Predatory Lending

Page contents

What is predatory lending?

What to watch out for

Predatory Loan Indicators & Sales Practices

Predatory Loan Terms

Things to not do

What to do

Before signing loan documents, you have the right to know

Resources

 

Information about Predatory Lending and How to Avoid It

What is predatory lending?

It can be any or all of the following:

  • A loan designed to strip equity from the owner of the property
  • An unaffordable or unreasonable loan designed to be refinanced repeatedly
  • A deceptive loan designed to force the owner into foreclosure

 

What to watch out for

  • A loan with payments you can't afford
  • Product steering (being guided toward a loan that is not in your best interest)
  • Excessive fees and points paid to mortgage lender, real estate brokers or appraisers
  • Flipping (repeated refinancing)
  • Prepayment penalties without disclosure
  • Single Premium Credit Life Insurance Policies
  • Daily interest changed when payments are late
  • Upfront fees or costs just for making a loan application

 

Predatory Loan Indicators & Sales Practices

  • Aggressive solicitations to targeted neighborhoods
  • Steering due to protected class to high rate lenders
  • Home improvement scams
  • Purposely structuring the loan with payments the buyer cannot afford
  • Falsifying loan applications such as inflated income level, assets or incorrect age
  • Changing loan terms at closing
  • Loans in excess of 100% of the value of the property
  • Adding insincere co-signers
  • Making loans to mentally incapacitated homeowners
  • Failure to provide accurate loan payoff amounts
  • Forging signatures on loan documents
  • Paying off lower interest mortgages

 

Predatory Loan Terms

  • Inflated appraisal values
  • Excessive broker fees
  • High points
  • High annual interest rates
  • Padded closing costs
  • Balloon payments
  • negative amortization
  • Required credit insurance
  • Required homeowners insurance with a particular company
  • Falsely indentifying loans as lines of credit
  • Itemizing duplicate services and charging separately

 

Things to not do

  • Sign a blank document or anything to be filled in later.
  • Sign anything you don't like or don't understand.
  • Trust an ad promising "No credit? Bad credit? No problem."
  • Stop making your current house payment while you wait to close on a loan.
  • Be afraid to ask questions or seek outside advice.

 

What to do

  • Know your rights
    • Become familiar with what questions to ask before signing loan documents (see below).
    • If you are refinancing, you have the legal right to change your mind up to three days after the loan closes.
    • Attend a homeownership education course offered by the U.S. Department of Housing and Urban Development (HUD)-approved, non-profit counseling agencies (webpage).
    • Meet with a housing counselor to review your loan documents with you.
  • Trust your instincts
    Be cautious of trusting someone you just met that wants to be your best friend and sell you something at the same time.
  • Shop around
    • Get a second opinion from another lender.
    • Seek advice from housing professionals before you make a decision.

 

Before signing loan documents, you have the right to know

  • The monthly payment amount
  • The total cost of the loan (the amount you must repay including interest and fees)
  • The annual percentage rate
  • How long you have to pay back the loan
  • If there is a prepayment penalty
  • Whether taxes and insurance are included in the payment
  • If there is a balloon payment (lump sum due)

 

Resources

Washtenaw Housing Education Partners (webpage)

U.S. Department of Housing and Urban Development (HUD) (website)

 

 

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