Real Estate Articles

Common problems associated with predatory lending

When loans hurt instead of help, they can quickly lead to foreclosure and even bankruptcy. It's important to learn about common problems associated with predatory lending.

The term, "predatory lending" covers a wide range of abusive practices. Some may be predatory for one borrower but not for another, because everyone's circumstances are different. Predatory lenders often take advantage of first-time homebuyers and others who may be vulnerable to high-pressure sales tactics, so it pays to know how to protect yourself and who can help.

Nearly all predatory lending occurs in the "subprime market," where loans are sold to people with less than ideal credit histories. Subprime loans have played an important role in helping millions of consumers achieve homeownership, but, unfortunately, some lenders abuse their role and take unfair advantage of vulnerable borrowers.

Here are some common problems with predatory loans which "Shopping for a Mortgage? Do Your Homework First," a brochure published by the National Association of Realtors® (NAR) and the Center for Responsible Lending, notes:

• High interest rates and fees: Predatory lenders often charge extremely high interest and fees that are added into the total amount of the loan the borrower must repay. These lenders charge what they can get away with, not a fair amount based on the credit history of the borrower.

• Broken promises and bait and switch: Sometimes home buyers are offered a new loan or a refinance of an existing loan that seems to meet all of their needs--only to find that interest rates and fees have changed when they get to the closing table. Agreeing to last-minute changes can cost thousands of dollars and result in a loan they just can't afford.

• Loans that start low and go high: Adjustable rate loans are popular in today's market, but many that seem affordable are likely to have steep cost increases in the future. Avoid "payment shock" by considering whether you can pay for the loan both now and in the future.

• Loan "flipping": Too many homeowners are persuaded to refinance their mortgage, sometimes repeatedly, when there is no real benefit. Even when a family receives some cash from a refinance, the gains should be weighed against the costs of excessive fees and a higher loan amount.

• Steering: Some families who receive subprime loans could qualify for a much more affordable home loan. Predatory lenders use aggressive sales tactics to steer families into unnecessarily expensive loan products.

Here are some ways home buyers can protect themselves from predatory lenders:

• Check out lenders with the Better Business Bureau, government websites, or other consumer groups. How long has the lender been in business? Have consumers filed many complaints? Does the lender belong to a trade association with ethics requirements for members?

• Refuse to participate in transactions that may be fraudulent.

• Share predatory lending "horror" stories with regulators, other consumers, Realtors®, counseling groups, housing professionals, and the media.

• Make contracts subject to the homebuyer receiving approval from a lender for a fair and affordable loan.

• Avoid unnecessary contract extensions that could cause the lender's loan commitment to lapse.

• Get educated on the value of your home by asking your Realtor® for a comparative market analysis.

• Review the HUD-1 closing statement before closing. Upon request, home buyers have the right to see this information 24 hours before the loan closing.

• Report possible violations to appropriate federal, state and local officials.

The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, e-mail , or phone (408) 200-0109.

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