Home Buying Guide: Predatory Lending Practices

Stories of borrowers taken advantage of by unscrupulous creditors pop up in the information frequently, especially in states which do not require the licensing or tracking of mortgage loan officers. This is to be expected, because there are bound to be unethical people in any industry where a person may create a lot of money by bending the rules. You don’t need to be a victim of a predatory lender. Just be aware that they’re out there. On the lookout for”red flags” and accepting common-sense precautions can allow you to avoid becoming a victim.

Identification

Simply speaking, a predatory lender is somebody who places her interests over those of her customer, often to the client’s detriment. These creditors take advantage of naiveté, absence of information, greed or despair to obligate a debtor into a loan with terms which are highly profitable for the lender but that exploit the debtor. This exploitation can come from bogus or excessive fees, higher rates of interest, points which return money to the lender or loan fraud. Predatory lenders also generate loans they know the borrower cannot manage, but for which the lender may qualify them, in order to generate money.

Tactics

First-time home buyers, buyers with language or cultural barriers and those with less than perfect credit are regular targets of predatory lenders. These borrowers do not know the intricacies of the mortgage loan process and only care about getting accepted. Predatory lenders will tell borrowers exactly what they want to listen to in order to”hook” their target, manipulate numbers or information to support their claims, and discourage their customers from shopping their loan with other lenders.

Considerations

Lenders are required by federal law to provide any borrower who completes a loan program with a fantastic Faith Estimate (GFE) and a Truth-in-Lending (TIL) statement. These documents detail the projected repayment amount, the payment breakdown, loan provisions such as interest rate and application type, if the interest rate is secured and a comprehensive listing of the closing costs associated with the loan. The information offered in the GFE and TIL permits a debtor to compare the loan supplies of several creditors to determine the best bargain. In the event the actual loan has terms or costs which vary from the GFE and TIL, the debtors must register new documents which reflect these numbers. Borrowers are not required to close on a loan which significantly varies from the original GFE and TIL, no matter what a lender says. Refinancing borrowers have a right of rescission, which provides them a three-day window after closure to change their heads without a penalty.

Potential

Predatory lenders will often lie on loan documents to get approval. Many will”fluff” numbers or supply false data backed up by forged or altered supporting files. In doing this in areas such as income, they receive loan approval for payments which are greater than a borrower may qualify for and manage. While this might qualify a borrower to the home they want, it leaves them in a vulnerable financial and fiscal place. Loan mortgage or default will harm a debtor’s credit for years and leave them unable to purchase a new residence for at least three years. Additionally, borrowers are legally responsible for any fraudulent data on their loan documents, because they verify that all information is true and accurate when they sign them.

Prevention/Solution

The perfect way to steer clear of predatory lending is to try to remember the adage”If it sounds too good to be true, it likely is.” Predatory lenders make their money from telling people everything they need to think in order to get them to the closing table, in which they’re vulnerable to pressure and will accept almost any terms to shut the loan. Understand what you can comfortably afford; do not allow your lender tell you exactly what you can afford. Question what a lender lets you know by doing research on the information he provides and using your GFE and TIL to store among three to four different lenders personally recommended by trusted friends, relatives and real estate professionals. Most creditors are going to have very similar conditions –beware the person who offers terms which are dramatically lower or better than others. Pick a lender within that group of those with comparable terms who is responsive and takes the opportunity to explain the loan process for you.

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