NEW YORK (CNNfn) - There is one breed of predator that doesn't prowl in the jungle.|
The predatory lender stalks consumers, seeking to seize their homes through high-cost, abusive lending practices. The elderly, people in low-income brackets and those who are under financial pressure are often the targets.
Predatory lending occurs most often in the subprime market. Subprime mortgage loans, sometimes classified as class "B," "C," or "D," offer borrowers with low incomes or a poor credit history access to home financing.
They usually come with exceptionally high interest rates and fees, not to mention repayment terms that leave the borrower with a large "balloon" payment that must be paid in full to satisfy the debt.
The U.S. Department of Housing and Urban Development released a report last week showing sub-prime home financing loans accounted for 51 percent of home loan refinancing in predominantly African-American neighborhoods, but only 9 percent in white neighborhoods.
In low-income neighborhoods, HUD reported, sub-prime loans account for 26 percent of total loans in 1998, compared with only 11 percent in moderate-income neighborhoods and 7 percent in upper income neighborhoods.
In 1993, sub-prime loans accounted for 3 percent in low-income neighborhoods and 1 percent each in moderate-income and upper-income neighborhoods.
Predatory lending also was a major issue on Capitol Hill last week, when three bills were introduced to toughen existing laws.
The Federal Trade Commission has identified some of the leading predatory loan scams. Take a look at the following scenarios and see if they seem familiar. If they do, the advice is simple: Watch out.
- Equity stripping: You're short on money and you've built up equity in your home. A lender says you can get a loan, even though you know you can't keep up with the payments. The lender wants you to pad your income on your application form so the loan goes through. But the lender may be out to steal the equity you've built up in your home. If you can't keep up with the monthly payments, the lender will foreclose and take your home. If you take out a loan and you don't have enough money to make the payments, you are being set up.
- Loan flipping: You're making your monthly mortgage payments, but you could use some extra money. A lender calls to talk about refinancing and you agree. After a few payments, the lender offers you a bigger loan for, say, a vacation. If you accept, the lender refinances your original loan and then lends you additional money. In this scam, the lender charges you high points and fees each time you refinance and may increase your interest rate as well. If the loan has a prepayment penalty, you will have to pay that penalty each time you take out a new loan. With each refinancing you've increased your debt and probably are paying a very high price for some extra cash. If you can't pay, you could lose your home.
- Hidden Loan Terms: You've fallen behind in your mortgage payments and may face foreclosure. Another lender offers to save you from foreclosure by refinancing your mortgages and lowering your monthly payments. But the payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end of the loan term, the principal — the entire amount you borrowed — is due in one lump sum called a balloon payment. If you can't make this payment or refinance, you could be looking at foreclosure and the loss of your home.
- Home Improvement loan: A contractor offers to install a new roof or remodel your kitchen. When you tell him you can't afford it, he offers to arrange financing through a lender he knows. You start signing a lot of papers and the contractor threatens to leave your house unfinished if you don't sign. Later you realize you've signed off on a home equity loan with high interest rates, points and fees. In addition, the work on your house is either done poorly or incompletely and the contractor has little interest in finishing the job.
- Signing over your deed: You're having trouble paying your mortgage and the lender has threatened to foreclose and take your home. Another "lender" may contact you and offer to help you find new financing. Before he can help you, however, he asks you to deed your property to him, claiming that it's a temporary measure to prevent foreclosure. The promised refinancing never comes through. Now that the lender has the deed to your property, he'll treat it as his own. He can borrow against it or sell it to someone else. Your mortgage payment will become "rent," and if you miss a payment you can be evicted from your home.
De-clawing the predatory lender
The FTC offers tips on how to avoid home equity scams. The idea is not to sign onto something you don't understand. Some of the tips are:
- Agree to a home loan if you don't have enough income to make the monthly payments.
- Let anyone pressure you into signing any document.
- Let the promise of extra cash or lower monthly payments get in the way of your good judgment.
- Keep careful records of what you've paid, including billing statements and canceled checks. Challenge any charge you think is inaccurate.
- Read all items carefully. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member or an attorney.
- Consider all the costs of financing before you agree to a loan.
You can file a complaint with the FTC by contacting the Consumer Response Center at 1-877-FTC-HELP or writing to Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave., NW, Washington, D.C., 20508. You also can use the Internet via the online complaint form. The FTC does not resolve individual problems for consumers, but the agency can act against a company if it discovers a pattern of possible violations.