Jeanette A. Tucker | 4/29/2005 9:30:07 PM
Some unscrupulous lenders are using misinformation and high-pressure tactics to prey on vulnerable homeowners. There is no clear-cut definition of a predatory loan, but LSU AgCenter family economics professor Dr. Jeanette Tucker says that it is the result of a lender misleading, tricking and sometimes coercing someone into taking out a home loan at excessive costs and without regard to the homeowner’s ability to repay.
Victims who have trouble repaying a predatory loan often face harassing collection tactics or are encouraged to refinance the loan at even higher fees. If a borrower has pledged his home as collateral for a loan and can’t repay, the home may be lost.
Predatory mortgage lending primarily has been a problem with non-bank companies that specialize in marketing to people with poor credit histories. These companies may include some mortgage brokers, home improvement contractors and finance companies. Predatory lending has also been associated with non-mortgage loans.
"Clearly, not every non-bank lender is unscrupulous, but consumers need to be informed to avoid doing business with those that are," Tucker says.
Predatory lenders, typically non-bank institutions, target consumers they believe are in need of cash or are otherwise vulnerable. Examples include older people who need money for medical bills or home repairs; moderate-and middle-income consumers who need to pay off credit card bills or consolidate other debts, or who want to make some dream purchase; people who don’t shop around for goods and services; and lower-income or minority communities where there may be limited competition from more reputable lenders.
Various federal laws help protect consumers from certain predatory lending practices. Tucker points out that the Truth in Lending Act, for example, requires lenders to provide timely information about loan terms and costs. It also gives consumers the right to cancel home equity loans and other loans secured by a home up to three business days after signing the loan contract.
The Home Ownership and Equity Protection Act (HOEPA) requires lenders of "high cost" loans to provide key information about the loan three days before closing. It also prohibits lenders from making a home equity loan without regard to the borrower’s ability to repay.
Although these laws provide important protections and information for consumers, Tucker suggests ways to protect yourself and your home from a predatory loan.
• Ask yourself, "Do I really need this loan?" Consider all your options before using your home as collateral for a loan.
• Deal with a reputable lender. Select a lender who will put all costs in writing, carefully explain the loan, encourage you to ask questions and not rush you into a quick decision.
• Ask questions and shop around. Get quotes from a minimum of three lenders. Consider the duration or term of the loan and the total cost of the loan fees. Then negotiate for the best deal just as you would for a new car.
• Understand the importance of credit reports and credit scores. Knowing your credit score, correcting errors in your credit report and aggressively shopping among several lenders will help you get a good loan. Borrowers with low credit scores may wish to wait until improving their credit score before taking out a loan that could put their home at risk.
• Know what you are signing. Read the loan documents carefully, especially the fine print. Sign a loan agreement only after you understand the terms of the loan, the fees and your obligation to repay. Obtain and carefully review the preliminary statement of final settlement costs (HUD-1 form) the day before closing.
• Speak up if you think you’ve been treated improperly. Try to resolve any problems with the lender. If unsuccessful, check with the Attorney General’s office of Consumer Protection. Federal government agencies, including the Federal Deposit Insurance Corporation, Federal Trade Commission or the U.S. Department of Housing and Urban Development are good sources of guidance and assistance.
For information on related family and consumer topics, visit the FCS Web site at www.lsuagcenter.com/Inst/
Extension/Departments/fcs/. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.