Definition and Example of Predatory Mortgage Lending
Predatory lending means imposing unfair (and sometimes hidden) fees, interest, or other terms on a loan at the expense of the borrower and benefit of the lender. A predatory mortgage lender might use high-pressure sales tactics or make deceptive promises to entice someone into borrowing a loan they can’t afford to pay back. Reputable lenders will check a borrower’s credit and debt-to-income ratio to make sure they have the means to pay back their home loan before borrowing. Predatory lenders, however, often approve loans regardless of someone’s ability to pay. Victims of predatory mortgage lending could find themselves saddled with unaffordable mortgages and lose their homes as a result. Predatory lenders often target minorities and people with lower incomes, because they may have less access to traditional lines of credit. For example, before the housing market crash and financial crisis of 2008, many lenders promoted subprime loans to vulnerable populations. Many of these homeowners ultimately couldn’t afford to make their mortgage payments and lost their homes. Almost 9.3 million Americans lost their homes to foreclosure or had to short-sell their homes between 2006 and 2014.
How Predatory Mortgage Lending Works
From hidden loan costs to undisclosed balloon payments, predatory lending can take a number of forms. Generally speaking, it refers to any unscrupulous practices that lenders use to entice and mislead borrowers to take out expensive loans. There are several laws that regulate the lending industry and seek to root out predatory lending practices. The Fair Housing Act outlawed discrimination in real estate, including against consumers seeking a mortgage. The Truth in Lending Act requires lenders to disclose the terms of their loans, and the Equal Credit Opportunity Act banned credit discrimination. Predatory lending practices can be profitable, so you’ll need to be careful when taking out a mortgage. Keep an eye out for red flags that could indicate predatory lending.
Excessive or Unnecessary Fees
Predatory lenders may tack on a bunch of unnecessary fees, like prepayment penalties. If your loan fees add up to more than 5% of your loan, that’s a warning sign. If you’re not sure what all the fees are for or where they’re coming from, reconsider taking out the loan. All lenders are legally obligated to present prospective borrowers the actual cost of the loan and its yearly rate. If any of the costs or fees seem unclear, you might be dealing with a predatory lender.
Aggressive Sales Tactics
If a lender is pressuring you into taking out a mortgage, that’s a red flag. Aggressive, high-pressure sales tactics could be a sign of predatory lending. Offers that sound too good to be true can also be a sign of predatory lending, unless they’re backed up with the proper paperwork.
No Credit Check
Be wary of any lender that’s offering a home loan without a credit check. Reputable lenders check your credit to review your financial history and assess your risk as a borrower. Lenders that skip this step may be targeting vulnerable borrowers and charging unaffordable rates and fees.
Loan Flipping
Borrowers may choose to refinance debt to get a better interest rate or more appealing terms. However, predatory mortgage lenders may refinance your loan into a new, long-term loan in a practice known as loan flipping. You’ll have to pay fees every time the loan is flipped. Rather than being financially beneficial for you, loan flipping makes your loan even more expensive and difficult to repay.
Bait-and-Switch Tactics
Another warning sign of predatory lending is a bait-and-switch scheme, where a lender promises you a certain type of loan or interest rate but then gives you another one. It might also take the form of a mortgage starting with a low introductory rate that rises dramatically a few months later.
Balloon Payments
Be wary of home loans with balloon payments. With a balloon payment, your monthly payments will be lower, but you’ll have to pay one lump sum at the end of the loan. That can force borrowers to refinance when the balloon payment is due, which costs them more money in interest and fees. Some lenders might even hide the fact that there’s a balloon payment until closing.
Loan Packing
If a mortgage lender is adding a bunch of unnecessary products into your mortgage, you might be a victim of loan packing. A predatory lender might try to force you to purchase credit insurance when you take out your loan.
Negative Amortization
Negative amortization occurs when your monthly payments aren’t high enough to cover interest charges. Although you’re paying every month, you end up owing more and more to the lender, making your home loan more expensive. Before signing a loan, ask to see your mortgage’s amortization schedule so you can see how your monthly payments are applied to both interest charges and your principal balance.
