Predatory lending definition
Predatory lending is a term for any dishonest lending practice targeting those borrowers with poor credit. Those that are affected the most by this illegal practice are the elderly citizens and the members of all minority groups. Typically, individuals that dabble in predatory lending charge a higher interest rate to an applicant, but pay no regard to their credit history.
In order to convince a borrower into signing, predatory lenders employ all kinds of tactics: claiming that it is the last chance of getting a mortgage, pretending to be the only one in town to offer such services, etc. Sometimes, a lender engages in convincing a borrower to refinance their mortgage without financial benefit for the customer.
The ultimate goal of this practice is to fool the borrowers into refinancing a higher interest rate. However, one of the most common predatory lending tactics is the practice of adding excessive fees and charges, as well as unnecessary insurance policies that inflate the loan. Therefore, it is very important to read the small print in a contract, because it might reveal unrealistic expenses and dishonest business. A good way of avoiding predatory lending is to have a solid plan, like a mortgage broker business plan.
Loan fraud is an illegal lending practice that is most easily detected. In loan frauds, lenders lie about the information that is important for the actual terms of the mortgage. They quote one interest rate, but write down another one (much higher), or even encourage the borrowers to conceal the information about their income and sign incomplete or incorrect contracts.
The effects of predatory lending
The biggest problem with predatory lending comes from the fact that it is often detected when it is too late for any action. Sometimes, a couple of years may go by before a borrower notices there are problems with paying their mortgage. Predatory lenders often offer contracts with a so-called teaser rate, which is much lower than the prime interest rate.
Anti-predatory lending laws and other preventive techniques
As far as the preventive techniques are concerned, the best way to watch out for predatory lending is by getting to know everything on mortgage terminology and some of its basic concepts. One should learn about the basic differences between fixed and adjustable rates and become familiar with requirements that are potentially dangerous (prepayment penalties, for example). Another tested technique for avoiding predatory lending is to shop around i.e. find the right lender for the current situation. Before deciding which lender to use, one should visit at least three of them and get all the relevant information in writing.
Fortunately, there is legal protection against predatory laws. Anti-predatory lending laws have been enforced in 25 states; in addition to this, 35 states have put the limit on a maximum prepayment penalty. Consumers are also protected by federal laws. The most important law governing the protection from predatory lending is the Equal Credit Opportunity Act (ECOA). According to this act, it is illegal for a lender to put higher rates based on a person’s age, race, gender, etc. Consumers are also protected by the Home Ownership and Equity Protection Act (HOEPA); it prohibits excessive fees and interest rates, and places additional requirements and regulations for the loans that are marked as “high cost”.
Do not end your search here. There is still a lot to learn about mortgage rates and the additional information on them. Go to mymortgagebroker.com and be amazed by the amount of information there on offer.