High-Cost Loans and Predatory Lenders

Don’t let yourself be a victim of bad mortgage practices. If you are over 65 and own your own home, live in a low income area, or are unfamiliar with the mortgage process, you are a prime target to be scammed out of your money in a mortgage transaction. Know the basic dos and don’ts to protect yourself and your well deserved, hard earned money!

Predatory lenders have extremely aggressive marketing schemes, all designed to convince a customer that borrowing money from them will be a quick and easy way to pay medical bills, make needed repairs, or to refinance your home. What appears to be easy money is just a way to part you from hard earned savings.

Many people –especially the elderly-- are facing high bills, diminishing savings and an unexpectedly higher cost of living, making them a target for unscrupulous mortgage lenders. Need creates a vulnerability.

The first sign of the predatory lending company is that they approach you, instead of you seeking out the company. Sales tactics include the traveling salesman, phone calls, and mass mailings all promising incredible deals on loans and easy fixes for bad credit.

Tip: Stop before you agree to anything. How badly do you need to borrow money? And, can you easily afford to make payments on borrowed money? Don’t be rushed into anything. Check with the Better Business Bureau for a reliability report. It is your right to decide for yourself what company you should use. Legitimate companies will always welcome you to check them out. TAKE YOUR TIME – DON’T BE RUSHED!!

The second sign to look for is the promise of small monthly payments on a large loan. Those small monthly payments can lead to "balloon" payments, where you have to pay one huge payment later on in the loan. Bad lending companies never tell you about the ultimate cost of your loan.

Tip: If someone tells you that they take applications by phone or asks you to give them money up front and they’ll approve you for the loan the next day, don’t believe them. You may not be approved for the loan and BBB experience is that you won’t get the money back.

The third sign of a possible scam is pushing for agreements and a signature. If they don’t seem willing to give direct answers to your questions, push back for the answers you need!

Tip: Take the time to read everything on the contract. Have a friend or lawyer go over it. You have the right to know everything about the contract up front. Ask about the total costs, annual percentage rates, and length of time to pay back the money, and miscellaneous fees. Beware of blank spaces. Be alert, whatever you is likely to be a legal document. Think before you act! Tell the lender you want a copy of the loan agreement BEFORE YOU SIGN IT to run past your lawyer, children or another trusted advisor. Remember, the good guys encourage you to check them out. They have nothing to hide.

If you suspect a predatory lending company has scammed you, there are places to seek help and places to report bad companies too. Contact the Better Business Bureau, the Attorney General’s office or Department of Financial Institutions. There are people out there who are ready, willing and able to help.

1. Speed - You are rushed into signing papers. DON’T DO IT. No legitimate company will rush you
2. Secrecy- The person or company trying to get you to do the construction job or borrow the money wants you to keep the details quiet. "This is such a good deal, don’t tell my boss, he’ll kill me" is a sure-fire give away to a scam, and
3. Selectivity - The salesperson tells you that this "special offer" is being made only to senior citizens, or in your neighborhood, or for some other special group.
   If you are being rushed into a decision, or told to keep it quiet, or told that you are part of a special group – DON’T SIGN THE PAPERS. STOP THE DEAL. SHOW THEM THE DOOR. YOU WILL NEVER REGRET IT!

Think before you sign. If you are uncomfortable, don’t do it! Shop around for what works best for your financial situation and what you like. Ask questions until you are satisfied with the answers. Read every printed item placed before you. Scrutinize contracts with fluctuating financial terms and be aware of how "balloon payments" or other arrangements could affect your situation.

Mortgage loans become predatory when they target a particular population, take advantage of the borrower’s inexperience and lack of information, manipulate a borrower into a loan the borrower cannot afford to pay, or defraud the borrower. There are three phases of a sub-prime loan transaction where predatory lending occurs: Origination of the loan, Servicing the loan, and Collection of the loan.

