Beware Of Predatory Home Loans
At a time when stock prices have tumbled, so have interest rates on home equity loans and mortgages, and many homeowners are borrowing against their homes to generate cash. As a result, more people are at risk of being victimized by “predatory” lenders. A predatory loan occurs when a company misleads, tricks, or even coerces someone into taking out a home loan with excessive costs and without regard to the homeowner’s ability to repay. The consequences of such a loan can be especially severe since the defaulting borrower could lose the home itself.
For the most part, predatory lending has been associated with companies that specialize in marketing to people with poor credit histories or who are simply strapped for cash. Typical targets are elderly people with high medical bills or overdue home repairs, middle-class individuals swamped by credit card debt, and lower-income consumers with less access to reputable lenders. A typical consumer may not know the terms for predatory practices, but the borrower will recognize some of these behaviors. In a “bait and switch” scheme, the lender promises one thing but offers something different at closing, when it really matters. “Equity stripping” results from encouraging heavy borrowing from home equity, beyond the consumer’s ability to make payments.
“Loan flipping” is multiple refinancing, to the point that fees, and possibly higher rates, become unmanageable. When a lender engages in “loan packing,” it has added charges to the loan contract for overpriced or unnecessary items.
There are federal laws designed to protect consumers from some of the predatory lending practices. The Truth in Lending Act requires lenders to give timely information about loan terms and costs, and it allows borrowers on loans secured by a home to cancel the loan up to three business days after signing the contract. The Home Ownership and Equity Protection Act requires providers of “high cost” refinancing or home equity loans to give the borrower key information about the loan three days before closing. It also prohibits the making of a home equity loan without regard to a borrower’s ability to pay it back. These laws play an important role, but the best deterrent to predatory lending is informed and vigilant consumers.
Some of the most effective preventive measures are only common sense, but in practice they are too often ignored: (1) think through the decision to borrow before taking the plunge, and be wary of a lender who hurries you; (2) select a lender with a good reputation in your community, and steer clear of home improvement contractors or loan brokers who contact you out of the blue; (3) compare quotes from at least three lenders, then negotiate for the best possible deal. And remember, the loan with the lowest monthly payment is not necessarily the best loan; and (4) read and make sure you understand the loan documents before signing them, keeping an eye out for discrepancies between what may have been discussed previously and what is in the fine print.

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