What is predatory lending?
Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected.
Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors. Their schemes often target people who have small incomes but substantial equities in their homes.
Common predatory lending practices
- Equity Stripping
The lender makes a loan based upon the equity in your home, whether or not you can make the payments. If you cannot make payments, you could lose your home through foreclosure.
- Bait-and-switch schemes
The lender may promise one type of loan or interest rate but without good reason, give you a different one. Sometimes a higher (and unaffordable) interest rate doesn't kick in until months after you have begun to pay on your loan.
- Loan Flipping
A lender refinances your loan with a new long-term, high cost loan. Each time the lender "flips" the existing loan, you must pay points and assorted fees.
You receive a loan that contains charges for services you did not request or need. "Packing" most often involves making the borrower believe that credit insurance must be purchased and financed into the loan in order to qualify.
- Hidden Balloon Payments
You believe that you have applied for a low rate loan requiring low monthly payments only to learn at closing that it is a short-term loan that you will have to refinance within a few years.
How are consumers targeted by predatory lending?
Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics.
Their advertisements promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer.
They may target minority communities by advertising in a specific language, or target neighborhoods with high numbers of elderly homeowners, or homeowners with little access to credit.
Tips to avoid predatory lending
- Shop for a lender and compare costs. Be suspicious if anyone tries to steer you to just one lender.
- Compare offers from multiple lenders.
- Ask questions and don’t let anyone pressure you into making a deal that you don’t feel comfortable with. If you don’t agree with the terms of the offer you always have the right to walk away.
- Ask questions until you understand the loan terms – even if you feel embarrassed for not knowing the answer.
How to report predatory lending
If you suspect a company is using predatory lending practices you should file a complaint with the Washington State Department of Financial Institutions.