Predatory Lending for the Consumer

Would you know what Predatory Lending is if you were sitting with a mortgage banker or mortgage broker? Thousands of homeowners purchase homes everyday and do not look into this as actively as they shop of deals as an everyday consumer. We trust the brokerage or banker with the faith that they are acting on our behalf.  Consumers get lured in by lower interest rates and cash back refinancing without realizing that they have just become a victim of Predatory Lending.

Predatory lending is unethical and abusive and has been going on for decades. Predatory lending is similar to identify theft in the fact that you need to be diligent in understanding how to prevent it from happening to begin with.

The first rule of thumb is being alert of the tactics used in Predatory lending. The best way to do this is to create a check list that you can use when you go to a banker or brokerage to lend money. Use the list to ensure you’re not falling into a trap.

The first item on your list should be fees. Are the fees excessive for the loan you are obtaining? A good example is the mortgage loan. You should pay around one percent or and approximately a one percent discount point on the loan. You will incur other fees as well associated with the loan as well. If the loan you are in negotiations with your brokerage firm or banker starts with high discount points already included in the loan then it is possible that you are dealing with predatory lending.

The second item on your list should be loan amount. If your banker or brokerage firm attempts to convince you to take out loan that is more expensive when you can qualify for a less expensive loan you may be dealing with predatory lending. A good example of this is borrowers who are placed into a subprime loan with a higher interest rate and they could have qualified for a conventional loan with a lower interest rate. Fannie Mae reports that over half of the subprime mortgages given to borrowers with high interest rate, the borrowers could have qualified for conventional loans with lower interest rates.

The third item on your list should be taxes and insurance. Bankers and brokerage firms dealing in predatory lending will often attempt to make the loan seem less expensive by quoting you a monthly payment that doesn’t include the taxes and insurance; thus making the loan look affordable to you.

The fourth item on your list should be refinancing. If your brokerage firm or banker is telling you that you should refinance frequently as often as every year then you may be dealing with a predatory lender. Refinancing is seen as a way to reduce a mortgage payment and can be a good way to reduce your debt but keep in mind that every refinance you process on your mortgage increases the principal balance. You should be aware of the mortgage term for example thirty year or fifteen year when refinancing. Make sure the loan will benefit you in the long run.

The fifth item on your list should be type of loan. Is loan an adjustable rate loan? Homeowners who are dealing with foreclosure were often victims of Predatory lending and were not aware of it at the time when signing loan documents. Millions of borrowers were placed into subprime mortgages that were issued prior to the collapse of the economy. The majority of subprime mortgage loans written were adjustable rate loans. Adjustable rate loans are not predatory in nature and often are a valuable financing tool; however some of these loans can be predatory. Adjustable rate loans that begin with a low interest rate but only last for a year or two then balloons after that period can be predatory. The rule of thumb here is being aware of how the rate adjusts. Can the rate go down as well as up and is the rate tied to the primary rate. Can the interest go down when the primary interest rate goes down? If not; then the product may be predatory.

The sixth item on your list should be class. Is this banker or brokerage firm pushing particular mortgage product on you due to your class in society? Many of the loans that helped create the mortgage crises were written to be given to people with a set social class. While it has been difficult to prove in the courts; many of the subprime loans that were written targeted borrowers of a particular class. Many lenders have been sued for their predatory lending practices and lending products in this arena.

The fact is that predatory lending has been going on for decades and has been let to run rampant until the mortgage backed securities market collapsed over a year ago. The government is stepping up and taking a closer look into the mortgage industry and the predatory lending that surrounds the industry as a whole.  They are looking into how such a large mass of Americans come to own homes they could not afford and have been making payments on for years. The process of change in the mortgage industry is going to be slow however what the average consumer needs to realize is that with new laws and new regulation on the mortgage industry purchasing that new home will be more difficult to obtain.

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