Although lending practices have tightened in the wake of the financial crisis, predatory lending hasn’t stopped. A number of unscrupulous lenders continue to put their own interests ahead of their customers’. A consumer who knows how to spot the warning signs of predatory lending is one who won’t be the next victim of discriminatory lending.
In this post, we will share detailed information on what a predatory loan is, tips on spotting a predatory lender, and what to do if you think you might be a victim.
You might be aware that one of our clients was a victim of discriminatory lending practices by JP Morgan Chase. In fact, Chris appeared on WPIX-11 to share client Luis Alvarez’s story.
Alvarez approached an independent mortgage broker, who secured what Alvarez believed to be the best deal for his new home. However, on closing day the rate unexpectedly jumped. Alvarez was told that he had no choice but to accept this higher rate. He quickly found that his loan payments were unaffordable and sought legal help from Cabanillas & Associates. Cabanillas explained that Alvarez’s situation is all too familiar, due to poor regulation of lending practices, particularly regarding mortgages sold between 2006 and 2009.
Now, regulations surrounding lending practices have been increased. JP Morgan Chase - who deny any wrongdoing - has agreed to pay $55 million for discriminatory lending practices. Alvarez is one of many victims of predatory lending looking forward to receiving compensation from the bank. But, many homeowners continue to suffer.
What is predatory lending?
Predatory lending - sometimes known as discriminatory lending - is lending that prioritizes the lender’s interests over the borrower’s. When a lender sells a mortgage (or any type of loan), they earn a fee and the lender should have the best product for the borrower’s needs. Predatory lenders sell consumers the wrong loan (a term we will discuss below) in order to gain higher commission.
The ‘wrong loan’ is one that is not the best fit for the borrower’s income or requirements. It might involve monthly payments that they will not realistically be able to meet, unnecessarily high fees, last minute changes, or clauses preventing the borrower from accumulating equity in their property. A predatory lender often makes the borrower feel that there is no option but to accept the terms in order to complete their purchase.
What if a borrower takes out a loan that they are aware is not the best option? This is not predatory lending if the lender has made the borrower aware of the facts, and the borrower has chosen that product, fully understanding the consequences.
How to spot a predatory lender
If you notice any of these warning signs, our advice is very simple - do not proceed with the transaction, and consult an attorney. These signs could be indicators that your advisor isn’t working in your best interests.
Unusually low interest rate. If a deal seems too good to be true, it usually is. Rates that are unusually low tend to be increased at the last minute, or other fees are hiked. Speak to a few lenders to get a sense of the rate that tends to apply to your financial circumstances.
Unusually high fees. Again, it makes sense to research what’s currently happening in the market.
You are encouraged to lie on the application form. Mortgage fraud is a crime. Ask yourself: “Why would a professional want to risk their reputation so I can get a better mortgage deal?” Are you happy to have sleepless nights worrying whether your lie will be discovered so the lender can make some commission?
Pressure is applied to make you sign. High pressure sales techniques are applied to force the consumer to sign quickly. Let’s revisit the case of Luis Alvarez above. The terms were changed on closing day, making him feel he would lose his home if he didn’t quickly agree to the new rate. This is a classic example of a predatory lender applying extreme pressure to make a sale. Allow yourself a cooling off period to go over figures and make sure you understand everything.
Action to take if you think you are a victim of predatory lending
If you have not signed any paperwork, you have not legally committed to anything and are free to walk away. Although you might risk losing your ideal home, car, or bargain purchase, there will always be more homes, cars and bargains. Signing up to the wrong deal has long term, potentially serious financial consequences for you and your family.
If you have already signed a loan that you believe was predatory, we recommend seeking legal counsel. Many predatory loans were taken out between 2006 and 2009, when the industry was poorly regulated. Our team at Cabanillas & Associates is ready to review your documents and advise you on the next step.