayne are the authors of Mortgage Fraud and Predatory Lending: What Every Agent Should Know, published by Dearborn Real Estate Education.
3 Signs of Predatory Lending
To work in your customer’s best interest, always be on the lookout for signs of abusive lending practices. Here’s a rundown of the three most common strategies predatory lenders use.
January 1, 2008
This is excerpted from Mortgage Fraud and Predatory Lending: What Every Agent Should Know.
By definition, greater upfront costs and continuing higher interest payments are some of the differences between prime lending and subprime lending. While providing opportunities to build equity through homeownership, subprime lending does cost more.
Ideally, responsible, risk-based subprime lenders provide access to credit for prospective home owners with poor credit scores. However, lenders are considered predatory when their practices, although legal, are not in the best interest of the borrowers.
These lenders can include mortgage companies, creditors, mortgage brokers, and even home improvement contractors. Suspect practices include targeting certain groups of people and using pressure tactics to force borrowing decisions while not disclosing valuable decision-making in-formation.
In addition, these loans are often bundled with higher interest, lump-sum credit life insurance, excessive fees, and high prepayment penalties without regard to the borrower’s ability to repay.
Most subprime lenders and the loans they make are not subject to federal legislation, so it has been difficult to document how these practices impact predatory lending.
1. Reverse Redlining: Finding Easy Targets
After decades of redlining (when lenders would not make loans in certain communities because of racial composition), today many predatory lenders specifically seek out groups to which it will market these excessive loans. In other words, these groups become the victims of “reverse redlining.” Predatory lenders also seek borrowers who need cash due to medical issues, unemployment, or other debt-related problems, and they look for borrowers who may not be aware of their choices.
Here’s a closer look at the groups that are most often targeted by predatory lenders:
- The Elderly. Many of the older generation have lived in their homes for a long time and have built up equity. They may be “house rich and cash poor.” When they encounter cash problems due to medical, unemployment, or other debt problems, predatory lenders encourage them to turn to cash-out refinancing to solve their cash flow problems. Because they may not have the experience to comparison-shop, they are vulnerable to contractors and their lenders who suggest the only way to find the money for repairs is to sign papers through the contractor or loan officer, who then charges rates that do not correspond to the risk of the loan. They may be pressured into borrowing money with payments that are so high they are unlikely to make the payments on their fixed incomes.
- Minorities. Although minorities have greater access to credit than ever before, many African Americans and low-income families are paying far more for their credit than corresponding whites. According to the analysis by three reporters from the Charlotte Observer of more than 2.2 million 2004 mortgage applications, in 2005 blacks and Hispanics continued to pay more in interest rates than did whites — no matter high how their incomes.
- Immigrants. Many immigrants are eager to invest in their own homes, and, in fact, owning their own homes may be one of the reasons they immigrated to the United States. However, immigrants can lack the language skills and previous homebuying experience to enable them to effectively analyze loan terms and their implications. They may also lack the bank accounts and credit histories that would qualify them for traditional loans, thus making them easy prey for predators with “alternative” loan programs.
- Individuals with Low Credit Scores. Low credit scores do not always indicate poor credit risks. Sometimes, borrowers fall behind in payments due to circumstances that are not likely to be repeated: unforeseen medical bills, an unexpected job layoff. However, they can end up with unscrupulous subprime lenders who use abusive practices.
2. Charging Unnecessary Costs
As if loan predators have not found enough ways to soak these borrowers, they can always pack in more unnecessary or nonexistent products and services (generally overpriced insurance), sometimes to borrowers who have no beneficiaries. Lenders have especially added to the cost of manufactured homes by folding in overpriced fixtures, appliances, and even free trips. Before borrowers make their first payments, these loans are underwater because the market value of the collateral is less than the loan amount.
3. Giving Misleading or No Information About Loans
Predatory lenders can use bait-and-switch tactics by offering loans that seem almost too good to be true. What they initially offer is often lost in the process, and borrowers may not even realize that the cost or loan terms are not what they originally agreed to. Borrowers have been told that the FHA insures against property defects and loan fraud, neither of which is true.
Borrowers should take time to shop around and compare houses, prices, estimates, and referrals. No reputable lender will ask a borrower to sign a blank contract or loan documents, because blank forms only present the opportunity for dishonest individuals to fill in false information.
Changing the Climate: It’s Up to You
Predatory lending is a big problem in today’s economy. However, this practice is not being perpetrated by all loan officers, and not all mortgage brokers are crooks. The key to changing the climate is to educate borrowers. There are crooks in every profession, and the consumer needs to know what to watch out for.