What is predatory lending?
Predatory lending is a practice wherein a lender forces you into abusive or unfair lending terms. This can be in the form of high interest rates, unreasonable penalties, and hidden fees that aren’t part of the mortgage contract. Often, the contract is written out so that it’s all but impossible for the borrower to get out of it, even when it puts them under financial stress. In fact, studies show that most of today’s foreclosures and defaults can be traced to some form of predatory lending.
Many predatory mortgages are so subtle that the borrower doesn’t know it — until things get out of hand and they’re facing foreclosure. But the earlier you take action, the faster you can set things right. Here are some signs that tell you if you’re on the losing end of the deal.
- Excessive fees. Some fees can be financed but are not directly affected by the interest rate. This makes them easy to disguise or manipulate. Fees below 1% of your loan amount are usually no cause for concern, but if they add up to more than 5%, you should get suspicious.
- Prepayment penalties. It’s common for lenders to charge you a penalty if you pay off your loan in advance. This is to make up for the interest they lose by letting you off early. The penalty is considered abusive if it’s effective for more than three years or is worth more than six months of interest.
- Yield Spread Premiums. This is a fancy name for the kickbacks your lender pays a broker to steer you into a high-interest or sub-prime loan. If you see this term on your bill, you’re probably paying more interest than is legally acceptable.
- Refinancing offers. If your lender offers you a tempting refinance package, think twice about it. It may be a form of loan flipping, a practice they use to generate income without giving you any tangible benefits. In the long term, the refinance can simply drain your equity and increase your monthly payments.
- Mandatory arbitration. This is one of the most common predatory practices. Mandatory arbitration is a provision in many contracts that bans you from going to court if you find the terms abusive. You’re basically being denied of your rights to justice.
What are my rights?
Most cases of predatory lending violate the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). These laws were put in place to protect borrowers like you, but lenders continue to violate them every day and trick millions of people out of their money. The best way to protect yourself is to know these laws and the rights they give you.
For one thing, you always have the right to speak up whenever you feel you’re being cheated. Sometimes it’s as simple as calling your lender and asking them to explain vague or overly high charges. They may or may not give a useful answer, but it’s important to let them know you’re not being fooled.
Even if you’re already in foreclosure, there are always steps you can take to correct the situation and save your home. Find a competent lawyer to help you out and look for RESPA and TILA violations in your contract. In most cases, the laws can help stopforeclosure and even give pay you back in damages.
What can I do?
If predatory lending has put you in serious financial trouble, one thing you can do is apply for a loan modification. This is a simple way to restructure the terms of your loan into something more reasonable and helps you stop foreclosure. All you need to do is call a loan modification attorney, a person who specializes in talking to lenders and negotiating for proper mortgage assistance.
You will have to provide some documents so that they can properly assess your case, including a hardship letter that explains your situation. Your loan modification attorney can use violations to negotiate better settlements with your lender. These may include misleading disclosures, exorbitant fees, or any of the signs mentioned above. Nearly every mortgage has at least one violation, but it takes a good understanding of the law to point them out.
After submitting your application, your attorney will start negotiating for better rates. When needed, they will use RESPA and TILA violations as leverage for getting the best loan modification offers. When it’s approved, you’ll receive a document detailing the mortgage modification, whether it’s a a lower interest rate, or some form of mortgage assistance. Once you approve it, you can keep your home and start paying off your mortgage at a comfortable pace.