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Predatory lending - How it affects the mortgage industry?

Posted on: 02nd Dec, 2005 12:36 am
Lenders and brokers in the mortgage industry often consider your best interest while offering various loan programs. But there are lenders who also keep in mind their own benefits only. They are none other than predatory lenders who take undue advantage of borrowers through abusive lending practices.

Whether you take a purchase loan, a refinance mortgage or any home equity loan, you may come across several predatory lenders in the mortgage market. The primary concern of such lenders is to make money by charging huge interest and higher payments and they may even take your home. Predatory lending implies huge profits for the lender and never-ending debt payments for the borrower.

Predatory lenders target homeowners who require cash and may have credit problems. They are often on the look out for individuals who want to take home equity loans. These lenders target people failing to pay their bills. Then there are the individuals who need funds for medical expenses, purchase of cars or for conducting home repairs. Seniors and homeowners belonging to the minority section as well as low wage earners are often the prime targets of predatory lenders.

You can identify a predatory lender under the following conditions.

  • High interest rate, points, and loan fees:
    Predatory lending requires you to pay much higher rates compared to other mortgages. Besides, you need to pay higher points and huge prepayment penalties in case you refinance your loan or sell the property before the loan period ends. The lender may also charge high closing costs such as document preparation fees or appraisal fees. Often these are included in your loan amount which then requires a high interest rate on your mortgage.

  • Changing the loan terms and conditions:
    The lender may intend to change the terms and conditions provided on your loan document after the loan closing is over.

  • Including credit insurance in your loan amount:
    Predatory lenders may ask you to pay for credit life insurance or disability insurance premiums stating that such premiums are required along with your mortgage. These premiums are quite costly and if they are included in your loan amount, then you may end up making higher interest payments on a monthly basis.

  • Home equity lending:
    Predatory lenders often approve home equity loans although your income may not support the loan payments. They may give you the impression that you can pay off the mortgage and also offer you a higher loan amount due to higher equity in your home. This is often done because these lenders intend to take away your home on account of foreclosure due to non-repayment of the mortgage.

  • Multiple refinancing or flipping:
    The predatory lender may ask you to refinance your mortgage loan again and again. This requires you to pay higher fees and prepayment penalties each time you refinance. Thus, your debt increases and in case you fail to make all payments, you may lose your home.

  • Charging balloon payments:
    Lenders often require you to pay the mortgage dues through balloon payments, that is, huge mortgage payments at the end of the loan term. In case you fail to make such payments or refinance to pay it off, the lender may conduct a foreclosure and you may lose your home.

  • Improper loan servicing:
    The lender may not provide you with all the receipts of monthly mortgage payments and the account statements. This often creates problems, as you don't know how much you have paid and how much you still require paying.

  • Home improvement loans:
    There are contractors who may place offers of home improvement loans through the lenders they know. You may not have the financial strength to support the entire loan but even then, you are allowed to sign the legal papers. But later on, you discover that it is a home equity loan with higher interest rates, points and loan fees.

  • Signing for a new loan:
    There are lenders who agree to provide a new loan so that you can pay down the existing mortgage dues and avoid foreclosure. You may sign over the deed to the new lender before he provides you with the loan amount. The lender never comes up with the loan but has the deed to your home. Thus, you may lose your home.
Predatory lending is quite common these days in the mortgage industry especially in the subprime mortgage industry, that provide loan programs to people with high credit risk. Therefore, as a borrower, you should be cautious while dealing with such lenders. The conditions given above will help you to detect predatory lending practices and thus help you to keep away from such lenders.
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I have managed credit card since a long time and have never been late on credit payments. A year ago we relocated and moved out of state and within a few months of moving my younbger daughter was in terribly ill. Still I could pay for the credit cards and mortgage payments on 2 homes (the other one I couldn't sell when I moved out of state) as well as car loan payments. But however, a few months ago, I asked the lender for a deedin lieu of the home that I couldn't sell and they readily accepted. But now the credit card company which offered me a card at 10% rate suddenly raised it to 30%. I was simply shocked to have heard it. The balance in this card is only a $15 and that's due to medical expenses that I have used it for. Do you have anything to suggest?? What can I do now?is it what they call predatory lending.. ?
Posted on: 12th Sep, 2007 03:51 am
Welcome Harris,

It is not predatory lending. May be you couldn't keep your credit record up to the mark and that's the reason why your credit card company may have changed the rate.

You can request them to reduce the rate so that you are able to pay off the debt. Or Else, you may consider taking a second job so that you can get exctr cash each month to make your payments.
Posted on: 12th Sep, 2007 03:58 am
i agree with adonis
Posted on: 12th Sep, 2007 05:49 am
Hi Harris,

Have you asked your credit card company what is the reason for this sudden increase in rate? Was there any contract like this at the time of taking the credit card that the rate will increase after a period of time?

You should ask them and find out the reason. Otherwise, you will have to continue with this high interest payments.
Posted on: 12th Sep, 2007 10:28 pm
I agree with Adonis as well, if you miss or are late on a payment they can raise your rate considerably.
Posted on: 06th Jan, 2008 01:51 am
Hi Jessica- Good and informative post, as usual. I'd hope that with all the publicity around the country and the politicians that most of the predatory lenders are out of the industry or cleaning up their act. But, as with any profession, I'm sure there's still more than a handful out there!
Happy New Year to you also!
Posted on: 07th Jan, 2008 07:27 pm
Most credit card companies will jack up the rate if you are even just a few days late on the payment. They have the right to increase the interest rate at any time. I would just find another credit card company.
Posted on: 07th Jan, 2008 08:26 pm
Lisa, aren't there laws restricting such rate hikes just because you are late on payments?
Posted on: 08th Jan, 2008 04:09 am
to roger_fraser:
Not for credit cards. In your agreement it clearly says that should you be late your interest rate will adjust to 24%, 30% or even 39% as soon as you are late. And in most cases even if you catch up it will stay there for at least a while.
Posted on: 08th Jan, 2008 06:54 am
Hi Roger,

There is no law against this with credit card companies since it is in the fine print. There is always a clause that says they are able to do this. It's often called the default rate. A lot of banks offer low teaser rates banking on the fact that a certian amount of people will be late on a payment so that they can jack up the rate.
Posted on: 14th Jan, 2008 06:27 pm
since you only owe $15 on that credit card, the rate increase will not truly affect you adversely. simply stop using that card once you have it paid off if the rate will be an issue. remember, if you pay your monthly bill in full every month, you won't pay any interest at all.
Posted on: 15th Jan, 2008 07:45 am
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