MoneyWatch: March 2008

Avoiding Predatory Lending

In today’s lending market, many more people can qualify for a home loan or an equity line of credit. However, the dream of owning a home can easily be destroyed when a trusting borrower falls prey to a deceptive and dishonest lender. Predatory lending occurs when a mortgage loan is intentionally set up to exploit the borrower and, in turn, greatly benefit the lender. Often these predatory loans lead to economic hardship and in many cases, foreclosure. Below are some tips on how to avoid predatory lending from the Ohio Attorney General and the Ohio Department of Commerce.

Shop around
* Check with at least 3 lenders and compare rates, closing costs, and fees
* Never do business with an unsolicited lender
* Call or visit local housing agencies that offer counseling of how to find a fair loan (links to local agencies below)

Deal only with licensed and trustworthy mortgage lenders
* Ohio Dept of Commerce, Division of Financial Institutions has a list of licensed lenders in Ohio
* Check with Better Business Bureau and Ohio Attorney General for complaints made about lending institutions

Stay Cautious
* Have a trusted friend or advisor read over the loan with you
* Watch for “Bait and Switch” tactics: Predatory lenders will often change details of loan at last minute without properly informing you
* Don’t be pressured into signing
* Watch out for lines like “If you don’t sign now, you are going to miss out on the best deal possible.”
* Always fill out all documents entirely, never leave any spaces blank
* Never agree to falsify any information
* Get copies of everything you sign
* When refinancing, you have a 3 day, federally guaranteed cancellation period

Know the Tricks of Predatory Lenders
* Focusing just on the monthly payment
* “Balloon” payment – monthly payment might be low because there is a large payment due at end of repayment period
* “Flipping” - Multiple refinancing to a lower interest rate, but borrower is charged again for all the initial fees
* Growing the Debt - predatory lenders will try to convince you to take out a larger loan so you can consolidate all personal debts into one loan payment
* Remember, a larger loan means more profit for the lender
* Very risky, non-payment can now lead to foreclosure
* Over-Inflating Appraisal
* Home is appraised at higher value than it is actually worth, which means that your home can be approved for a higher loan
* Insurance packing - insurance that is included with the loan that is not necessary and often only insures the lender, not the borrower

Get Help if You Become a Victim of Predatory Lending
* There are many non-profit organizations and predatory lending hotlines that provide assistance and legal counsel. Many are free to those who qualify. (links provided below)

Click on these links for more information on avoiding predatory lending.

Local Resources
DontBorrowTroubleCC: Cuyahoga County’s Foreclosure Prevention Program
Freddie Mac: Overview of Cuyahoga County’s 211 Foreclosure Prevention Hotline
211Cleveland: Links to Predatory Lending Awareness Programs
211Cleveland: Links to Predatory Lending Assistance
HUD: Approved Housing Counseling Agencies in Cleveland

State Resources
Attorney General: Tips to Avoid Predatory Lending
Attorney General: More Info about Predatory Lending
Department of Commerce: Tips to Avoid Predatory Lending
Department of Commerce: Predatory Lending and its Tricks
Coalition on Homelessness and Housing: Toll-Free Predatory Lending Hotline

National Resources
HUD: Predatory Lending Information
HUD/Treasury: Joint Report on Predatory Lending
AARP: Avoid Predatory Lenders
Better Business Bureau: Beware of Predatory Loan Practices
National Consumer Law Center: Predatory Lending Info for Older Americans

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Research assistance for MoneyWatch is from Cleveland State University Nance College of Business Administration.