It could be predatory lending
Whether it is through the use of print media, bill boards, radio spots, television adds or the internet, we are constantly bombarded by lenders too numerous to count who promise us a better financial future if we merely take out home equity loan or mortgage with them. Unfortunately, some of these lenders prey on cash strapped borrowers promising them financial freedom by giving them more flexible payment options (in effect, giving the homeowner and not the bank control over the how much they need to pay), while in effect selling them a financial product that can erode their equity and in the end cost them their home. These lenders participate in what has been labeled “Predatory Lending.”
Predatory lending is not something that can be easily defined, primarily because whether or not a specific practice rises to the level of predatory lending is different from individual to individual and property to property. “[B]ut may experts agree that it is the result of “misleading, tricking and sometimes coercing someone into taking out a home loan (typically a home equity loan or mortgage refinancing) at excessive costs and without regard to the homeowner’s ability to repay.”
However, predatory lending can also take on a very insidious form, such as where a lender persuades a homeowner to refinance a loan by emphasizing a particular feature of the loan (i.e. an interest only option) that the homeowner finds favorable for his current financial situation, while failing to point out the other provisions of the note (i.e. limits on the interest only payments, negative amortization, pre-payment penalties, etc.) that had the borrower been fully informed of, he would have most likely declined the loan.
The devil is in the details.
A family that finds itself financially distressed; that is, a family that has acquired more consumer debt then what they can comfortably meet with their current income, has already demonstrated the tendency for making poor financial decisions. And it is precisely this type of borrower that the predatory lender targets.
Mortgage brokers know that when someone has their back up against a wall is presented with an offer to significantly reduce their monthly payments, they will be blinded by the prospect of having additional money at their disposal at the end of each month. (Imagine having extra money added to your budget each and every month and all you have to do is agreed to refinance your current mortgage!) As such, these borrowers either won’t spend the time to review the details of their loan, or they simply adopt an attitude that the only thing that matters is that they get financial relief today; thus the details of their loan simply don’t matter.
Predatory lenders rely on the fact that the borrower is looking for a quick fix to their financial woes and won’t ask a lot of questions about the product being sold to them. (Don’t kid yourself, a mortgage broker gets paid a commission when he gets you to commit to a mortgage and some of the products that they sell carry a much higher commission then others.)
There are several ways to protect yourself from Predatory Lenders, which include:
Fully understand what you are signing.
The surest way to protect yourself from predatory lenders is to know and fully understand the terms and conditions of the loan documents that you are being asked to sign, before you sign them. Don’t limit your inquiry to just what your monthly payments will be, consider the total cost of the loan, then check with other lender’s.
Don’t rely solely on the representations of the mortgage broker; remember this individual stands to make thousands of dollars in commissions if you take out a loan with him. Rather, considering hiring a real estate attorney to review the loan documents and explain their financial impact.
Talk to your existing lender.
Be careful of lenders who solicit you to refinance your home mortgage, or with those that you are unfamiliar of. If you believe that it is in your best interests to refinance your existing mortgage, talk with your current lender to see what programs that it may have available for you. Your lender may even look at absorbing some of the cost associated with the refinancing to keep you as its customer.
Examine your other options.
Remember when obtaining a home equity loan you are pledging your home as collateral and if you can’t make the mortgage payments, you stand to loose the property in foreclosure. If you are having problems making your current mortgage payments, what makes you think that entering into a new home mortgage or borrowing more money is your answer? Perhaps you need to re-examine your financial wellbeing and consider selling your home and eliminating your existing consumer debts before taking on new obligations.
Take your time in making a decision.
Don’t succumb to pressure tactics used by mortgage brokers to get you to make a quick decision. The loan you take out against your home can have consequences for you and your family for the next thirty years. Take your time, understand the terms of the loan instrument, seek advise from others, don’t be panicked into making such an important decision.
Don’t be afraid to change your mind.
Under the Truth in Lending Act, all borrowers who refinance their home mortgages have a period of three (3) business days to rescind the loan for any reason what so ever. Thus, you have the ability to re-think what you have signed and in effect do a “do over.”
This rescission period has it’s drawbacks. Keep in mind that there days is not a lot of time, and since the borrower will not received their first payment statement until thirty (30) days or more after the mortgage documents are executed. Thus, they won’t necessarily see the effects of their actions until well after the rescission period has expired. Unfortunately, by the time the borrower sees how the loan actually impacts them financially, it is too late to rescind the mortgage.
Keep in mind that when you take out a home equity loan you are pledging the ownership of your home to ensure your compliance with the note terms. Simply put, if you fail to maintain the payments as agreed you stand to loose your home.
Unfortunately, many individuals who have been the victims of predatory lending practices end up loosing their homes, destroying their credit and ruining their lives. So when it comes to refinancing your home don’t rush into the decision. It is important that you take your time, ask questions, insist on answers in writing and if you are not absolutely 100% certain about the all the terms and conditions of your loan, hire an attorney to help you.
The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.
This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.
Philip J. Vacco, Attorney at Law ©
FDIC Consumer News – Summer 2002, FDIC Consumer News is published by the Federal Deposit Insurance Corporation, www.fdic.gov/consumers/consumer/news/cnsum02 .