1. Reverse Redlining. This suggests that borrowers may be targeted for sub-prime products based on factors other than the quality of their credit, especially elderly homeowners who have a high level of equity in their home.

2. Solicitations. Predatory mortgage lenders target lower income and minority neighborhoods for extensive marketing by advertising through TV commercials, direct mail, highly visible signs in neighborhoods, telephone and door to door solicitations, and flyers stuffed in mailboxes. Flyers sometimes resemble social security or government checks to deceive homeowners about the transaction.

3. Home Improvement Scams. Predatory mortgage lenders use local home improvement companies essentially as mortgage brokers to solicit loan business. The homeowners are often grossly overcharged for the work, which the contractors often perform shoddily and fail to complete as agreed.

4. Mortgage Broker’s Fees and Kickbacks. Predatory mortgage lenders also originate loans through local mortgage lenders who act as "bird dogs", or finders for the lenders. These brokers receive kickbacks from the predatory lenders to refer borrowers for loans at higher interest rates than those for which the borrower would otherwise qualify. The borrower ends up paying a higher interest rate to cover the fee.

5. Steering to High Rate Lenders. Some banks and mortgage companies steer customers to high rate lenders, even though those customers may have good credit and would be eligible for a conventional loan from that bank or lender. Kickbacks or referral fees are paid as an incentive to steer the customer to a higher rate loan.

6. Making Unaffordable Loans. Some predatory mortgage lenders purposely structure loans with monthly payments that they know the borrower cannot afford so that when the homeowner is led inexorably to the point of default, he/she will return to the lender to refinance the loan, and the lender can impose additional points and fees. The goal of the predatory lender may also be to foreclose on the borrower’s house.

7. Falsified or Fraudulent Applications. Some lenders knowingly make loans to homeowners who do not have sufficient income to repay the loan. Such lenders have the borrowers sign a blank application form, and then insert false information on the form, claiming that the borrower has employment income that he/she does not, so it appears that he/she can make the payments.

8. Adding Co-signers. This is done to create the false impression that the borrower is able to pay off the loan, even though the lender is well aware that the co-signer has no intention of contributing to the payments.

9. Incapacitated Homeowners. Some predatory lenders make loans to homeowners who are clearly mentally incapacitated. They take advantage of the fact that the homeowner does not understand the nature of the transaction in an effort to foreclose on the borrower’s home

10. Forgeries. Some predatory lenders forge loan documents. In some cases, the unwary homeowners are stuck with loans they know nothing about.

11. High Annual Interest Rates. Because the purpose of engaging in predatory lending is to reap the benefit of high profits, these lenders almost always charge extremely high interest rates. Predatory lenders may charge rates of 19% to 25%, or three times the rate of conventional mortgages, even though the lender’s risk is minimal or non-existent.

12. High Points. Legitimate lenders charge points to borrowers who wish to buy down the interest rate on the loan. Predatory lenders charge high points (5 to 10), but offer no corresponding reduction in the interest rate. The points are financed within the loan and not paid at closing. This produces more actual interest to the lender.

13. Balloon Payments. Predatory lenders frequently structure loans so that the borrower’s payments are applied primarily to interest, and at the end of the loan period, the borrower still owes most or all of the principal amount borrowed. The final balloon payment often equals 85% or so of the principal. This forces the homeowner to refinance at a higher interest rate or suffer foreclosure.

14. Negative Amortization. The loan is structured so that the monthly payment is insufficient to pay off accrued interest and the principal balance therefore increases each month. There will almost always be a balloon payment at the end of this type of loan.

15. Credit Insurance – Insurance Packing. Predatory lenders market and sell credit insurance as part of their loans, often without the knowledge or consent of the borrower. This insurance is supposed to cover all or part of the monthly loan amount in the event the borrower can’t make a payment. Lenders frequently charge exorbitant premiums, which are not justified based on the extremely low actual loss payouts. In short, credit insurance becomes a profit center for the lender and provides little or no benefit to the borrower.

