Also known as loan fraud, predatory lending involves a wide array of abusive practices that mortgage brokers, appraisers and home contractors use to take advantage of unsuspecting seniors who are in the market to refinance their homes. Using high-pressure sales pitches, confusing language and elaborate marketing programs, predatory lenders will target senior citizens that are in need of money to consolidate debts or meet an emergency expense, often offering them high-cost and high-fee loans.
According to the Center for Responsible Lending, some of the most common predatory lending practices include:
Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.
Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of subprime mortgages carry a prepayment penalty – a fee for paying off the loan early.
Kickbacks to Brokers
When a broker delivers a loan with an inflated interest rate, the lender will often pay a "yield spread premium," or kickback, for making the loan more costly to the borrower.
A lender "flips" a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments.
Borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
Loan contracts may require "mandatory arbitration," meaning that borrowers cannot seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms.
Predatory lenders may steer borrowers into subprime mortgages. Vulnerable individuals may be subjected to aggressive sales tactics and/or outright fraud.
When in need of a loan, seniors need to be smart consumers. Comparison shopping, taking the time to understand the terms of the loan and seeking the advice of an expert, relative or trusted friend can be the difference between entering a beneficial financial agreement and becoming the victim of a predatory lender.