Learn the Signs
of Predatory Lending
Jeanette Joy Fisher
If you're shopping for a home
loan, you can save thousands of dollars by being
aware of predatory lending practices, in which
you're charged too much for your loan or are forced
to buy services you don't really need. You can
protect yourself by learning to recognize the signs
of predatory lending. The Center for Responsible
Lending lists seven specific warning signs that
consumers should be aware of when applying for a
mortgage.
The first warning sign is excessive points and loan
origination fees. Since these fees are often
financed as part of the loan, it's easy to hide
them. Competitive lenders typically charge 1% or
less of the loan amount, but predatory lenders often
charge 5% or more, which can add up to thousands of
dollars over the course of a home mortgage.
The second sign is a high prepayment penalty.
Mortgages don't have to contain a penalty for paying
off a loan early. In fact, only about 2% of loans
from competitive lenders include such a penalty.
However, some 80% of predatory lenders build them
into their loans. Since nonprime borrowers are often
motivated to refinance their homes with lower loans
once their credit improves, a stiff prepayment
penalty--sometimes as much as six months of
interest--can generate a substantial windfall when
the loan is refinanced.
Another warning sign is if a broker gets a kickback
from a lender, in which a real estate broker
delivers borrowers to a lender at a higher interest
rate than the normally accepted rate. The lender
then kicks back a "yield spread premium," paying the
difference back to the broker. This can add
thousands to your overall mortgage premiums.
Loan flipping is the fourth sign, in which the
borrower is required to refinance the loan, often
several times, over the course of the mortgage. The
fees can be hefty, and are purely meant to add to
the lender's bottom line. They can also reduce
equity and increase monthly payments.
Another warning sign is when you're told that buying
extra services, such as credit life insurance, is
mandatory for loan approval. These products are
often unnecessary, and can also add thousands of
dollars to your overall mortgage payments.
The sixth sign to watch for is mandatory
arbitration, in which you're told that any future
dispute over the loan will need to be settled
through arbitration, and not through the court. This
can severely limit your rights, and sometimes you
can be required to appear personally in the lender's
home offices, which could be thousands of miles
away.
The final warning sign is if you find yourself being
steered toward a less desirable type of mortgage,
even if it appears as if you could qualify for a
more favorable loan. Fannie Mae estimates than
nearly half of nonprime borrowers could have
qualified for better loans.
To avoid being a victim of predatory loan practices,
learn to recognize the seven warning signs.
The Truth about
Predatory Lenders
Copyright © 2006 Jeanette J. Fisher
Read "The Truth about
Credit Counseling"
Jeanette
Fisher teaches how to get out from under credit card debt,
how to use credit to make money, and six ways to
build strong credit to finance your first home and
multiple investment properties. For a free credit
advice and free ebook "Credit Tips for Mortgage
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