Predatory Lending Practices

At some point in time, most people need to borrow money for one reason or another. However, there are times when borrowers may be directed away from loans with affordable interest rates and payments. Instead, borrowers may be steered toward loans with unreasonably high interest rates, unnecessary fees, and excessive charges, such as added points or insurance.

These are examples of predatory lending. Predatory lending is the term given to unethical practices that exploit a borrower's financial situation and/or lack of knowledge, leading to high profits for the predator and worsening finances for the borrower.

Here are some signs of predatory lending:

• Loans based only on the equity in a home, not the borrower's ability to repay the loan.
• Unusually high interest rates.
• Excessive points added to a loan without lowering the interest rate.
• Excessive fees are included, such as charging a penalty for paying the loan off early.
• Unnecessary costs are added, such as life and/or disability insurance.

It may be difficult or even impossible to repay the loan with these extra fees. If payments on the loan fall behind, additional charges may apply, or the lender may suggest refinancing the loan to lower monthly payments. You may also receive offers through the mail or phone suggesting you refinance as a way to deal with your debt. However, any unpaid payments of the first loan may be added to the new loan, costing more money to repay in the long run. While refinancing a loan may look attractive or may be necessary, remember that fees will be added when refinancing your loan.

Most often, victims of predatory lending are the low- to moderate-income population, including minorities and the elderly. However, it can happen to anyone!

Here are steps to protect yourself from predatory lending:

Be aware of offers from someone who calls over the phone or comes to your door without an invitation. Remember, if an offer sounds too good to be true, it probably is.
Watch for sales pitches that state an offer is good only for a limited time. If the offer is good today, it should still be good tomorrow. Do some research and check it out.
If considering consolidating debts into a home-equity loan, speak to a local housing or consumer credit counseling agency first. Other options may be available to resolve the debt without having to take out a loan.
Avoid loans with unneeded extras, such as additional life insurance. The cost of the extras will be added to the total cost of the loan, causing higher payments. If unsure about whether or not to purchase extras, consult another lender for a second opinion.
Never sign any paper, such as an agreement, you don't understand or if the information is incorrect. Even if the company states it is "standard," still ask for explanation.If still uncertain, ask for a copy of the paper and get a second opinion from an advisor or local housing or consumer credit counseling agency.
Fill in all blank spaces. Even if an answer is not needed, write not applicable or "N/A" in the blank. Do not sign the agreement until every space is filled.
Comparison shop. Contact various lending institutions and compare interest rates and loan options. Also contact the Better Business Bureau for a list of lenders who are members. Find the one that best suits your needs and budget.
Take someone with you who is knowledgeable about the process involved in the closing of a sale, such as your attorney or real estate agent. He/she may be aware of pitfalls to avoid or of opportunities you should take advantage of when closing.

Because people have different needs, there are various types of loans available. However, if you feel you have been a victim of predatory lending, contact your local legal service/legal aid organization, which are listed in the business section of your telephone book.

The above information should be understood to be a general discussion of the subject matter and DOES NOT constitute a legal opinion about the situation. For further information please consult a qualified attorney.

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