As the housing market sours or softens –whatever you want to call it–some Americans are finding they overpaid for their homes and they're struggling to make their monthly mortgage payments. This is the kind of time when predatory lenders swoop in for a bite of you. They claim they can rescue you with too-good-to-be-true loans, but those loans turn out to be abusive.If buying a home is the American dream, then predatory lending is the American nightmare. Predatory lending typically occurs in refinancing deals. Unscrupulous lenders cause people to lose their homes and neighborhoods to lose their luster. Aggressive mortgage brokers target the poor, the elderly, minorities and women, but it can happen to anyone.
Charles K. is a combat veteran who lives on a fixed income. He was a month or two behind on his mortgage, so he wanted to refinance in hopes of arranging a lower monthly payment. The mortgage broker promised Charles he could lower his payment from $980 a month to $880. The broker advised Charles to stop making payments to his old mortgage company, because his new loan would be ready soon. But then the broker waited more than a month to schedule Charles' closing. At that closing, Charles learned his new monthly payment was $1250 –hundreds more than the old payment he had been struggling to make. By now, Charles' old mortgage company was threatening to foreclose on his home, so he felt trapped and he signed for the new loan.
When I investigated Charles' case, I learned his monthly payment was jacked up illegally. By law, the broker was supposed to inform him the price was going up. The reason the monthly payment was so high is that the brokerage firm charged $13,000 to process the loan. Pure profit for the broker. This abusive fee was then rolled into Charles' loan, so he ended up owing $146,000 on a house that was only worth $126,000. Charles couldn't afford his new monthly payments. Eventually, he declared bankruptcy and the bank sold his home on the courthouse steps.
That's just one example. There are dozens of variations on predatory lending. Predatory lenders often work through home improvement companies. These contractors approach people about sprucing up their homes. If the homeowners say they can't afford it, the contractor then steers them toward a predatory lender. Of course, the loan fees are high and the quality of the carpentry is low.
Some predatory lenders purposely structure their loans so the monthly payments are too high for the borrower. When the borrower defaults, the lender offers yet another loan with additional closing costs and fees. This is called "flipping." Consumer advocates have documented cases in which homeowners were "flipped" into more than ten different loans in just four years. One homeowner just wanted to borrow $26,000, but ended up paying $29,000 on multiple loans in closing costs and fees!
Know the signs:
1. Predatory lenders often promise one set of terms when they talk to you, then jack up the price at closing. It's a sign that you're in for a rough ride.
2. If a mortgage broker asks you to sign a blank application form, that's a red flag. The broker may intend to falsify your credit history so you'll qualify for a loan you can't afford.
3. Adding co-signers is another ploy. Unscrupulous brokers may ask you to come up with a co-signer, knowing full well that person doesn't really intend to contribute to the payments. It's another way of getting you an expensive loan that the broker will make a lot of money on.
4. If a lender refuses to give you a copy of the good faith estimate, that's a signal that the estimate will change. The lender doesn't want you to have written proof of the terms you were first offered.
5. Predatory lenders often structure loans with balloon payments at the end. The monthly payment seems manageable, but in a few years time you could owe tens of thousands of dollars all at once. Of course, the broker is hoping you won't be able to afford the balloon payment and you'll refinance again, generating more fees for the firm.
6. If you see 'credit life insurance" as a line item in your loan, beware! This kind of insurance is supposed to pay off your loans if you die. It's a rip-off. A basic life insurance policy is all you need. Plus, predatory lenders charge exorbitant premiums for products like credit life, credit disability and involuntary unemployment insurance.
7. Same goes for homeowner's insurance. Predatory lenders have been known to add expensive homeowner's insurance to a loan even though the homeowner already has insurance through an outside company.
8. Some predatory lenders continue to abuse you after you've gotten your loan by tacking on expenses to your monthly payments. They may charge for providing an escrow account for your property taxes even though you are paying them directly yourself. They may charge late fees even when your payments are on time. If you try to refinance with another lender they may refuse to provide you with an accurate payoff statement.
Do your homework:
1. Be the hunter, not the hunted. Don't borrow money from a company that slips a flyer under your door or blares at you in a TV commercial. Find your own mortgage company. Check with the company that currently holds your mortgage if you want to refinance. Go to the bank where you have your checking account. Ask friends and neighbors if they've had a good experience.
2. Once you narrow down your list, check out the mortgage brokers or lenders by contacting the BBB and your county and state consumer protection agencies.
3. When a mortgage broker or lender gives you an estimate, get it in writing and make sure you have your own copy.
4. If you want a loan to make home repairs, hire your lender and contractor separately.
5. Never sign any paperwork that contains blanks.
6. Never follow advice to stop paying on your old mortgage loan. This could impact your credit record and trap you into accepting a predatory loan.
7. Demand a copy of your closing paperwork a couple days before the closing. Review it to see if the terms are different from what you were initially offered.
8. When you refinance with a different lender, you have the right to back out of the loan within three days of your closing. If you detect problems at your closing, immediately ask a real estate attorney for an opinion, so you can take advantage of that window.
How to complain:
If yours is an FHA loan, complain to HUD, the department of Housing and Urban Development. If you've got a Veteran's loan, complain to the V.A. Contact your county and state consumer protection offices too. If they can't help you, they'll give you a referral. Your city or county office of fair housing may also be able to help. Complain to the BBB so other consumers will have a paper trail to follow.