16. Padding Closing Costs. Certain costs are increased above their market value as a way of charging higher interest rates. Examples include charging document preparation fees of $350 or credit report fees of $150, which are many times the actual cost, or paying a "courier" $200 to walk forms from one desk to another across an office.

17. Inflated Appraisal Costs. In most mortgage loan transactions, the lender requires an appraisal. In some cases, borrowers are charged for a detailed appraisal, when only a drive-by appraisal was done. But predatory lenders commonly make use of bogus appraisals that over-value the property, making the deal more acceptable to a lender or banking institution.

18. Padded Recording Fees. Mortgage transactions usually require that documents be recorded at the local courthouse, and state or local laws set the fees for recording the documents. Predatory lenders often charge the borrowers a recording fee in excess of the actual amount established by law.

19. Bogus Broker Fees. In some cases, predatory lenders charge borrowers broker fees when the borrower never met or knew of the broker

20. Unbundling. This is another way of padding costs by breaking out and itemizing charges that are duplicative and are also included under other charges.

21. Excessive Prepayment Penalties. Predatory lenders often impose exorbitant prepayment penalties. This practice provides back end interest for the lender if the borrower does prepay the loan.

22. Mandatory Arbitration Clauses. Some lenders attempt to obtain an unfair advantage by relegating their borrowers to a forum perceived to be more favorable to the lender.

23. Refinancing 0% Interest loans. Some housing agencies offer 0% loans to low- to moderate-income individuals for necessary home improvements to bring their homes up to code standards. Mortgage lenders have refinanced these homebuyers by paying off their no interest mortgage loans, but adding costs and a high interest rate.

24. Shifting Unsecured Debt Into Mortgage. Mortgage lenders badger homeowners with advertisements and solicitations that tout the "benefits" of consolidating bills into a mortgage loan. Doing this may not reduce the interest rate being paid on debts, increase the monthly payment, add significant closing costs, partially cut into the borrower’s home equity, and secure the loan with the borrowers home.

1. Force Placed Insurance. Lenders require homeowners to carry homeowner’s insurance, with the lender named as a loss payee. Mortgage loan documents allow the lender to force place insurance when the homeowner fails to maintain the insurance, and to add the premium to the loan balance. The premiums for the force placed insurance are frequently exorbitant.

2. Daily Interest When Payments are Made After Due Date. Most mortgage loans have grace periods, during which a borrower may make the monthly payment after the due date without incurring a late charge. It is deceptive for a lender to charge a late fee as well as daily interest when a borrower pays before the grace period expires.

III. COLLECTION OF THE LOAN

1. Abusive Collection Practices. The collection departments call homeowners at all hours of the day and night, send late payment notices (in some cases, even when the lender has received timely payment or even before the grace period expires), send telegrams, and even send agents to hound homeowners, who are often elderly widows, into making payments.

2. High Prepayment Penalties. When a borrower is in default and must pay the full balance due, predatory lenders will often include the prepayment penalty in the calculation of the balance due.

3. Flipping. When a borrower is in default, predatory mortgage lenders often use this as an opportunity to flip the homeowner into a new loan, thereby incurring additional high costs and fees. Lenders also mail check vouchers to prospective borrowers with the goal of "flipping" the unsecured debt into a loan secured by the borrower’s home a few weeks later.

1. Foreclosure Abuses. These include persuading borrowers to sign deeds in lieu of foreclosure, giving up all rights to protections afforded under the foreclosure stature, sales of the home at below market value, sales without the opportunity to cure the default, and inadequate notice which is either not sent or backdated. Finally, foreclosure deeds have been filed in courthouse deed records without a public foreclosure sale.

If you have less-than-perfect credit and need a car, you may be tempted by offers specifically designed to attract attention of people in just your position, and generally for used vehicles. They may guarantee credit if you can meet minimum criteria, such as proof of residence and incoming paychecks. Such offers are often Sub-Prime Auto Loans.

