Lesson 9: Watch Out For Predators
Jewell: Hello. My name is Jewell DiDucca and welcome to American Consumer Credit Counseling's presentation on home buying. Our home buying workshop is a nine lesson series focused on the essentials of owning your own home. Today in Lesson Nine, we'll be discussing predatory lending. Let's get started.
As a renter or home owner, you probably receive many calls and offers in the mail for credit cards, bill consolidation loans, home equity loans, home remodeling loans, and refinancing options. Oftentimes these deals sound too good to be true and too often they are. You need to remember that some lenders and salespeople are out to make money for themselves and your best interest may not concern them. They may be pitching loans that you don't want and you don't need. Even worse, they may be offering loans that carry huge fees and high interest rates. These types of lenders are referred to as predatory lenders. That's exactly what they are, predators.
How can predatory lenders get away with what they do? First of all, it's legal as long as they disclosed the terms to you. Secondly, they rely on the fact that most people don't care enough about their financial affairs to bother reading the terms and conditions of the loans they're taking out. Third, they tend to write their agreements in such a way as to confuse people as much as possible. Also, they know that you need money and may not have many options open to you. Finally, they prey upon your trusting nature.
Always remember that when it comes to your money, you have to watch out for your own best interest. Predatory lenders do not discriminate. They'll take money from anyone that they can. They even target certain types of groups of people. Some of the potential predatory lending targets include people with numerous credit cards with large balances, people who own their own home and have equity that could be borrowed against it, people who do not speak or read English well, elderly people, military personnel, teachers, police and firefighters, inner city residence, and low income people.
You need to understand that most lenders base their decisions on your credit history. If you don't have a good one, you can expect to pay higher interest rates and higher fees. You must be on the alert for any schemes that may identify predatory lender. Here are some things to look out for:
A lender asked you to sign papers that contain blanks. You should never sign documents that contain blank spaces because numbers could be written in after you leave the office. A lender asked you to sign papers without allowing you to read them first. You should always have a thorough and clear understanding of the documents you're signing. A lender is reluctant to provide you with the copy of contract to read ahead of time. A lender does not disclose the loan cost upfront with you or provide you with a good faith estimate. A lender is required by law to give a good faith estimate and truth-in-lending statement within three business days of taking a loan application. A predatory lender may not disclose that the loan has fixed rates or adjustable rates. They may also add life insurance at the closing without discussing it or getting your advanced approval.
Furthermore, predatory lender may not discuss a prepayment penalty at the time of your loan application. Beware of prepayment penalties. Some lenders will charge large penalties for prepayment anywhere from one to five years after you take out the loan. Predatory lenders are also known to use a practice called flipping. Flipping is a practice with a realtor loan officer and usually the appraiser join together to sell you a property at an inflated price. If this happens to you, you could find out that you paid too much for a property and can't really afford the payment. Worse off, you may not be able to refinance your loan or sell the property. The desire to own your own home can be intense. Don't allow that desire to blind you to things that just don't seem right.
Here are a few things you may encounter that should raise your suspicion. One, you may receive offers for loans or credit cards you didn't ask for. Some of these offers may be good, some of them may be bad. It's up to you to learn how to evaluate these offers so that you know a good opportunity from a bad one. Two, you may also encounter that the disclosed cost of your loan are substantially different at the time of closing. If you see a discrepancy in these costs, you should ask for an explanation. If you don't like the numbers or the explanation, don't be afraid to postpone the closing or walk away from the loan.
However, sometimes a lender may not necessarily be using predatory practices if the cost at closing are different than the ones disclosed to you at the time of the application. Changes during the application process will impact the final cost. However, your lender should be able to provide a solid explanation and documentation to support these changes.
Three, sometimes you notice that the annual percentage rate disclosed in the truth-in-lending at the closing is different than the one you got at the time of the application. Don't close until you know what the difference is and until you're comfortable with it. Four, you may also be offered the opportunity to refinance your loan for a lower interest rate at no cost to you. In this case, the old adage that nothing is free is appropriate. Fees of some sort have to be paid on just about all home loans and secondary mortgages. Someone has to pay them and make sure you know who that is. Five, sometimes the sales person tells you, you need to act quickly. Don't be pressured into a decision you're not comfortable with. If you miss this opportunity, another one will come along. Lending is a competitive business and there are special deals offered all the time.
Six, oftentimes, predatory lenders will approach you about moving up into a nicer home or neighborhood without you initiating the contact. They'll offer to buy your current home so that you'll be free to purchase another home. They tell you that they'll pay you cash for your current house if you sign over the deed of the property to them. You can then go and buy a nicer home using the cash for the down payment. However, you'll probably find out that you can't qualify for another house since your name is still on the mortgage to the old property. Now, you can't purchase the new property and you've lost the old one since you signed over the deed. What sounded like a good opportunity to move up to a nicer home is, in fact, a terrible scheme.
Seven, you should be suspicious if you're already financial difficulties and someone to offers to help save your home. Someone might offer to pay up your delinquent amount if you sign over the deed to the property. You would then pay them a much higher interest rate than your current loan rate and if you are late with one payment you might lose your house and any equity that you might have had. You also want to question any lender that offers to lend you more than what your property is worth. Some lenders will give you up to a 125% of the value of your property. That may sound like a good idea until you have to sell your property and you can't get enough money to pay off your loan. Any time you're borrowing more than what something is currently worth, you could be asking for trouble.
Lastly, you might want to be on the lookout for subprime loans. Subprime loans are loans made to people with credit issues or low credit scores. On a subprime loan, the interest rate and fees charged are higher than those given by prime rate lenders. A predatory lender will charge much higher rates and fees than warranted. You'll only know if the rates and fees are reasonable for your credit rating if you do comparison shopping with several different lenders. You need to shop around and compare cost to be sure you're getting the best deal that you can qualify for. If you think you've been a victim of predatory lending practices, you must keep in mind that in most cases, there's nothing illegal about it if the lender has provided the required disclosures to you.
If you didn't take the time to read and understand them or compare that loan with any others, the problem is yours and yours alone. However, if you're still in the rescission period, you may change your mind and walk away from the loan. Remember that the rescission period is the three days that you have to change your mind about taking the loan. Secondly, you want to work on getting your credit and financial situation back in order as soon as possible so that you can refinance out of your problem loan. Lastly, if you think that something illegal has been done, you should contact your state attorney general and the banking commission to file a complaint. You may want to seek legal assistance from an attorney or legal aid office and a local non-profit housing counseling agency may be able to help you with possible financial solutions.
The financial aspects of purchasing a home can become complicated. You must constantly be on guard against predatory lenders. They live off your reluctance to do your research, your desire to get something for nothing, and your impatience at going through all the normal procedures and steps. Shortcuts can be very costly to you. If you take the time to do your research, ask questions and shop around, you'll be able to find a lender that has your best interest at heart. This concludes our home buying series.
I'm Jewell DiDucca. Thanks for watching. If you have any questions about the home buying process, please contact us today.