Question:

What are the signs of predatory lending?

Answer:

There are certain signs of predatory lending - a whole bunch of abusive home loan practices that borrowers have to be aware of and try to avoid.

Signs Of Predatory Lending

Prepayment penalties are a common feature of subprime loans. Unlike conventional loans, less than 5% of which carry a prepayment penalty of any kind, bad credit loans do have very high rates and normally are equipped with prepayment penalties for the next several years after signing the loan agreement. Subprime borrowers are usually not informed of the prepayment penalty, which could span several years and generally require 6-month interest to be paid upon refinance.

Exorbitant broker/lender/origination fees also are a common sign for predatory lending. With proper loans, those fees can amount to 2-3% of the loan amount. With predatory loans they can amount to 6% and higher; some fees will be hidden up until closing, or made to appear smaller, and additional junk fees can show up at the last moment.

Yield spread premiums (YSPs) are cash paid to the broker for making the borrower accept higher rate than what the lender advertised. YSPs are commonly applied on racial grounds - some minority representatives are more likely to be steered into higher rate loans than others.

Another common predatory lending practice is to convince borrowers that they cannot qualify for prime rate loans. To avoid being steered into subprime mortgages without need, borrowers are advised to seek credit counseling before accepting a subprime offer.

Equity stripping through unnecessary refinancing allows lenders to cash huge closing costs every time a refinance takes place, while borrowers are stripped of equity. At the last refinance, the borrower may end up owing 2-3 times more than the original loan amount they began with. The sign of ‘flipping' is the growing loan amount every time a refinance occurs. Make sure you exact firm costs and fees from the lender to prove the refinance is in your benefit.

BMA (binding mandatory arbitration) is another approach for lenders to squeeze borrowers. Signing loans with BMA clause prevents borrowers from taking legal actions towards lenders in regards to unfair loan terms. Instead, they are required to go through mandatory arbitration which usually results in additional losses and unfavorable outcome for the borrower.

Another popular sign of predatory lending is the lenders' insistence on credit insurance to be purchased upfront by the borrower. Combined with consecutive refinancing, this is the quickest way for the borrower to triple their loan amount in a short time.

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