Predatory lending has warning signs

Borrowers should be cautioned to beware of predatory lending

The mortgage industry has been thriving for the past five years or so; as prices have gone up and interest rates have gone down, it’s been a great time to lend money for real estate. Agents, brokers and lenders have often been so busy that they haven’t had time to return calls. And with the boom in overall lending, there has been a corresponding boom in predatory lending.

Predatory lending is loosely defined, but in general, the term refers to lenders who offer loans to buyers while putting their own best interests ahead of those of their customer. They don’t particularly care if the customer can afford the loan; in fact, they are often just as happy if the customer loses the house to foreclosure so that it can be sold as a profit. Predatory lenders tend to seek out “marginal” customers, such as those who have slightly tarnished credit scores that might make it difficult for them to obtain home loans from legitimate, top-tier home lenders.

If you are shopping for a home loan, there are some things you should watch out for in order to make sure that you don’t become a victim of a predatory lending scam.

Here are a few things you should consider:

• Excessive fees - Fees paid at closing aren’t fixed, and can legitimately vary from one mortgage to another. These fees cover paperwork processing costs, appraisals and other incidental expenses associated with creating the loan. But it is rare for such fees to exceed 1% of the total value of the loan amount. With predatory lenders, fees in excess of 5% are not unusual. Check the fees carefully; lenders often hide all manner of things in the fine print.
• Prepayment penalties - Many predatory loans include outrageous prepayment penalties that assess a fee to the buyer if he or she decides to refinance. It makes sense; if you are paying them a lot more money than you have to, they don’t want to see you go somewhere else. These fees can often amount go six months’ interest on the loan or more and can often run for more than three years, meaning that you are stuck with at least 36 months of those high loan payments.
• High interest rates - It is not unusual for predatory lenders to charge interest rates that are more than 5 points above what other lenders might charge, even to the same customer. By all means, if you are offered a loan at a rate that seems unusually high, check around with other lenders.
• Mandatory arbitration - Some sneaky lenders put clauses in the contracts that require buyers to submit to binding arbitration to resolve problems rather than seeking a solution through the courts. This is not a good idea, as arbitration panels are hired by the lender and the results are stacked in their favor. If you see this clause, you should be concerned.

This is far from a complete list of things to watch out for, but you should get the general idea of what predatory lending is about. These people aren’t interested in you or whether or not you get to buy a house; they only want your money. Watch out.