Loan steering can cost you thousands of dollars

Unscrupulous or aggressive agents can engage in deceptive lending practices

The process of buying or refinancing a home is a complicated one, and most consumers lack the experience to understand a lot of what is written in the documentation. That can be a problem when something goes wrong, or when a lender decides to engage in underhanded lending practices. We have covered a number of predatory lending schemes in past articles; in this one we will discuss the particularly expensive practice of loan steering. 

Loan steering is, at its simplest, the practice of discouraging a buyer from taking out a loan with favorable terms for the buyer in favor of taking out a loan with terms that are favorable to the lender. The interest rate could be higher, the fees could be higher, and the loan could even be arranged in such a way that foreclosure is inevitable. In some cases, that’s the plan; the lender just wants the house.

How does loan steering work?

It often employs a rogue employee working for a legitimate lender. The employee may come across a loan application by a buyer who has somewhat shaky credit. The credit doesn’t have to be poor, but it may just be poor enough that the buyer won’t qualify for a mortgage with the lowest possible rate. At that point, before the application is processed, the agent tells the customer that their application for a loan has been denied by the lender.

At that point, the buyer will undoubtedly express disappointment, but the agent assures them that it will be all OK. The agent knows someone else who can arrange for the buyer go get financing. That’s good, the agent points out, as he assures the buyer that no other legitimate bank will help them with their loan. The agent then “steers” the buyer towards another company that he or she has a financial relationship with. That company will grant the loan to the buyer.

But the loan is nothing like the loan the buyer originally thought he was going to get. This loan has a substantially higher interest rate, several points added to the closing costs, and all manner of additional fees tacked on to the document. And to make matters worse, the contract also has a clause that will make it difficult to refinance elsewhere - a significant prepayment penalty.

The lender assures the buyer that at some point in the future, they can refinance at a better rate. Of course, that never happens.

The buyer, thinking that he has no other choice, signs the documents. The new lender gets the higher fees, and the agent gets a kickback from the lender for steering the customer in their direction. Should the buyer default on the loan, and that often happens, the agent may get an additional kickback after the house is sold.

While not overly common, loan steering does exist and is often practiced in areas where buyers may have poor credit and few other options for buying a home. Should you encounter such a lender who tells you that your loan has been declined and that no one else will lend to you, you should still try to talk to other lenders. Always get a second opinion. Doing otherwise could cost you thousands of dollars or even cost you your home.