Avoid the Pitfalls of Predatory Lending Practices

If you are considering a loan of any type, you need to beware of certain questionable lending practices. The Federal Reserve Bank of New York has defined "predatory lending" as:

A welfare-reducing provision of credit, where lenders profit by tempting

consumers into over-borrowing and delinquency.

There are several different types of predatory lending practices.

Predatory Mortgage Lending

Predatory mortgage lending involves a wide array of abusive practices. It often wipes out a family's wealth and frequently leads to foreclosure. Estimates place the annual cost of predatory mortgage lending at over $9 billion. Here are brief descriptions of some of the most common.

• Excessive fees: Many times lenders will include fees and points with the mortgage payment, even on standard loans. However, predatory lenders may charge fees that total more than 5% of the loan amount. A typical lender may charge around 1%.
• Prepayment penalties: Only around 2% of prime market mortgages will charge a penalty for paying off the loan early. However, the vast majority -- about 80% -- of subprime mortgages charge an early pay-off penalty. With abusive predatory loans, the penalty may be more than six months worth of interest.
• Kickbacks: Some predatory lenders have deals to pay kickbacks to real estate brokers who submit a loan that carries a bloated interest rate. The kickback, or “yield spread premium," is paid directly to the broker as an incentive for selling higher interest rate loans.
• Flipping: Consumers usually pay a fee to refinance their mortgage loan. Flipping occurs when a borrower refinances a loan to generate fee income without providing any benefit to the borrower. These unnecessary fees can drain a borrower's equity and inflate their monthly payments. Flipping may even occur with debt-free homes.
• Steering: Some borrowers are steered toward high interest loans, even if they may qualify for sub-prime loans. Research conducted by Fannie Mae shows over half of all borrowers with subprime mortgages could have qualified for loans with more appealing terms. Steering seems to occur more frequently among certain ethnic pockets. One government study revealed 51% of refinanced mortgages in predominantly African-American neighborhoods are subprime loans, compared with just 9% of refinances in predominantly white neighborhoods.

Short Term Predatory Lending

• Payday loans: Payday loans are short-term products available to many consumers with little or no collateral. They simply must show they have a job in order to qualify for the loan, which they must repay by their next payday (hence, the term "payday loan"). Payday loans (also called "cash advance) come with excessively high interest rates, which rise rapidly when the borrower cannot repay the loan within the prescribed timeframe.
• Car title loans: These are similar to payday loans. Car title loans come with high annual interest rates (usually over 100%) that often lead to a cycle of debt because their require repayment within one month, and the borrower is often unable to pay off the loan that quickly.

Tips 

We want all our members to be cautious. To help you avoid predatory lending practices, we have compiled the following list of tips:

1. Ask questions. Do not just accept the representative's word as the truth. Seek out additional information on all products.
2. Shop around. You may be in a rush to obtain the money, but it pays to take your time whenever your money is concerned.
3. Be an educated consumer. The Internet is an excellent source of information. Seek out consumer reviews and articles on products and companies with which you may conduct business.
4. Always read the agreement carefully before you sign. 
5. Avoid balloon payments. 
6. Avoid deals with prepayment penalties. 
7. Know your rights as a consumer. 
8. Just say, “no" if you believe the deal is not beneficial. 
9. Build your credit. This is one of the most effective ways to ensure you will receive the most competitive rate. 
10. Keep in mind -- low monthly payments are not always the best deal. Look at the overall cost of the loan. 
11. Watch out for offers to refinance the loan to a better rate down the road. 
12. Never sign a blank document or anything the lender promised to complete later. 

AltaOne offers several financial tools to help our members better understand how to manage their finances and avoid potentially under-handed lending practices. 

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