Tips and Information about Predatory Lending
Spotting a Predatory Loan. Although some features are common to predatory loans, the same features are not always predatory in every loan. The key is to know the contents of the loan documents and what the terms mean in relation to a particular financial situation. The following are some important terms to be aware of before signing loan documents:
- A balloon payment is a lump sum payment due at the end of the loan. A consumer should make sure they can pay the monthly amount as well as any large future payments. Many lender websites offer loan calculators which allow a consumer to figure their housing budget before going to the lender.
- A prepayment penalty is a fee for paying the loan in full before the end of the set term. If excessive, it could be difficult for the borrower to refinance or sell their home.
- Asset lending is when a loan is based on the equity in a consumer's home instead of their income or ability to pay. Often, this leads to foreclosure if the loan amount far exceeds the amount a consumer is able to pay per month.
- Flipping is when a lender repeatedly refinances a loan. Usually, consumers agree to "flip" their loan to get more money. This increases their overall debt which can lead to unreasonably high payments.
Avoiding a Predatory Loan. Below are some steps consumers can take to avoid predatory loans and unscrupulous lenders.
- Always shop around. Examine the terms of the loan and compare to those offered by other lenders. Start with a traditional lender, especially one with whom an existing relationship already exists.
- Ask questions. Understanding the terms of a loan is the key to a successful transaction. The numbers and various terms are confusing to the average buyer. The lender must give a "good faith estimate" of the terms of the loan three days before the closing. Do not be afraid to ask someone, such as a lawyer, a representative of the bank, or someone you trust, to explain anything that is unclear. Never sign a document without knowing the complete terms of the obligation.
- Be aware of the TOTAL payment amount over the life of the loan. Although the monthly payment amount may be low, the extra fees increase the total cost of the loan. Borrowing more than is affordable per month is never a good financial decision. A mortgage payment should fit into a monthly budget for years to come, not just for a short time.
- Avoid promises to refinance at better rates in the future. There is no guarantee that interest rates can be reduced in the future. Interest rates depend on many factors such as income, credit score, collateral, and market changes. The lender who originated the loan cannot promise a better rate in the future because they can not accurately predict these variables. Even if the first rate is not the best, make sure it is a rate which is affordable for years to come.
- Never sign a blank document or anything the lender promises to fill in later. If a consumer signs a blank document, fraudulent lenders could change any term they previously promised. If a lender claims that an offer is good for a limited time, investigate and compare this offer to other lenders. If in doubt, do not sign. An honest lender wants new business and will not set unreasonable time limits on accepting the loan terms or use high pressure tactics.
- The above information is intended as a general guideline for Tennessee consumers. The home buying process is overwhelming for most people. This Office recommends thoroughly educating oneself before purchasing a home. The following are resources available for advice and information on predatory lending and the home buying process.
Federal Trade Commission
Telephone: (877) FTC-Help
Federal Department of Housing and Urban Development
Telephone: (615) 736-5600
Tennessee Housing and Development Agency
Telephone: (615) 741-2400
Tennessee Department of Financial Institutions
Telephone: (615) 741-2236
Division of Consumer Affairs
Telephone: (800) 342-8385 (in Tennessee) or (615) 741-4737