High-Cost
"Predatory" Home Loans:
How To Avoid The Traps
A
few unscrupulous lenders are tricking cash-strapped, unknowing
borrowers into expensive home equity loans and mortgages. The
big risk: If you can't repay the loan you could lose your home.
Here is useful information for anyone thinking about a home loan.
Homeownership is at
an all-time high. That's great news. But the media, financial
regulatory agencies and law enforcement officials also are reporting
that something is robbing homeowners of money and putting many
of these same families at risk of losing their homes.
The percentage of mortgage loans in foreclosure during the April-June
quarter was the highest in 30 years reports the Mortgage Bankers
Association. It's a problem known as "predatory" lending.
There is no clear-cut
definition of a predatory loan, but many experts agree that it
is the result of a company misleading, tricking and sometimes
coercing someone into taking out a home loan (typically a home
equity loan or mortgage refinancing) at excessive costs and without
regard to the homeowner's ability to repay. Victims who have
trouble repaying a predatory loan often face harassing collection
tactics or are encouraged to refinance the loan at even higher
fees.
And remember this:
If you pledge your home as collateral for a loan, and you can't
repay, you could lose your home.
Predatory mortgage
lending primarily has been a problem with nonbank companies that
specialize in marketing to people with poor credit histories.
These companies may include some mortgage brokers, home improvement
contractors and finance companies. Predatory lending also has
been associated with non-mortgage loans.
Obviously, not every
nonbank lender is unscrupulous, but you need to be informed so
you can void doing business with those that are.
Reports indicate that
predatory lenders target consumers they believe are in need of
cash or are otherwise vulnerable. Examples include older people
who need money for medical bills or home repairs; moderate- and
middle-income consumers who need to pay off credit card bills
or consolidate other debts, or who want to make some dream purchase;
people who don't shop around for goods and services; and lower-income
or minority communities where there may be limited competition
from more reputable lenders.
"Some abusive
lenders use misinformation and high-pressure tactics to prey
on vulnerable homeowners," says FDIC Chairman Donald E.
Powell. "Clearly, one solution is to make sure that homeowners
are aware of the predatory lending problem, so they are in a
better position to protect their investment."
Various federal laws
help protect consumers from certain predatory lending practices.
The Truth in Lending Act, for example, requires lenders to provide
timely information about loan terms and costs. The law also gives
consumers the right to cancel a home equity loan and certain
other loans secured by a home up to three business days after
signing the loan contract. (This is known as your "right
of rescission.")
Furthermore,
under the federal Home Ownership and Equity Protection Act (HOEPA),
if a refinancing or a home equity loan is classified as "high
cost," the lender must provide key information about the
loan three days before closing on the loan. The HOEPA also prohibits
lenders from making a home equity loan without regard to a borrower's
ability to repay.
These laws provide
important protections and information for consumers. But there
also are important steps you can take to protect yourself and
your home from a predatory loan. Here are our suggestions, many
of which can be useful for anyone thinking about obtaining a
home equity loan or mortgage.
1. Ask yourself:
Do I really need this loan? If you're having money problems,
consider all your options before you use your home as collateral
for a loan," says Jeanne M. Hogarth, program manager for
consumer policies with the Federal Reserve Board. "Talk
with someone knowledgeable and trustworthy before making any
decisions. Remember, if you decide to get a home loan and can't
make the payments, the lender could foreclose and you could lost
your home."
Hogarth says among
the resources you may wish to consult are your lenders, a reputable
credit counseling service in your community, and a local social
services agency. There also are housing counseling agencies that
offer advice on everything from buying and financing a home to
avoiding foreclose if you miss loan payments. The U.S. Department
of Housing and Urban Development (HUD 1-800-569-4287 www.hud.gov),
can suggest a housing counseling agency near you.
2. Deal with a reputable
lender. Be careful when dealing with unfamiliar lenders,
home-improvement contractors or loan brokers, especially those
who contact you out of the blue. And, don't fall for a friendly
voice or a fantastic-sounding sales pitch, either.
"Many people can
avoid being talked into loans they cannot afford if they learn
how to recognize fair and honest lenders before borrowing
money," says Valerie Williams, a Community Affairs Officer
with the FDIC. Your best approach? "Deal with lenders who
have a good reputation in the community," she says, "and
guard against lenders who resort to high-pressure practices."
Other qualities to
look for in a lender, according to Williams: someone who will
put all costs in writing, carefully explain the loan, encourage
you to ask questions, and not rush you into a quick decision.
Also, find out if there
have been consumer complaints filed against an unfamiliar lender.
Start by contacting your state government's consumer protection
or Attorney General's office (listed in your phone book or other
directories) or the local Better Business Bureau.
3. Ask questions
and shop around. If you need to borrow money, contact several
banking institutions or other reputable lenders, not just one.
Most experts recommend getting quotes from a minimum of three
lenders. "The best deal isn't always the first one you find,"
says Kevin Shields, an FDIC Community Affairs Specialist.
Find out about the
different types of loans that meet your needs and financial situation,
especially the loans that don't require you to put your home
at risk if you run into repayment problems. Also, be wary of
any offer to lend more than what your house is worth. That may
sound like a good opportunity, but remember that if you run into
problems repaying the loan, you could lose your home and still
owe money to the lender (the amount of the loan above the
value of your home).
