Some lenders engage in practices that are known as ‘predatory lending’. This means that they are fraudulent, deceptive and/or unfair in their behavior. There is no real legal definition of the practice, but there are laws to protect consumers from it. It is unfortunate that some people continue to fall victim to these types of lenders and it is very important to be able to spot the warning signs. Let’s take a look at the 8 most common signs of predatory lending.
1. Big Fees
The first thing you should look out for is that the lender is collecting big fees.
“‘Points’ or ‘discount points’ are the lender’s fee for making the loan. Generally, a charge of three points — 3% or less of the loan amount — is a good deal, including such necessities as an appraisal and title insurance. Get your credit score in advance and research typical fees in your area.”
In many cases, a predatory lender will tell you that, because your credit is so bad, they need to charge further fees in order to find a loan product. This is untrue. Regardless of what your current credit status is, finding a financial product should take the same amount of time and effort. Hence, if you see a fee of above 3%, you should avoid the lender – or the broker.
2. Early Repayment Penalties
Generally speaking, you will have to pay some penalty if you want to pay a loan back early. This is because you would otherwise theoretically be able to borrow money without ever having to pay any interest. However, there are guidelines and rules in terms of how much you can be charged for an early repayment. A lender that forces you to pay all of the interests as a repayment fee is clearly engaging in illegal practices.
3. Not Allowing You to Shop Around
Many predatory lenders will also tell you that they are the only ones who can help you.
“A lender or investor tells you that they are your only chance of getting a loan or owning a home. You should be able to take your time to shop around and compare prices and houses.”
This is true not just for mortgage lending either. Predatory lending practices can be seen in all types of financial products, from huge mortgages to small payday loans. Brokers most commonly use this tactic. They will tell you that there is no point in you shopping around, as there are no lenders or financial institutions that would consider you that they don’t have on file. In reality, however, you can find any institution that they have on their books yourself with a little bit of research, and you can most likely find more as well.
4. Broker Interest Rates
Brokers make money in two different ways. First of all, they receive a premium from a lender to whom they refer somebody. This is a common and legal practice. However, some will charge you what is known as a ‘yield spread premium’. This means that they inflate the interest rates that the lender will actually charge you, pocketing money for themselves for the duration of your loan. Ask your broker whether they have this premium in place or not. If so, then it will always be cheaper to go directly to the lender and cut out the middleman.
5. Targeting Specific Demographics
There are a number of specific demographics that certain predatory lenders will target, in particular. These tend to be vulnerable demographics, such as senior citizens, disabled people, veterans and those from areas of high social deprivation. In many cases, these people are told that they can have a loan regardless of their credit status, or even that no credit check will be performed on them. In many cases, these lenders will actually charge very high interest rates, or will even try to make money by charging a broker’s fee without then finding a loan at all.
6. Second Set of Documents
Once you have signed for your loan, you should no longer be expected to sign any further documentation. Predatory lenders, however, will frequently come up with more paperwork at later stages.
“Never sign an addendum or second set of documents that won’t be shared with all parties. This could be a warning sign that fraud is being committed.”
Similarly, some will send you paperwork with some blanks. They will tell you that the blanks will be completed later. Since this means they could put anything in there and your signature will be on it, this is something you must avoid at all costs. If you can, have any paperwork that they send you looked over by a professional to make sure that it is completely legal.
7. Offering Later Refinancing Options
A very common tactic that predatory lenders engage in is offering you a very bad deal on a loan with the promise of coming up with a better refinancing option at a later stage. They will tell you, for instance, that running the bad loan for a period of time will improve your credit rating, so that it will become easier for you to apply for a different product afterwards. While there is some truth to that, the reality is that the better loan will never be offered to you unless you search for it yourself. This means that you will be stuck with a bad deal for the duration of the loan.
8. False Insurance Promises
This particular predatory tactic is applicable to mortgages. Some predatory lenders will tell you that you are protected from loan fraud or property defects by the Federal Housing Administration insurance. This is untrue. If a lender even mentions this, you can almost guarantee that they are either committing loan fraud, or that they are trying to sell you a property with defects. If you do want insurance against this, that is a separate product that you need to find yourself. As always, it is vital that you do your research and compare the market.