Behold, Beware: Signs of Predatory Lending

Predatory lending is a term often associated with short-term consumer financing options such as payday loans, but it’s prevalent in the home loan realm as well. In fact, mortgage fraud is rampant these days.

At best, these practices are annoying to potential victims, but for the actual victims, the end result could be far worse: the loss of a home, financial catastrophe, the destruction of hard-earned credit scores.

With that in mind, it’s vitally important to choose the right lender and remain fiscally secure. We’ve taken a look at some common predatory lending practices to alert prospective borrowers to the warning signs before they’re victimized. It’s vital that you know how to protect yourself, and know where to go if it’s already too late for that.

Current homeowners seeking refinance options are at greater risk of fraud than regular home loan seekers, but no one is immune by any means. At particular risk of mortgage scams are any buyers who, due to credit issues or self-employment status, must rely on subprime lending.

Also at risk are those seeking to buy in neighborhoods that have been red-lined (read: greatly discriminated against) by conventional lenders. Almost by default, a buyer in this kind of area, which is likely low-income and in need of some serious housing overhaul, is placed at the mercy of subprime lending providers.

But it goes beyond that.

There are many people involved in fraudulent, predatory practices, ranging from large and well-known banks, loan servicing companies, small-time con men who once hocked aluminum siding and water filtration systems door-to-door, corrupt loan originators working for otherwise legitimate firms, jaded real estate attorneys, builders, agents, and more.

THE BOTTOM LINE: Predatory lending is profitable, and more opportunists are always coming out of the woodwork. Here’s a list of predatory practices and tactics used to promote them, in no particular order.

1. Aggressive Solicitation. Specifically, by lenders. The guilty parties are pushy in their approach to borrowers. Despite having their ability to telemarket curbed by the FCC “No Call” rule, they still have the Internet, door-to-door salesmen, the U.S. Mail, and other resources. The pitches a borrower/victim will hear are often similar:

• Lower your monthly mortgage payments!
• We will save you hundreds each month by consolidating your credit card debt and other payments!
• Use your equity to buy that new [insert car, boat, kitchen, dream vacation or other indulgent purchase here]!
• Save your home from foreclosure and bankruptcy!
• Check out these Florida home loan refinance options at low, low rates!

They don’t take no for an answer and will insinuate themselves into your life, become your friend (which is particularly dangerous to the elderly, who are often lonely as well as endowed with large amounts of home equity). An Internet lender will send you many, many emails if you’re unlucky enough to land on their list. Don’t even think about trying to unsubscribe, because they will find a way to get to you.

2. Home Improvement Scams. This classic operation is a team effort. If you need a new roof or structural repairs, or maybe have a dream of adding a second bath or a new kitchen, you’re a target. A contractor who just so happens to be “working in the neighborhood” stops by to talk. Turns out he has equipment already on site and can offer a deal on any project.

Not only that, but his company can finance it (the paper will then be sold to a predatory lender), or he has a friend in the mortgage business who has a spiffy new home improvement program. The bewildered owner agrees, papers are signed, work begins immediately, and what’s done is done. The work is shoddy, overpriced, and often done without proper permits.

Then the real damage comes — with the loan. It will be the poster child for predatory lending, with a high interest rate, excessive surcharges, a prepayment penalty that locks the borrower in. You name it. In particular, people who have been impacted by two dreadful hurricane seasons or other such hardship should beware. The teams may be in your area already.

3. Pushing Hard For Refinancing. An unethical lender, after convincing a buyer to take on a new loan, will start pitching refinancing of the first Florida home loan rather than granting the second mortgage the borrower originally sought.

The lender might argue, for the convenience of a single payment or the potential savings, that this is the way to go. He may also initially promote a second mortgage at 10 percent, but reduce it to 8 percent if borrowers agree to a total refinance of the first home loan.

The borrower will probably save on his monthly payment. A second mortgage is usually for a term of 10-15 years, whereas a first mortgage is usually amortized over a 30-year span. Wrapping both into a total refinance of a mortgage that may have only 20 years left, and amortizing the total amount over 30 years will usually result in a substantially reduced payment, even at the higher interest rate.

