The reason predatory lending rose so dramatically is that many lenders operating in the A loan market had subsidiary companies making hard money mortgage loans. This has made a huge amount of money available for these loans, as well as aggressive and widespread marketing. The bigger lending institutions got into the hard money business for two reasons. First, these loans were much more profitable than A loans. Second, the fast-rising cost of homes over the last several years has made these formerly high-risk loans low risk situations. Foreclosed property that did not bring enough to cover the balance owed was a rarity in many areas of the country.
In 2007, the housing market collapsed and most of the subsidiary companies either closed or changed their practices. Today, these loans are high-risk loans and many companies that made them are out of business. The borrowers are still stuck with the loans.
If you have been solicited by a lender to get a mortgage loan, there are certain warning signs that may indicate predatory lending.
• Is the lender insisting that you pay off your current first loan and replace it with a higher-interest loan rather than getting a second mortgage for only the amount that you want to borrow?
• Is the lender insisting that you obtain credit life insurance that will pay off the loan if you die or are disabled? These are almost always bad deals. If you do decide you want this insurance, term insurance purchased through a reputable insurance company or agent will accomplish the same goal with a lower premium.
• Will the loan consolidate bills that, by some careful budgeting, you could pay off without further borrowing? Remember that paying off short-term debt by creating long-term debt should be a last resort.
Note: Check with a local nonprofit credit counseling agency. You may not be as bad off as you have been led to believe.
• Are there inconsistencies between what you are told and what you get in writing? You may be told, for example, that you are borrowing $5,000, but the paperwork shows that you are borrowing $7,000 when fees are included. This practice of packing a mortgage loan is common with predatory lenders. You do not have to agree to take the loan unless you agree to it after the necessary information is disclosed to you. If you are told that it is too late to back out now, do not sign anything and tell the lender that you are going to check with a lawyer before going any further.
• Get all promises in writing. Refusing to give you what the terms of your loan will be in writing is a warning sign. Predatory lenders want to give you all the bad news as late as possible. If they can wait until you are truly desperate for the money, there is a better chance you will agree to almost anything.
One side benefit of HOEPA is that some lenders lowered rates and fees to avoid having their loans covered by the act.
Most predatory lending can be avoided by shopping around. If you start with your local bank, savings and loan institution, and credit union, you should get a pretty good idea as to where you fit as a borrower. If your only hope is a hard money loan, make sure there is no way you can live without the money. If you still want the loan, talk to two or three mortgage loan brokers to try to find the best terms available for you.
Finally, allow yourself as much time as possible to do your research. If you know that you are probably going to need to borrow money six months from now, do not wait five months before exploring your options. One of the major reasons people agree to bad loans is that they need the money immediately.