Don't focus on getting
the lowest monthly payment. Consider the duration or term of
the loan and the total cost of the loan fees, especially those
you'd be paying back (with interest) during the life of the loan.
Then negotiate for the best deal just as you would for a new
car. Let the lenders know you've been shopping around. They may
be willing to compete for your business by offering better rates
or terms. For a list of questions to ask a lender, see the list
of suggestions.
4. Understand the
importance of credit reports and credit scores. It's a good
idea to make sure your credit report accurately reflects your
credit history, such as how you repay credit cards and loans.
Some consumers who have inaccurate information in their credit
report (compiled by credit bureaus) could qualify for a lower-priced
loan after their records are corrected.
You can get a copy
of your credit report (free in some cases but no more than $9
under current law) by contacting any of the three major credit
bureaus: Equifax (800-685-1111 or go to www.Equifax.com on the
Internet); Experian (866-200-6020, which is toll free, or go
to www.experian.com); and Trans Union (800-888-4213 or www.transunion.com).
Primarily because not all lenders report information to all three
of these credit bureaus, your credit reports may vary significantly.
That's why some experts suggest that you review your credit report
from all three.
Many lenders also use
an applicant's credit score in deciding whether to give that
person credit and at what cost. Your credit score usually is
a number between 300 and 900. A high score means you could get
a "prime" loan with an attractive interest rate. A
low score means you may only qualify for a "sub prime"
loan with higher rates and fees than those quoted to people with
unblemished credit.
Your credit score information,
which includes an explanation of how your score was derived and,
in some instances, how you can improve your score, is available
for a small fee.
You can obtain your
credit score information by calling or checking the Web site
of any of the credit bureaus mentioned previously.
"Knowing your
credit score, correcting errors in your credit report and aggressively
shopping among several lenders will help you get a good loan,"
says Angelisa Harris, a Senior Community Affairs Specialist
with the FDIC. She adds that if you currently have a low credit
score, you may want to wait until you improve your credit score
before taking out a loan that could place your home at risk.
5. Know what you
are signing. Read the loan documents carefully, especially
the fine print. Only sign a loan agreement after you understand
the terms of the loan, the fees, and your obligation to repay.
For example, know whether your loan agreement contains a "balloon
payment" or a prepayment penalty.
Under federal laws
such as the Real Estate Settlement Procedures Act and the Truth
in Lending Act, you have a right to key information about how
much you can expect to pay for a loan. For example, you must
receive a "Good Faith Estimate" of mortgage loan settlement
fees and services early on in the process. You also have the
right to get a preliminary statement of final settlement costs
(its called the
"HUD-1" form) the day before the closing. You may want
to ask an attorney or a housing counselor to review this document
prior to closing.
When you get these
and other loan documents, look in the fine print for overcharges
perhaps a payment to a broker you never met, a bill for a detailed
appraisal when only a drive-by review was performed, and fees
for credit reports that are many times their actual cost. At
closing, compare the interest rate, fees and other costs shown
in the final documents with those given to you in preliminary
estimates.
Other words of wisdom:
Never let a lender rush you or pressure you into signing a loan
contract a possible sign that the lender has changed loan terms
and doesn't want you to notice. Check that all the information
in your application accurately reflects your financial situation,
and never agree to falsify information on a loan application
in order to qualify for the loan.
Don't sign a loan contract
if the terms have changed from what you were told previously
and if the lender cant explain to your satisfaction the reasons
for the change. Likewise, make sure you only sign a complete
and final loan agreement. Don't sign if there are blanks for
dollar amounts or loan terms, even if someone offers to "take
care of things" for you, because they may only take you
for a lot of money!
If you're not comfortable
going to the closing alone, consider having a lawyer there with
you to examine the loan documents before you sign. Get a copy
of the signed loan documents before you leave the closing and
keep them in your files. Should a predatory lender change the
terms of the loan from what was agreed upon at the closing, contact
HUD, a housing counselor or an attorney and provide a copy of
your signed loan documents.
Important reminder:
For certain loans secured by your home, federal law gives you
up to three business days after signing a loan contract to change
your mind for any reason and cancel the deal without penalty.
6. Speak up if you
think you've been treated improperly. Try to resolve any
problems with the lender. If that doesn't work, consider asking
for help from the appropriate state or federal government agency.
A good place to start is your states consumer protection office
or Attorney General. In addition you can contact the Federal
Trade Commission which works to prevent unfair business practices
at 877-382-4357 or visit the web site at www.ftc.gov. The U.S.
Department of Housing and Urban Development (HUD) enforces fair
lending practices involving home loans backed by the federal
government, including Federal Housing Administration (FHA) loans.
Call 1-800-569-4287.
The FDIC's Kevin Shields
also notes that a variety of legal services organizations provide
special help to low-income people who have been victimized by
predatory lenders. They also can be found in your phone book
or by calling your state or local government.
Final Thoughts
The bottom line: Don't rush into a decision with any loan, but especially one where you can lose your home if you cant make your payments. Be aware of your options especially the different kinds of loans available from reputable lenders. Review the terms and conditions of the loan before you sign on the dotted line. And remember that if you have questions or concerns, there are government agencies and other organizations in your community that can come to your assistance. You do not need to face a loan problem alone.
