Predatory lending practices are designed to benefit only the lender, not the borrower, and they prey on those who are less likely to have the financial resources to cover the loans. Unfortunately, predatory lending is also quite common and completely devastates consumers financially.
Subprime mortgage, payday, and car loans are three industries where predatory lending practices are prevalent. These tend to target the most vulnerable, such as low-income consumers, those with poor credit histories and ratings, and those who lack the financial resources to make payments.
What Laws Protect Consumers From Predatory Lending?
Since the 1960s, the U.S. Government has passed several laws governing lenders to protect consumers from predatory lending practices, as follows:
- Fair Housing Act (FHA): Congress passed the FHA to protect homeowners from discrimination and abuse tactics by outlawing discrimination in the real estate industry, including mortgage loan borrowers. The law banned discrimination on the basis of race, national origin, religion, and sex, with later amendments regarding disability and familial status.
- Truth in Lending Act (TILA): The TILA established a law requiring mortgage companies and other financial lenders to disclose the terms of their loans to applicants. Since then, the law has been amended to include a range of real estate practices and furthered through the addition of the Home Ownership and Equity Protection Act (HOEPA) to protect borrowers against predatory, high-cost mortgages.
- Equal Credit Opportunity Act (ECOA): The Equal Credit Opportunity Act provides borrow protection banning credit discrimination against women and later expanded to include race, color, national origin, age, religion, and public assistance program participation. Combined with the protections under the FHA, the two laws were applied during the 2008 housing crisis.
- Dodd-Frank Act (DFA): The 2008 housing crisis resulted in Congress passing the DFA and created the Consumer Financial Protection Bureau (CFPB) to oversee the ECOA and TILA regulations.
What Are Common Predatory Lending Practices?
Fraudulent, deceptive, and unfair tactics are the hallmark of predatory lending practices, designed to be appealing to the consumer. The result of such loans leaves homebuyers with exceedingly high mortgage debt they cannot pay, leading to foreclosure. Common tactics or practices include:
- Aggressive solicitation: If lenders are soliciting you to become a customer with loan officers, this is a definite red flag. Stay clear of any too-good-to-be-true loan offers, and seek out a reputable company on your own.
- Loan flipping: A refinance tactic, loan flipping involves pressuring you to refinance your loan repeatedly and often not with lower interest rates. Many refinance in order to obtain a cash-back option, however, those additional funds are tacked onto the existing loan each time the loan is refinanced and borrows can end up owing far more than the original loan.
- High fees: Review your settlement details and Good Faith Estimate costs regarding applicable fees. If more than five percent of your loan value pertains to fees, then you are probably paying inflated fees.
- Property taxes: Good lending practices allow you to set aside your property tax cost into an escrow account each month in order to ensure the full amount when due. Predatory lenders will instead offer an additional loan to cover property tax costs, supplying them with additional fees and interest exceeding the actual tax amount each year.
- Balloon payments: Many people fall prey to the balloon payment tactic because it lowers the monthly cost of mortgage payments. In order to accomplish this, the loan will require a large balloon payment to be paid at the end of the loan. More often than not, when that time arrives, the borrower is unable to make the large payment, requiring them to refinance a new loan with additional fees and interest.
- Consolidating debt: Using a mortgage loan to consolidate and pay off credit companies is generally not a good idea. Consolidating credit card debt with your mortgage can put your home at risk of foreclosure to the credit card companies should you not be able to make payments.
- False disclosure: This tactic involves lenders hiding or misrepresenting the loan’s true appropriateness, costs and risks, or changes the terms of the loan after the initial offer.
- Risk-based pricing: Predatory lenders often use your credit history and rating to base a higher interest rate on the loan. Those with high-risk credit histories and the most likely to default are then charged significantly higher interest rates.
- Loan packing: Watch for unnecessary additions to the loan, such as credit insurance, which pays off the loan if the homebuyer passes away. This practice benefits only the lender with a higher monthly fees and interest and payout upon death.
- Asset-based lending: When refinancing a mortgage loan, emphasis should be based on the amount of the home’s current equity. Lenders using an asset-based lending tactic base the refinance loan amount on income and ability to pay instead, thus encouraging the homebuyers to increase the amount of the loan.
- Reverse redlining: Predatory lenders target residents of low-income neighborhoods that otherwise would not qualify for traditional bank loans, charging homebuyers much higher interest rates regardless of income, credit history, or ability to make payments.
- Negative amortization: Negative amortization occurs when the homebuyer’s monthly payment is too low to cover the principal or interest and the excess gets credited to the total unpaid balance. Borrowers end up owing much more than the original loan amount.
- Abnormal prepayment penalties: Borrowers wishing to refinance in order to secure better terms, such as interest rates, can be subjected to a predatory lending practice of abusive prepayment penalties for paying the loan off early, particularly subprime mortgages.
- Mandatory arbitration: This practice involves the lender including language in the loan contract restricting the borrower’s ability to take legal action against the lender for fraud or misrepresentation, essentially allowing these abuses with very little ability to fight back.
In addition to these predatory lending practices, beware of unlicensed loan officers and promises that all loans will receive approval regardless of your credit history or rating. Both of these tactics usually arrive as unsolicited offers by mail.
How Can I Protect Myself From Predatory Lenders?
The number one way to protect yourself against predatory lending practices is to educate yourself on common practices and what to look out for to spot deceptions. The following are additional tips to help protect yourself against fraudulent lenders:
- Know your credit rating. Before seeking a loan, obtain a copy of your credit report and understand your rating. All consumers are entitled to one free copy of your report per year.
- Trust your instincts. Offers that are too good to be true generally are exactly that and a major red flag signaling trouble.
- Read the fine print. Request all loan documents to review before closing, and read everything carefully for errors and misleading or false information. Do not sign anything until you understand and agree with all terms, requesting corrections if necessary.
- Look for the bait-and-switch. Read the loan documents carefully for any terms that are not what you initially agreed upon or expected. Do not sign and demand changes.
- Be cautious of blank spaces. Do not sign any loan documents or agreements that contain blank spaces that the lender could fill in after obtaining your signature.
- Loan shop. When seeking a loan, shop around for the best arrangement you feel most comfortable with rather than settling for the first offer.
- Take your time. One of the most common predatory lending practices is to rush the entire process specifically so you will not read through all the documents and ask questions. Take the time you need to read everything carefully and agree with the terms, and do not be afraid to ask questions, demand answers, or say “no.”
- Always be honest about everything. Lying on any forms will always hurt you in the end. If you are untruthful with any information, your loan will be based on false documents and cause you many problems, especially if you are unable to afford the payments.
Pittsburgh Consumer Fraud Defense Attorneys at East End Trial Group Advocate for Clients Taken Advantage of by Predatory Lenders
If you feel that your lender is using predatory practices or is actively violating state or federal laws, one of our experienced Pittsburgh consumer fraud defense attorneys at East End Trial Group can help. Call us at 412-223-5740 or contact us online for a free consultation. Located in Pittsburgh, we serve clients throughout Pennsylvania.