Beware of Predatory Lending

Shockingly, federal law does not define predatory lending. When it comes to protection from abusive lenders, don't count on your good old Uncle Sam for help. Nope. You're own your own in that department. It's you versus the mega-bankers in the dog-eat-dog financial arena. Sadly, in that environment with no protective rules, it's the big dog that almost always wins.

The best way not to lose that fight is to get informed. Know the big dog's tactics and protect yourself from them in advance.

Here are three tactics that I've seen that fall within my definition of predatory lending:

There are lenders who are providing a valuable resource with automatic refinancing, and there are lenders who are taking advantage of borrowers through automatic refinancing. In principle, automatic refinancing is a great service to the borrower; the lender continually monitors interest rates and will automatically refinance the loan for the borrower if rates drop enough to make the refinance worthwhile. The problem arises in the definition of worthwhile.

It is not a secret that lenders charge fees every time they process a mortgage loan. Sometimes these fees are paid for by the borrower at loan closing, other times these fees are added to the outstanding balance of the loan: the fees are financed. It is those fees that can get very expensive.

Suppose you have a mortgage with an outstanding balance of $200,000. Your lender has monitored interest rates and informs you that rates have dropped almost 1/2 percentage point and you could save $20 per month by refinancing. Let's further say that you will not have to pay anything at loan closing, the fees can be added to the loan. Just come into the office and sign the papers. On first look, this seems like a good deal to you. However, the fees that are added to your loan can be substantial. How many points are you paying? What other fees are being added? What will your new loan balance be? In this example, it is likely to be around $206,000.

Automatically refinance like this a few times each year, and your loan balance could increase as fast or faster than your home appreciates. When you sell your home in a few years, you could end up getting back less than your down payment. All the appreciation would have been eaten by the fees every time you refinanced. In this example, the lender pocketed thousands and thousands of dollars in fees, and you lost much of your equity. Beware.

Would you buy a car from a dealer that tried to sell you tires at 4 times the going price? It is doubtful. Yet, thousands of people each day do the financial equivalent by refinancing their mortgage with a lender that tries to sell them insurance at 4 times the going rate or even more.

Credit life insurance, or loan life insurance, or any other name that unscrupulous lenders dream up is nothing more than a simple term life insurance policy. Don't let lenders talk you into an insurance policy associated with your mortgage loan if that same policy can be purchased separately for 1/4th the cost. Usually, lenders that try to foist this overpriced policy on borrowers will offer it at the time of loan closing. This is done on purpose so that the borrower can't comparison shop. You should ALWAYS shop for price comparisons.

We've covered excessive fees somewhat in the first item. However, excessive fees can be applied to any fee associated with a mortgage loan.

Let's say the average national APR for a fixed, 30-year mortgage on the day you apply is 6.34% with one point. You find a lender that is offering 6.20% with one and a half points. Turning to your handy mortgage calculator, you find your payments will be less with the loan from the latter. What the mortgage calculator cannot tell you is that the latter loan is likely going to be much more expensive.

Lenders that offer below market rates as teasers are not doing it out of the kindness of their heart. You can bet they will try to get a profit in some other way. In the instance just described, appraisal fees, attorney fees, loan processing fees, documentation fees, credit report fees, and more can all be inflated to cover the cost of the lower interest rate. Additionally, a prepayment penalty can be included in the fine print giving the lender even more profit when you sell your home or refinance.

Borrower beware.