What to watch out for when you're shopping for a home loan.
Sign 1 - Big Fees
"Points" or "discount points" are the lender's fee for making the loan. Generally, a charge of three points—3% or less of the loan amount—is a good deal, including such necessities as an appraisal and title insurance. Get your credit score in advance and research typical fees in your area.
Sign 2 - Penalties For Paying Off Early
A "prepayment penalty" requires you to pay a steep fee before refinancing. The penalty period can last several years and cost thousands of dollars.
Sign 3 - Inflated Interest Rates From Brokers
Brokers can make more money if they boost the interest rate above the lender's actual charge. Ask if your broker will be paid a "yield-spread premium" – a financial reward lenders pay for inflated interest rates.
Sign 4 - Steering And Targeting
Predatory lenders often target senior citizens and people of color to place them in unnecessarily expensive loans. Don't respond to ads that say bad credit doesn't matter, and be especially wary of lenders or brokers who contact you or those who try to rush you into decisions.
Sign 5 - Adjustable Interest Rates That "Explode"
Beware of adjustable-rate loans that can rise significantly, especially if it isn't possible for the interest rate to go lower, only higher. Make sure you understand the worst-case scenario for future payments. And don't count on a future refinance to rescue you from an unaffordable loan.
Sign 6 - Promises To Fix Problems With Future Refinances
Predatory lenders are notorious for selling bad deals by promising that they will refinance the loan later. If a loan stretches you too much now or in the future, just say no.
Sign 7 - Repeated Refinances That Drain You
Repeated refinances—"flipping"—mean you lose more money in points and fees every time. Don't be tempted by a bit of cash when you might end up owing even more on your house, losing valuable equity, and paying more than necessary.
Sign 8 - Not Counting Taxes And Insurance
Know in advance whether your monthly mortgage payment will include the costs of property taxes and insurance (i.e., whether the lender has established an escrow account for these costs). Unscrupulous lenders make house payments seem artificially low by not counting all costs—which you will be required to pay.
FAQs
In California, all you have to show to prove that predatory lending took place is that your lender had reason to believe that you could not afford your loan amount. You can use a violation of predatory lending law as grounds to rescind your loan or as a formidable defense against foreclosure.
What are signs of predatory lending? ›
8 Signs of Predatory Mortgage Lending
- Sign 1 - Big Fees. ...
- Sign 2 - Penalties For Paying Off Early. ...
- Sign 3 - Inflated Interest Rates From Brokers. ...
- Sign 4 - Steering And Targeting. ...
- Sign 5 - Adjustable Interest Rates That "Explode" ...
- Sign 6 - Promises To Fix Problems With Future Refinances.
In California, all you have to show to prove that predatory lending took place is that your lender had reason to believe that you could not afford your loan amount. You can use a violation of predatory lending law as grounds to rescind your loan or as a formidable defense against foreclosure.
Which of the following may be an indication of predatory lending? ›
Usually, predatory lending involves high interest rates, excessive fees, hidden and undisclosed terms, etc. In the case of a mortgage loan, when a borrower can't repay the loan amount, the property is foreclosed, or the borrower may even need to file bankruptcy.
How do you know if you are a victim of predatory lending? ›
Look for high or hidden fees.
High interest rates and other fees are common tactics used to take advantage of borrowers. Be sure to read through the terms and conditions and look for sections that list the fees, penalties, and payment details.
What is the red flag for predatory lending? ›
Extremely high fees
Predator loans can also have very high fees compared to those from reputable lenders. Some examples of fees could be document-preparation fees, closing costs, title search fees, credit report fees, appraisal fees, application fees, and origination fees.
What are the tactics used by predatory lenders? ›
Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics. Their advertisem*nts promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer.
Can I sue my mortgage company for predatory lending? ›
Can I Sue for Predatory Lending? If you can prove that your lender violated local or federal laws, including the Truth in Lending Act (TILA), you may want to consider filing a lawsuit. It's never easy going against a wealthy financial institution.
Who are the most common victims of predatory lending? ›
Predatory lenders typically target minorities, the poor, the elderly and the less educated.
What type of loan is considered predatory? ›
Predatory lending is any lending practice that imposes unfair and abusive loan terms on borrowers, including high-interest rates, high fees, and terms that strip the borrower of equity. Predatory lenders often use aggressive sales tactics and deception to get borrowers to take out loans they can't afford.
Predatory lenders will target homeowners who have equity in their homes and may also have credit problems or need cash. They will advertise their services to people in financial need - people who may have fallen behind paying in their bills, or need money for medical bills, cars or costly home repairs.
What type of homeowner is a frequent target of predatory lending? ›
Homeowners in certain communities, particularly the elderly and minorities, are especially likely to be targets of predatory lending but almost anyone can fall prey to abusive lending practices.
How to get out of predatory lending? ›
If you suspect you've been a victim of predatory lending, contact the CFPB and your state consumer protection organization. The CFPB has a portal where you can submit a complaint and can also be reached by phone on weekdays at 855-411-2372. Be vigilant when it comes to taking out a mortgage or any other type of loan.
Who investigates predatory lending? ›
The FDIC addresses the problem of predatory lending by taking supervisory action, by encouraging and assisting banks to serve all sectors of their community, and by providing consumers with information to help make informed financial decisions.
How do I protect myself from predatory lenders? ›
Make sure the lender and broker you are dealing with are licensed by the State Banking Department. You may contact the Banking Department at (800) 522-3330. Watch out for “hidden” terms, such as prepayments and balloon payments. Be wary of loans offered through door-to-door sales or telemarketing solicitations.
Which of these is a common predatory lending tactic to watch out for? ›
They may also employ aggressive marketing tactics to persuade borrowers to take out unnecessary loans, such as payday loans, which often come with exorbitant interest rates. Overall, encouraging debt is a common tactic used by predatory lenders to exploit and profit from vulnerable borrowers.
What is an example of predatory lending? ›
Examples of predatory lending include failing to disclose information or disclosing false information, high interest rates or fees, and risk-based pricing.
What is predatory lending What are the characteristics of it? ›
Predatory lending is any lending practice that imposes unfair and abusive loan terms on borrowers, including high-interest rates, high fees, and terms that strip the borrower of equity. Predatory lenders often use aggressive sales tactics and deception to get borrowers to take out loans they can't afford.
What to watch out for when you're shopping for a home loan.