What is Predatory Lending?

Predatory lending comes in a variety of forms and can impact your wallet in a number of ways. First-time home buyers and seniors are particular targets of the practice. Predatory lending occurs when a lender uses dishonesty or fraud to get you in a loan that is not in your best interest. The following examples can help you know what to look out for.

Too Much Loan

A predatory lender’s loan tricks include:

Inflating the appraisal.  With an appraisal above a home’s actual value you are being placed in a loan that is more than you need.

Lying on the application. Predatory lending mortgage scams also include getting you to falsify application information such as the amount of your income, debt or cash available for down payment. This gets you into a larger loan than you can afford to pay.

Loaning too much. A simple predatory lending scam is the lender talking the borrower into more loan than the borrower can comfortably repay. It differs from lying on the application because in this scam, the borrower’s financials support the loan, but the lender is aware of impending changes (college costs, expanding family) that make the loan unwise.

Unreasonable Fees or Rates

Predatory lenders can offer suitable loans, fairly applied for and still take advantage of the unwary borrower. There are fees associated with any borrowing, but in predatory lending, the fees are unreasonably high or, in some cases, for services that are never rendered.

Predatory lenders can also offer above-market interest rates when there is nothing in the borrower’s credit application to warrant it.

Unnecessary Loans or Payments

Refinancing a loan to get a lower payment or better terms is a legitimate borrowing practice. But in predatory lending, the borrower is guided to refinance multiple times, which gives additional fees to the lender but creates a scenario for the borrower in which the financial advantages of refinancing are wiped out.

Predatory lenders also might push an unqualified borrower into a low-interest rate loan with a big balloon payment at the end of a relative short term, knowing the borrower will have difficulty finding financing to pay the balloon payment.

A home improvement loan can be predatory lending if you are pushed by a lender into repairs or improvements you don’t need.

Hurting Equity Values

Predatory lending also includes homeowners being pushed into unnecessary cash out refinancing, which closes a loan for the lender but reduces equity in the home.

Predatory Lending Tactics

Be alert for the following tactics, which could mean you’ve fallen into predatory lending scam:

  • You’re told only this particular lender can help you.
  • You agreed to loan terms and the final documents reflect something different.
  • You’re expected to sign a document before you’ve read it or in which there are unfilled blanks.
  • You’re pushed toward a home that is much more expensive than other homes near it.
  • You’re told that refinancing is the only way to solve your credit problems.