Common Elements of a Predatory Loan

Society for the Preservation of Continued Homeownership Common Elements of a Predatory Loan

Several things can make a loan predatory. However, there are a few that occur more often than others. It is important to have an understanding of what makes a loan predatory. Below are the most common elements of a predatory loan.

Interest Only Loans

Jim takes out an interest only loan for $300,000. He is very excited that his monthly payment will only be about $1000. He has agreed to pay this amount each month for 10 years. At the end of these 10 years, even though Jim has paid $120,000, he still owes 300,000.

Monthly payments on an interest only loan are simply made to pay off the interest that has accumulated. These payments do not affect the loan balance. The total loan (in Jim’s case $300,000) must be paid off in one lump sum at the end of the loan contract term. (See: Balloon Payments)

Balloon Payments

A balloon payment is a large lump sum that is due at the end of a term of the loan agreement/contract. It is in addition to the regular monthly payments made during the loan contract, and must be paid in full on or before the date specified.

Loan “Flipping”

Predatory lenders encourage you to refinance your loan every few months. They probably explained that you would be able to get even more money by refinancing. However, each time your loan is refinanced, or “flipped”, they charge new fees. Along with these new fees, any additional things included in the loan, like credit life insurance, are cancelled even though you have already paid for them in full.

Blank Pages

Predatory lenders are taught to explain your new loan to you as quickly as possible, while explaining as little as possible. Many times, lenders will ask a borrower to sign blank pages explaining that they simply have to fill in a few facts afterwards. Beware. Never sign blank pages, anything that you have not read, or anything that you do not fully understand. These blank pages are routinely filled in later with false facts about your home and financial situation, which can hurt you in the end.

Bait and Switch

Lenders will show you a contract with numbers and figures that you find appealing and are eager to agree to. However, when they ask you to sign the final loan documents, the numbers have been changed.

Deed Stealing

A predator notices that you are behind on your mortgage payments. He then offers to help you pay back the mortgage. However, he explains that you will have to sign the deed to your home over to him, to prevent foreclosure for the time being. After a few months, the loan the man promised never materializes, and you no longer own your own home.

Packing

Extra things included in the loan without the borrower’s knowledge and/or consent. See Credit Life Insurance.

Forged Signatures

Former predatory lenders have admitted to forging client signatures, even after being told that the client was not interested.

High Interest Rate (APR)

A good indicator that your loan may be predatory is a high APR, or Annual Percentage Rate. Newspapers publish competitive interest rates. If your interest rate is significantly higher than those published, you should shop around for another lender.

Solicitation

Predatory lenders seek out certain people to do business with, often profiling race, age, or neighborhood. The lenders are not concerned with the income or employment status of a target and will push loans that they know can not be repaid. If the lender is trying to push you to take a loan greater than you can afford, it may be a predatory loan. Be wary of lenders who approach you.

Credit Life Insurance

Remember Jim? The lender who sold Jim his loan insisted that he buy a credit life insurance plan, along with the loan, to protect his family in case of a tragedy. This should have made Jim a bit suspicious about his new loan.

Often times, lenders will insist that you buy a credit life insurance policy along with your loan. They also insist that it is better for you to pay the premium all at once. They end up making more money in the end if you pay all at once instead of in monthly. However, when your lender calls and asks you to refinance your loan, the credit life insurance policy is cancelled, even though you have already paid the premiums. Many times, they will have you sign up for yet another policy on this new, refinanced loan. Then, they will repeat this the next time your loan is refinanced.

Prepayment Penalties

A prepayment penalty is due when a loan is repaid early. Many times, when a loan is “flipped,” a prepayment penalty of many thousands of dollars is due.

Appraisals

Predatory lenders often work hand-in-hand with crooked appraisers who may overvalue your home to justify a high-cost loan.