High-Cost "Predatory" Home Loans: How to Avoid the Traps
Brought to you by "The Simple Man's Guide to Real Estate"
A few unscrupulous lenders are tricking cash-strapped, unknowing borrowers into expensive home equity loans and mortgages. The big risk: If you can't repay the loan you could lose your home. Here is useful information for anyone thinking about a home loan.
Homeownership is at an all-time high. That's great news. But the media, financial regulatory agencies and law enforcement officials also are reporting that something is robbing homeowners of money and putting many of these same families at risk of losing their homes. It's a problem known as "predatory" lending.
There is no clear-cut definition of a predatory loan, but many experts agree that it is the result of a company misleading, tricking and sometimes coercing someone into taking out a home loan (typically a home equity loan or mortgage refinancing) at excessive costs and without regard to the homeowner's ability to repay. Victims who have trouble repaying a predatory loan often face harassing collection tactics or are encouraged to refinance the loan at even higher fees.
And remember this: If you pledge your home as collateral for a loan, and you can't repay, you could lose your home.
Predatory mortgage lending primarily has been a problem with non-bank companies that specialize in marketing to people with poor credit histories. These companies may include some mortgage brokers, home improvement contractors and finance companies. Predatory lending also has been associated with non-mortgage loans. Obviously, not every non-bank lender is unscrupulous, but you need to be informed so you can avoid doing business with those that are.
Reports indicate that predatory lenders target consumers they believe are in need of cash or are otherwise vulnerable. Examples include older people who need money for medical bills or home repairs; moderate- and middle-income consumers who need to pay off credit card bills or consolidate other debts,or who want to make some dream purchase; people who don't shop around for goods and services; and lower-income or minority communities where there may be limited competition from more reputable lenders.
"Some abusive lenders use misinformation and high-pressure tactics to prey on vulnerable homeowners," says FDIC Chairman Donald E. Powell. "Clearly, one solution is to make sure that homeowners are aware of the predatory lending problem, so they are in a better position to protect their investment."
Various federal laws help protect consumers from certain predatory lending practices. The Truth in Lending Act, for example, requires lenders to provide timely information about loan terms and costs. The law also gives consumers the right to cancel a home equity loan and certain other loans secured by a home up to three business days after signing the loan contract.(This is known as your "right of rescission.")
Furthermore, under the federal Home Ownership and Equity Protection Act (HOEPA),if a refinancing or a home equity loan is classified as "high cost," the lender must provide key information about the loan three days before closing on the loan. The HOEPA also prohibits lenders from making a home equity loan without regard to a borrower's ability to repay.
These laws provide important protections and information for consumers. But there also are important steps you can take to protect yourself... and your home... from a predatory loan. Here are our suggestions, many of which can be useful for anyone thinking about obtaining a home equity loan or mortgage.
1. Ask yourself: Do I really need this loan? "If you are having money problems, consider all your options before you use your home as collateral for a loan," says Jeanne M. Hogarth, program manager for consumer policies with the Federal Reserve Board. "Talk with someone knowledgeable and trustworthy before making any decisions. Remember, if you decide to get a home loan and can't make the payments, the lender could foreclose and you could lose your home."
Hogarth says among the resources you may wish to consult are your lenders, a reputable credit counseling service in your community, and a local social services agency. There also are housing counseling agencies that offer advice on everything from buying and financing a home to avoiding foreclosure if you miss loan payments. The U.S. Department of Housing and Urban Development (HUD) can suggest a housing counseling agency near you.
2. Deal with a reputable lender. Be careful when dealing with unfamiliar lenders, home-improvement contractors or loan brokers, especially those who contact you out of the blue. And, don't fall for a friendly voice or a fantastic-sounding sales pitch, either.
"Many people can avoid being talked into loans they cannot afford if they learn how to recognize fair and honest lenders before borrowing money, "says Valerie Williams, a Community Affairs Officer with the FDIC. Your best approach? "Deal with lenders who have a good reputation in the community,"she says, "and guard against lenders who resort to high-pressure practices."
Other qualities to look for in a lender, according to Williams: someone who will put all costs in writing, carefully explain the loan, encourage you to ask questions, and not rush you into a quick decision.
Also, find out if there have been consumer complaints filed against an unfamiliar lender. Start by contacting your state government's consumer protection or Attorney General's office (listed in your phone book or other directories) or the local Better Business Bureau.
3. Ask questions and shop around. If you need to borrow money, contact several banking institutions or other reputable lenders, not just one. Most experts recommend getting quotes from a minimum of three lenders. "The best deal isn't always the first one you find," says Kevin Shields, an FDIC Community Affairs Specialist.
Find out about the different types of loans that meet your needs and financial situation, especially the loans that don't require you to put your home at risk if you run into repayment problems. Also, be wary of any offer to lend more than what your house is worth. That may sound like a good opportunity, but remember that if you run into problems repaying the loan, you could lose your home and still owe money to the lender (the amount of the loan above the value of your home).
