Well-intentioned debtors often turn to predatory lenders for help in paying off their debts. The result is the rise of an unscrupulous new breed of lenders, engaging in deceptive practices, charging excessive fees, and abusing vulnerable consumers.
Predatory lenders have several distinguishing characteristics. Seeking to exploit vulnerable and unsophisticated borrowers, they charge more in interest and fees than is required to cover the risk of lending to people with imperfect credit. These lenders steer prime loan candidates into more expensive sub-prime products. They entice customers with promises of easy, no-hassle loans, and bury the true cost in the fine print, leaving unsuspecting borrowers with unmanageable debts. This forces many into multiple re-financings with the same lender, compounding the problem with each repeated transaction.
Predatory lenders also often discriminate on the basis of an applicant’s race, religion, sex, marital status, familial status, sexual orientation, or disability. Locked out of the mainstream credit market, certain credit applicants are forced to turn to predatory, expensive lenders who charge astronomical interest rates and high fees.
Borrower protection starts with the borrower. To protect yourself from predatory lenders, or when you are shopping for a loan, it is important to understand all the terms and conditions of a proposed loan. Start with what is in the loan offer itself. Read what is between the lines as well as what is in front of your eyes. The Federal Trade Commission warns consumers to be on the look out for the following buzz words that should trigger warning signs that you are about to become a victim of predatory lending and consumer fraud:
A Low “Fixed” Rate —Ads that tout a “fixed” rate may not tell you how long it will be “fixed.” The rate may be fixed for an introductory period only, and that can be as short as 30 days. When you shop for a mortgage, you need to know when and how your rate, and payments, can change.
Very Low Rates — Are the ads talking about a “payment” rate or the interest rate? This important detail may be buried in the fine print, if it is there at all. The interest rate is the rate used to calculate the amount of interest you will owe the lender each month. The payment rate is the rate used to calculate the amount of the payment you are obligated to make each month. Some offers advertise a low payment rate without telling you that it applies only during an introductory period. What’s more, if the payment rate is less than the interest rate, you will not be covering the interest due. This is called “negative amortization.” It means that your loan balance is actually increasing because you are not paying all the interest that comes due, and the lender is adding the unpaid interest to the balance you owe.
Very Low Payment Amounts — Ads quoting a very low payment amount probably are not telling the whole story. For example, the offer might be for an Interest Only (I/O) loan, where you pay only the amount of interest accrued each month. While the low payment amount may be tempting, eventually, you will have to pay off the principal. Your payment may go up after an introductory period, so that you would be paying down some of the principal — or you may end up owing a “balloon” payment, a lump sum usually due at the end of a loan. You must come up with the money when a balloon payment is due. If you cannot, you may need another loan, which, in turn, means new closing costs, and potentially points and fees. And since housing prices are falling, you might not be able to refinance to lower your payments.
Mortgage rates near 30-year lows! Rates as low as 1%!
You are paying too much! Who doesn’t want to reduce their mortgage payments?
Loan amount $300,000 — pay only $900 per month!
— Ads with “teaser” short term rates or payments like these don’t often disclose that a rate or payment is for a very short introductory period. If you don’t nail down the details in advance about your rates and payments for every month of the life of your loan, expect payment shock when the rate and payment increase dramatically.
Important Notice From Your Mortgage Company.
Open Immediately — Important Financial Information Enclosed.
Please do not discard — account information enclosed.
— Appearances can be deceiving. Mailers that have information about your mortgage and your lender may not be from your lender at all, but rather from another company that wants your business. Companies can legally get your information from public records. Before you respond to any offer, review it carefully to make sure you know who you are dealing with.
You are eligible to take part in an exclusive interest rate reduction program. This financial institution has been licensed to negotiate your existing adjustable mortgage to a new fixed rate mortgage. You must contact us immediately regarding this notice.
— Some businesses use official-looking stamps, envelopes, forms, and references to make you think their offer is from a government agency or program. If you’re concerned about a mailing you’ve received, contact the government agency mentioned in the letter. If it is a legitimate agency — and not one that just sounds like a government agency — you will find the phone number in the Blue Pages of your telephone directory.
Victims of predatory lenders may be able to claim compensation with the help of an attorney.
If you have been victimized by a predatory lender, contact Consumer Fraud Online to discuss your options with a lawyer.