Predatory lending has obvious signs; watch out for them

Several tips to help you avoid being a victim of a predatory loan

The process of taking out a home loan is a complicated one, and one with which most consumers are not really familiar. Few people buy a house more than once or twice in their lives, and the paperwork and legal requirements are complex enough to often require the services of a lawyer. Many people find out that they are qualified for a loan and then simply do as they are told by the lender and sign where necessary. Assuming that the lender is honest, this will work just fine, but is certainly not advisable. If the lender isn’t honest, you may find yourself the victim of a predatory loan.

Predatory lending is the process of taking advantage of a buyer by providing a loan that has terms that are not necessary and serve only to provide additional profit to the lender. In a competitive market, such loans aren’t common. In the subprime market, where lenders cater to people with less-than-ideal credit, such lending is common. Buyers with credit problems are often grateful that anyone will discuss lending with them at all and they often don’t realize that the lender has taken advantage of them until it is too late.

There are usually signs that show up ahead of time that a lender may not be acting in your best interests. Here are some signs that you should watch out for in order to avoid becoming a victim of predatory lending:

• Prepayment penalties - A prepayment penalty is one that requires you to pay a fee if you should pay off or refinance the loan before a date specified in the contract. They generally exist only to benefit the lender and prevent you from “taking your money elsewhere” to get a better deal. The fees can amount to thousands of dollars and effectively leave you stuck with a bad loan.
• Binding arbitration - Some contracts include clauses prohibit the borrower from suing the lender for any reason. Instead, the documents provide for a hearing before an arbitration panel that will yield a binding result. These hearings are usually weighted in favor of the lender.
• Requiring money ahead of time - With the exception of modest loan application fees, loans shouldn’t cost you anything. After all, you are trying to borrow money, aren’t you? Watch out for lenders that charge large fees upfront. In all likelihood, they’ll take your money and give you nothing in return.
• Excessive fees and closing costs - Some charges, such as loan origination fees, document fees, appraisal fees and courier fees, are legitimate. But unscrupulous lenders often stack loan documentation with excessive and petty fees that can sometimes amount to more than 5% of the loan amount. Watch out for fees that aren’t mentioned ahead of time that suddenly show up on the documents at closing.
• Loans that find you - You will always get your best deal from shopping around. Watch out for loans that come to you through mail or telephone solicitations. These deals are often shady.

Most lenders are legitimate and just want to help their customers buy homes. Others are shady dealers who want to help themselves. It’s up to you to determine the difference, because once you sign you name on the paperwork, the obligation is yours whether it’s a reasonable deal or not.