Real estate industry experts are warning that the increase in subprime lending has opened the door for unscrupulous lending practices, known in the banking industry as predatory lending. Subprime loans are generally high-cost loans made to individuals who have had credit problems. And while not all of these loans are bad, predatory lenders use their more flexible terms to prey on consumers who may be desperate for a loan or uneducated about the home buying process. “Predatory lenders have two distinct targets,” says James Ballentine, director of community and economic development at the American Bankers Association in Washington, D.C. “They go after minorities, because they consider them to be less financially sophisticated than other ethnic groups, and the elderly, because they are seeking to retrieve equity out of their homes. Or they sell the elderly high-cost mortgages, refinanced loans, or consolidation loans that they can’t afford so they can take their homes.”
According to research by the National Community Reinvestment Coalition, African Americans received a disproportionate share of subprime loans — 29.4% — while their Hispanic and white counterparts received 15.3% and 10.4%, respectively. Here’s how to avoid becoming a victim of predatory lending or loan fraud:
Avoid junk fees. “If it costs $250 to type your personal information into the application, and administrative fees cost an additional $500 to $600, ask questions,” says Russell Scott, senior loan officer at Merit Financial Inc. in Kirkland, Washington. “The key is to know what the fees are and what they are going toward.” To compare fees from various lenders, take a Federal Trade Commission mortgage shopping worksheet (http://www.ftc.gov/bcp/conline/pubs/homes/bestmorg.htm) with you when you go loan shopping.
Go to more than one lender. Go to your bank, credit union, or mortgage broker and compare rates and fees. “Marketing hype may make it look like a good loan when it’s really disastrous,” says Sally Herme, a consumer protection attorney with AARP in Washington, D.C. She recommends consulting a HUD-certified housing counselor or real estate attorney about loan terms. Ballentine cautions: “Check to see if a lender is regulated by the FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision, or the Federal Reserve. If it’s not, consider shopping elsewhere.”
Understand the terms of the loan. According to the American Bankers Association, excessive fees can turn a loan with low monthly payments into one that actually costs you more in the long run. Scott says that in most cases, borrowers will either pay lower points (origination or discount fees that are charged up front to pay the lender) and get a higher interest rate, or pay higher points and get a lower interest rate. Predatory lenders will often charge high up-front fees and higher interest rates to make money on the “back” of the loan. A borrower should not be hit with both and should be aware of what they are being charged.
Beware of prepayment penalties and balloon payments. “Avoid prepayment penalties that are longer than your guaranteed fixed rate,” says Scott. “For example, if you have a