If you finance, the total cost of the car increases. That’s because you’re also paying for the cost of credit, which includes interest and other loan costs. You’ll also have to consider how much you can put down, your monthly payment, the length of the loan, and the annual percentage rate (APR). Keep in mind that annual percentage rates usually are higher and loan periods generally are shorter on used cars than on new ones.

Dealers and lenders offer a variety of loan terms and payment schedules. Shop around, compare offers, and negotiate the best deal you can. Be cautious about advertisements offering financing to people with bad credit. These offers often require a big down payment and a high APR. If you agree to financing that carries a high APR, you may be taking a big risk. If you decide to sell the car before the loan expires, the amount you receive from the sale may be far less than the amount you need to pay off the loan. If the car is repossessed or declared a total loss because of an accident, you may be obligated to pay a considerable amount to repay the loan even after the proceeds from the sale of the car or the insurance payment have been deducted. If your budget is tight, you may want to consider paying cash for a less expensive car than you first had in mind.

If you decide to finance, make sure you understand the following aspects of the loan agreement before you sign any documents:

• the exact price you’re paying for the vehicle

• the amount you’re financing

• the finance charge (the dollar amount the credit will cost you)

• the APR (a measure of the cost of credit, expressed as a yearly rate)

• the number and amount of payments

• the total sales price (the sum of the monthly payments plus the down payment) Used cars are sold through a variety of outlets: franchise and independent dealers, rental car companies, leasing companies, and used car superstores. You can even buy a used car on the Internet. Ask friends, relatives and co-workers for recommendations. Check the Better Business Bureau’s report on the dealer.

Remember: Dealers are not required by law to give used car buyers a three-day right to cancel. The right to return the car in a few days for a refund exists only if the dealer grants this privilege to buyers. Dealers may describe the right to cancel as a "cooling-off" period, a money-back guarantee, or a "no questions asked" return policy. Before you purchase from a dealer, ask about the dealer’s return policy, get it in writing and read it carefully.

Many used cars are sold "as is," meaning that the dealership is not responsible for any existing problems or defects the particular vehicle may have when it is purchased. Buyers have very limited recourse when problems arise with "as is" vehicles, so get the car checked by a trusted mechanic before you buy it.

If you’re short of cash or on a restricted income and a major appliance such as a washer, drier, or refrigerator fails, it may be difficult to replace it. Ordinary department or appliance stores may offer credit, but if you have had credit problems in the past, you may be refused. Rent-to-Own Stores offer a fast solution.

Rent-to-Own Stores work on a relatively simple principle: Part of the rent clients pay toward items they rent is applied toward purchasing the items. Fees are usually charged monthly, but sometimes run by the week. Generally, the store contracts for the specific period of the rental agreement and outlines its policies in print, including the payment schedule, amount of payments, any necessary calculations for "buying out" the item, and other applicable terms.

Some clients have run into trouble with Rent-to-Own stores because they did not understand the contracts, or because they were unable to keep up the payments on the items they were renting and the store reclaimed the items. Many contracts allow the store to reclaim the items at the expense of whatever fees had been paid into purchasing the product. Others realize that in the amount of time they had been paying on the item, the item has become obsolete or has broken down. A simple reality of dealing with Rent-to-Own Stores is recognizing that you will pay significantly more for the item than you would if you purchased the item from a conventional outlet with cash (or even with in-store financing). It may mean doing without the item until you have enough money to purchase it, but the ability to delay the gratification of having the item until it can be purchased with cash can save you a lot of money over the period of a rental agreement – in some cases, and for some items, the cost of renting to own is more than double the cost of the product in a store.

The type of item, the specific financial conditions, and personal needs all should enter into consideration when choosing to do business with a Rent-to-Own business. The need to obtain an appliance, for instance, should figure differently into your budget than a television or stereo. Consider shopping for second-hand items that may prove just as reliable at a much cheaper price.