In the long run, the borrower will pay tens of thousands in additional interest (plus the initial loan fees, usually wrapped into the loan) over the life of the loan and will lose a great deal of equity. It doesn’t end there. In addition to the immediate profit from a larger loan, the lender’s real goal is to gain a first mortgage position on the home.

A second mortgagee is always behind the first in the case of foreclosure, and/or bankruptcy, and may have to pay off the first mortgage in order to recover on its loan. A borrower that develops a financial problem will be able to default on a second mortgage with little fear of foreclosure if there is a larger first mortgage that he continues to make payments on.

4. The Classic Bait & Switch. This commonly-used term comes from numerous retailing industries, where a great sale on a plasma TV or new car gets buyers to come down to a store, only to find out that the item is sold out or the sale no longer applies. However, the retailer has something “almost as good” that he’ll give you a good deal on to make up it.

The practice is common in the mortgage field as well.

A borrower commits under a set of terms — a certain interest rate, a fixed - or adjustable-rate mortgage with a specified time frame and adjustment index, loan duration, etc. Then, at closing, the borrower realizes the documents specify a higher rate, a different adjustment, a five-year note with a balloon, or other terms to which he had not agreed.

The loan originator does not answer his phone.

The sellers are beginning to look real unhappy.

Under pressure and distraught, the borrower signs the documents and swears he will get the mess straightened out. But with the papers signed, it is now a legal issue that takes time, money and perhaps courts to resolve. If you think this could never happen to you, a California study of 125 people who used subprime lenders reported that 70 percent of borrowers said that at least one key of their loans changed negatively at closing.

5. Lending More Than a Borrower Can Afford. It happens more often than you might think — a lot more often. You’ve seen the ads in your email box or on late night TV for sure.

• Borrow 125 percent of your home’s value!
• Use your house to buy a new [insert car, yacht, home entertainment system, dream vacation or other indulgent purchase here].

While these can be classified under aggressive solicitation (see above, #1), they are also part of a more devastating practice. Purposely granting and/or structuring a loan with monthly payments in excess of what a client can reasonably be expected to pay is probably as bad as it gets. An over-the-top loan-to-value ratio is all but guaranteed to get you in trouble, but there are other things to watch out for on top of that.

Disregarding income and debt, for one. Bad lenders ignore the conventional guidelines regarding the borrower’s ratio of debt to income, or the level of income itself. If a borrower is lined up to pay 55 percent of his income to PITI, for instance, default is all but guaranteed.

Negative amortization is now illegal in many states, and should be in all of them, but lenders can usually get away with closing these deals with an uninformed borrower, and with little risk of prosecution. With a “neg am,” the borrower is required to pay less than the amount due each month, with the balance being tacked on to the principal. At some point, that swollen principal will come due. Which means disaster in most cases.

Interest-only loans. Zero amortization is less dangerous than negative amortization, but both Florida home loans are a recipe for disaster. In both cases, the borrower makes a minimum payment for a period, covering interest but paying nothing toward principal. After 5-10 years, payments are accelerated to cover both interest and principal.

A lender usually does this to virtually insure that the borrower will fall into default, and when that inevitably happens, the lender is the first to know and can approach a customer to offer refinancing to bail them out of the jam. How convenient.

Under any of the above scenarios, a borrower might refinance 2-3 times before ultimately losing the house to foreclosure or being forced to sell, losing most or all his equity in the process and walking away virtually empty handed.

6. Loan Steering. This happens when a bank or mortgage company notifies a qualified borrower that he is not, by reason of income, credit, or a host of other causes, qualified for a Florida home loan from that institution. This may be done as a routine practice by a predatory institution, or an honest bank may be the totally innocent instrument of a renegade employee.

In the latter situation, a rejection is conveyed by a loan officer acting totally on his own. But, it just so happens, that officer has a friend who might be able to help out the borrower. He can get the borrower pre-approved and into that dream house in no time. Of course, the loan that the buddy is able to arrange varies greatly from different from what the buyer had imagined when he started the process. But that’s a story for another time.

Oh, and the Florida home loan rates are higher (usually by a lot).

But rejection by the bank has shaken the buyer, and he’s ripe for the picking. Then any number of combined predatory practices discussed above can (and will) come into play. Don’t let it come into play for you. Make absolutely certain if you work with a mortgage broker and/or lender that you receive ethical and thorough treatment. Don’t make the mistake of your life.