Understanding, Guarding Against Abusive Practices
What are the hallmarks of a predatory loan and what can consumers do to protect themselves from being victimized?
Most predatory loans have at least one of the following traits:
* High upfront loan fees, or “points.” Points on a typical refinance or home-purchase loan can amount to 1% to 2% of the loan amount. Predatory loans typically charge 7%--$70 for every $1,000 borrowed--and sometimes more.
Often, the fees are rolled into the loan balance, making the cost even higher because borrowers pay interest on the fees.
* Extremely high interest rates. The average consumer can now get a home loan with a rate below 8%, but predatory lenders charge rates as high as 20%, according to the Assn. of Community Organizations for Reform Now, a consumer group.
* Single-premium credit insurance. Credit insurance, which pays the lender if the borrower defaults or dies, is significantly more costly than regular life insurance, and the need for it is debatable. Lenders contend that low-income borrowers often can’t qualify for traditional life insurance because of either poor health or poor credit, so credit insurance can be valuable. But by financing 30 years of premiums into one lump sum, paid upfront, the consumer pays thousands of dollars in interest.
* Prepayment penalties. These penalties generally lock consumers into paying thousands of dollars in interest charges if they pay off their loans early.
* Balloon payments and “flipping.” Both practices force or encourage borrowers to refinance their loans over and over again, paying transaction fees each time.
* Inappropriate loans. Legitimate lenders won’t lend money to borrowers who can’t repay the loan, based on their monthly income. Predatory lenders, however, will make a loan based on the equity in the home, knowing that they can foreclose to get their money back.
* Misleading come-ons. Predatory lenders often tell consumers that they can lower their monthly payments by refinancing their existing mortgage and get cash for home improvements or to pay off other debts. But when the loans are finalized, the actual terms include double-digit interest rates, high upfront fees and unaffordable monthly payments.
Consumer advocates suggest that individuals considering a mortgage loan do several things to protect themselves:
* If you’re unfamiliar with the loan process, consider going through loan counseling. Nonprofit counseling centers can be found through the Department of Housing and Urban Development at https://www.hud.gov or through local HUD offices.
* Consider having a loan-savvy friend or relative review your paperwork--or go with you--when you shop for loans.
* Carefully review your loan documents and pay particular attention to the interest rate, fees and terms of the deal. Watch out for prepayment penalties and balloon payments. And remember that federal law allows borrowers a three-day “cooling-off” period during which they can back out of the deal.
* If you buy credit insurance, make sure you understand what it costs, what it covers and why you need it. Remember that credit insurance doesn’t pay your relatives if you die--it pays the lender the balance of the loan. Also, don’t finance the premium. Instead, pay the premiums in monthly or annual installments.
* Make sure to take a copy of the loan agreement--with the final rates and terms--with you.
* If your payment coupons show an interest rate or monthly payment higher than those in your loan documents, immediately call or write the lender. If the complaint isn’t satisfied there, take it to your state real estate department or department of corporations.
