Merriam-Webster’s defines the word predatory as, “wrongly harming or using others for pleasure or profit;” and lending is defined an act “to give for temporary use on condition that the same or its equivalent will be returned.” Conversly, Investopedia defines predatory lending as, “unscrupulous actions carried out by a lender to entice, induce and/or assist a borrower in taking a mortgage that carries high fees, a high interest rate, strips the borrower of equity, or places the borrower in a lower credit rated loan to the benefit of the lender.”
Predatory lenders aren’t overtly suspicious characters waiting to pounce on unassuming individuals. Some of the main culprits include a few of the largest lending companies in the United States; Ameriquest and Countrywide are two known culprits.
A lack of knowledge is a key criteria these predators use to their advantage. The manifestations of predatory lending have burdened several populations, especially communities of color, new homeowners, and low income homeowners.
One of the ways to fight back is to understand the manipulative language used. Current homeowners and future homeowners (or anyone who will ever need to borrow money) should familiarize themselves as a means to avoid falling victim to predatory lending.
- Fees: All of the disclosures on loans will explain these items in words that require a degree in finance. Mortgage News Daily says, the key is to remember that any loan with fees over 5 percent of the loan amount is a sign of a predatory loan.
- Prepayment Penalties: According to the National Association of Consumer Advocates, a vast majority of subprime loans carry a prepayment penalty. Subprime loans are for borrowers who do not qualify for prime loans (much lower interest rates) due to low credit scores or low income. The interest rates are higher on subprime loans so the borrower may feel inclined to pay it off early. Bad idea. An astounding 80 percent of these loans have penalties for paying early.
- Steering & Targeting: Lenders tend to target senior citizens and communities of color utilizing aggressive sales tactics, despite the fact that more than half of this targeted population could have qualified for prime loans with lower interest rates.
- Loan Flipping: Once you sign up for the loan at a certain interest rate, the lender convinces you to repeatedly refinance the loan for a longer-term loan. The lender may make it seem like it is in your best interest to refinance, but the benefit is only for them. Refinancing results in new fees that get rolled into the principal amount of the new loan (not in your best interest).
- Bait and Switch: Of all of the predatory lending tactics, I think this is the worst one. Lenders will come into your home and tell you they have the best loan for you at the lowest interest rate in the market. Everything is great at the beginning of the process, but when closing, what they have on paper is not what they promised on their way in. Don’t accept this change, you can get better if you do more research.
Other tactics to beware of can be found on the websites below. Always ask for the disclosures in writing, at the beginning and at the end. Be knowledgeable of your credit rating so that you already know what you qualify for. Most importantly, do not go into a loan that has an adjustable interest rate. Know the best-case and worst-case scenario for any loan you sign up for.
By Melissa Bautista