Don't focus on getting the lowest monthly payment. Consider the duration or term of the loan and the total cost of the loan fees, especially those you'd be paying back (with interest) during the life of the loan. Then negotiate for the best deal just as you would for a new car. Let the lenders know you've been shopping around. They may be willing to compete for your business by offering better rates or terms. For a list of questions to ask a lender, see our list of questions to ask a lender.
4. Understand the importance of credit reports and credit scores. It's a good idea to make sure your credit report accurately reflects your credit history, such as how you repay credit cards and loans. Some consumers who have inaccurate information in their credit report (compiledby credit bureaus) could qualify for a lower-priced loan after their records are corrected.
For certain loans secured by a home, you have up to three business days after signing a loan contract to change your mind and cancel the deal without penalty.
You can get a copy of your credit report (free in some cases but no more than $9 under current law) by contacting any of the three major credit bureaus: Equifax (call 800-685-1111 or go to http://www.equifax.com/on the Internet) ;Experian (866-200-6020, which is toll free, or go to http://www.experian.com/); and TransUnion (800-888-4213 or http://www.transunion.com/). Primarily because not all lenders report information to all three of these credit bureaus,your credit reports may vary significantly. That's why some experts suggest that you review your credit report from all three.
Many lenders also use an applicant's credit score in deciding whether to give that person credit and at what cost. Your credit score usually is a number between 300 and 900. A high score means you could get a "prime" loan with an attractive interest rate. A low score means you may only qualify for a "subprime" loan with higher rates and fees than those quoted to people with unblemished credit.
Your credit score information, which includes an explanation of how your score was derived and, in some instances, how you can improve your score, is available for a small fee. You can obtain your credit score information by calling or checking the Web site of any of the credit bureaus mentioned previously.
"Knowing your credit score, correcting errors in your credit report and aggressively shopping among several lenders will help you get a good loan, "says Angelisa Harris, a Senior Community Affairs Specialist with the FDIC. She adds that if you currently have a low credit score, you may want to wait until you improve your credit score before taking out a loan that could place your home at risk.
5. Know what you are signing. Read the loan documents carefully, especially the fine print. Only sign a loan agreement after you understand the terms of the loan, the fees, and your obligation to repay. For example, know whether your loan agreement contains a "balloon payment" or a prepayment penalty. (See our list of Questions to Ask.)
Under federal laws such as the Real Estate Settlement Procedures Act and the Truth in Lending Act, you have a right to key information about how much you can expect to pay for a loan. For example, you must receive a "Good Faith Estimate" of mortgage loan settlement fees and services early on in the process. You also have the right to get a preliminary statement of final settlement costs (it's called the "HUD-1" form) the day before the closing. You may want to ask an attorney or a housing counselor to review this document prior to closing.
When you get these and other loan documents, look in the fine print for overcharges - perhaps a payment to a broker you never met, a bill for a detailed appraisal when only a drive-by review was performed, and fees for credit reports that are many times their actual cost. At closing, compare the interest rate, fees and other costs shown in the final documents with those given to you in preliminary estimates.
Other words of wisdom: Never let a lender rush you or pressure you into signing a loan contract - a possible sign that the lender has changed loan terms and doesn't want you to notice. Check that all the information in your application accurately reflects your financial situation, and never agree to falsify information on a loan application in order to qualify for the loan.
Don't sign a loan contract if the terms have changed from what you were told previously and if the lender can't explain to your satisfaction the reasons for the change. Likewise, make sure you only sign a complete and final loan agreement. Don't sign if there are blanks for dollar amounts or loan terms, even if someone offers to "take care of things" for you, because they may only take you for a lot of money!
If you're not comfortable going to the closing alone, consider having a lawyer there with you to examine the loan documents before you sign. Get a copy of the signed loan documents before you leave the closing and keep them inyour files. Should a predatory lender change the terms of the loan from what was agreed upon at the closing, contact HUD, a housing counselor or an attorney and provide a copy of your signed loan documents.
Important reminder: For certain loans secured by your home, federal law gives you up to three business days after signing a loan contract to change your mind for any reason and cancel the deal without penalty.
6. Speak up if you think you've been treated improperly.Try to resolve any problems with the lender. If that doesn't work, consider asking for help from the appropriate state or federal government agency. A good place to start is your state's consumer protection office or Attorney General. In addition, several federal government agencies also are good sources of guidanceand assistance.
The FDIC's Kevin Shields also notes that a variety of legal services organizations provide special help to low-income people who have been victimized by predatory lenders. They also can be found in your phone book or by calling your state or local government.
The bottom line: Don't rush into a decision with any loan, but especially one where you can lose your home if you can't make your payments. Be aware of your options - especially the different kinds of loans available from reputable lenders. Review the terms and conditions of the loan before you sign on the dotted line. And remember that if you have questions or concerns, there are government agencies and other organizations in your community that can come to your assistance. You do not need to face a loan problem alone.