Common Foreclosure Scams - Predatory Lending

Predatory lenders promise loans that are "too good to be true" and pressure borrowers to take them on the spot. However, did you know that it is illegal to loan money to someone that you suspect cannot afford to repay the funds? Illegal or not, the goal for predatory lenders is not to receive the excessive payments you make – it’s the hope that you DON’T make the payment so they can take your home.

Here's a few things you should know about spotting and avoid predatory loans. The Center for Responsible Lending in Durham, North Carolina, has outlined the seven signs of predatory lending:

Excessive Fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.

Abusive Prepayment Penalties: Borrowers with higher-interest sub-prime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all sub-prime mortgages carry a prepayment penalty – a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.

Kickbacks to Brokers (yield spread premiums): When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays a “yield spread premium" – a kickback for making the loan more costly to the borrower.

Loan Flipping: A lender "flips" a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments – sometimes on homes that had previously been owned free of debt.

Unnecessary Products: Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.

Mandatory Arbitration: Some loan contracts require "mandatory arbitration," meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.

Steering & Targeting: Predatory lenders may steer borrowers into sub-prime mortgages, even when the borrowers could qualify for a mainstream loan. Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with sub-prime mortgages could have qualified for loans with better terms.

How can you protect yourself from predatory lending?

1. Always shop around.
2. Ask questions.
3. If you don't understand the loan terms, talk to someone you trust to look at the documents for you.
4. Don't trust ads promising "No Credit? No Problem!"
5. Buy The Foreclosure Workbook.
6. Ignore high-pressure sales tactics.
7. Don't take the first loan you are offered.
8. Remember that a low monthly payment isn't always a 'deal.' Look at the TOTAL cost of the loan.
9. Be wary of promises to refinance the loan to a better rate in the future.
10. Never sign a blank document or anything the lender promised to fill in later.