8 Warning Signs of Predatory Lending
Does it make you nervous to read all of the coverage in the media about people who are in bad loans and are facing foreclosure as a result? Don’t let it happen to you!
Here are 8 warning signs that are are not working with the right mortgage broker/lender and in fact may be a target for predatory lending.
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Excessive Fees. Points and fees are costs that are not directly reflected in interest rates. Because these costs can be included in the total amount you finance in your loan, they can be easy to disguise or downplay.
Note: Fees below 1% of the loan amount are typical. On predatory loans, fees totalling more than 5% of the loan amount are common. -
Abusive Prepayment Penalties. If possible, avoid prepayment penalties, however if you choose to go forward with one, it should not be in effect longer then 3 years and it should not cost more than 6 months worth of interest. In the Prime Loan market, only about 2% of loans carry prepayment penalties of any length.
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Kickbacks to brokers (yield spread premiums). Mortgage brokers who deliver a loan with an inflated interest rate (higher then what the lender requires) the lender will often pay a yield spread premium - basically a kickback for making the loan more costly to the borrower. This is where working with a trusted mortgage broker/lender and/or getting multiple quotes is important so you know whether you are being quoted a higher rate based upon your credit or the mortgage broker’s greed.
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Loan Flipping. A lender “flips” a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Make sure you understand the costs associated with refinancing and that you are getting a clear benefit from doing so - it doesn’t always make sense! BankRate.com has a good refinance calculator that can help you run the numbers to see if you should even be speaking with a lender about refinancing.
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Unnecessary Products. If you are told that you need to buy insurance products. I’m not talking about PMI (Private Mortgage Insurance) that is often required for any loans that don’t have at least a 20% downpayment, I’m talking about fire and hazzard, life, disability or unemployment insurance policies. These are often substantially more then if you work with an independant insurance agent. These are especially a problem when premium is paid 3-5 years upfront.
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Mandatory Arbitration. Some loan contract required “mandatory arbitration” which means 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 abuse.
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Steering & Targeting. Know your credit before you talk to a lender. Predatory lenders may steer borrowers into subprime mortgages, even when the borrower could qualify for a mainstream loan. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.
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False or Blank Information. If at any time you are encouraged to include false information on your loan application or leave signature lines or other important line-items of any form blank you should turn around and walk out the door.
Article Sources: Center for Responsible Lending - A resource for predatory lending opponents, National Association for Consumer Advocates.
Need a Referral for a Quality Lender? Here are my two favorites:
- Hank Stecker - Windermere Mortgage Services Branch Manager/Mortgage Consultant (Located in Woodinville) Hanks’ Website
- Bryan Gorder - Legacy Group Loan Originator/Mortgage Consultant (located in Bellevue) Bryan’s Website