If you decide to use a Rent-to-Own Store, make certain you understand the agreement before you sign any documents, and know:

• the exact price you’re paying for the item

• the amount you’ll pay and how often and for how long

• who is responsible for any needed repairs to the item

In recent years, businesses have popped up in the Cleveland area offering cash advances or loans until payday. As a way to avoid a temporary cash crunch, these businesses may seem ideal, but there are hidden traps to sidestep if users of the services want to maintain financial stability.

Americans are saving less, are deeper in debt -- and when unexpected expenses or a cash crunch hits, fewer of us can dip into our savings to ease the financial burden. Coming to the rescue: Payroll advance companies. Given the current decline in savings, a business offering short-term loans until payday on a personal postdated check will be popular indeed. Providing additional services, such as paying utility bills and public-access fax machines, the companies typically charge 10 or 15% of the amount for which the borrower is writing the check. The procedures of the businesses vary. Some require clients to provide copies of current pay stubs or utility bills; others restrict business only to those with active checking accounts.

The practice has spiked the interest of some federal agencies and Attorneys General, mainly thanks to bad press concerning the practice in its most extreme forms. According to Ohio’s State Division of Consumer Finance, which handles the registration of such businesses, offerers of payroll advance loans must furnish their clients with loan agreements covering interest rates, amount finances, amount of payments, and total finance charge. All truth in lending law triggers and disclosures must also appear in the loan agreement, but the enforcement on Regulation Z issues comes from Federal Trade Commission, not the state level. Maximum fees for the services are also outlined by the state, and there are two allowed on the loan: Loan Origination (with a maximum of $5 for every $50 borrowed), and Interest (5% monthly). The state also strictly limits fees for checks returned NSF at $20. Payroll Advance Loan Offerers must have two licenses: Check Casher, and Check Casher/Loans. Despite the red tape, payroll advance loan offices eagerly deal with situations that have escaped the notice of traditional lenders and offer cash to those who may not be "good risks" in the eyes of banks.

Consider this: If the amount of the original advance was $500, the maximum for most payday loan offices, the first check would be written for $575; a second check in the event of a default would be for $650. Some payroll loan branches assess late fees and other penalties. At least one provider allows its clients to take as many as eight extensions on a single check -- as long as clients pay the 15% penalties along the way. Stringing together a few weeks of bad luck could put users in a serious financial hole.

Managers of payroll lending offices will point out that they are the only place some people can turn. Conventional banks are not generally geared toward servicing this sort of short-term loan. Because they deal with customers who have bad credit or are otherwise bad risks in the eyes of banks, payroll advance businesses have a higher default rate than other lenders, and that justifies the higher charges. Most lenders are clear about the arrangement in their agreement. But the loan agreements or other paperwork involved in the process vary widely between lenders, despite the state’s law. Copies of contracts between the customer and payroll advance offices should clearly disclose specific charges, including potential collection fees and damage to the client’s credit report. A typical contract will include what the Annual Percentage Rate would be if the loan were to be extended for a year (on a sample $200 loan application, the APR was listed at 365%). Contracts may also include statements in large, bold print such as "WARNING: The rate of interest charged on this loan is higher than the average rate of interest charged by financial institutions on substantially similar loans." Not all payroll offices play by the rules. An outlet shopped by the BBB gave a "customer receipt," which appears to perform the same function as the formal contract. The receipt contains little information beyond the amount borrowed and the company’s address.

The Better Business Bureau continues to review the agreements of payroll advance loan services in our area and will communicate with those whose paperwork falls short of the state or federal requirements. The BBB recommends that potential clients of payroll advance loan offerers carefully review any information provided, know their obligations to the lender (especially those surrounding a possible default), and understand that they are paying a higher amount to borrow money than is charged by conventional lenders.

Consider the importance of getting the loan compared to its cost. Of course, shop around for the best deal, and avoid companies that do not have written policies concerning their loan agreements.