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Featured Article
Four Signs of Predatory Lending
Clients and friends are always asking me, "How do I know if I have been the victim of predatory lending?" And the answer I always give is, "you have to look at the loan documentation."
The reckless mortgage boom of the early 2000's saw millions of Americans renegotiating the loans on their homes in reaction to low interest rates. Alongside this increased demand followed a large number of dishonest mortgage brokers looking to take advantage of people looking to refinance their homes. These brokers (and sometimes banks and/or lenders themselves) saw this as an opportunity to cheat borrowers with empty promises, excessive fees and confusing terms.
The problem most Americans face is that the mortgage process is so complicated and involves so many documents, finding predatory lending violations becomes difficult. Here are a few signs that you may be the victim of predatory lending practices that require a little or no review of your mortgage documents:
- More Expensive Loan: Brokers often direct borrowers into a much more expensive loan, like a subprime loan, even when you qualify for a mainstream loan. Did you have an excellent credit score, sufficient income and/or large amount of equity in your home when applying for the loan, yet you were only given a subprime mortgage option? Senior citizens and minorities are often the victims of such scrupulous practices. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.
- Adjustable Interest Rates That Suddenly Explode: The most common type of subprime mortgage was an "exploding" ARM—a home loan with an adjustable interest rate that can increase suddenly after a short time, usually two or three years. If you are a person of modest income, this type of loan is not appropriate for you. TIP: look for a document in your Mortgage papers called an "ARM Rider." A missing and/or undisclosed rider is a good sign of predatory lending.
- Promises to Refinance with Better Terms in the Future: Predatory lenders are notorious for selling bad deals by promising that they will refinance the loan within a short time, or if it becomes unmanageable for you. It is important to remember that the lender is not bound by that promise.
- Balloon Payments: One way that lenders make loans sound good is to make the monthly payment small but then require a big balloon payment at the end of the loan period. Some loans have you wait to repay the entire loan amount until the loan term ends. This promise may be just a way for the lender to charge you higher fees and closing costs. Predatory lenders make money by charging excessive fees every time they refinance the loan and they'll encourage you to refinance often.
While these signs are not specifically actionable against your lender, they are good indicators that you may be the victim of predatory lending. Almost all of the violations can only be found through a forensic legal analysis of your loan documents. In addition, most borrowers were not given all the material documents with respect to their loan and they must be obtained from their lender through a formal legal request (Qualified Written Request). For more information go to www.ProdigyLawGroup.com
By Paul Price
Paul Price is an associate attorney in Prodigy Law Group's California office.
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