Is your current loan or the one being pitched to you
predatory? Consider some of these warning signs highlighted by consumer
advocates and lending experts.
| Warning
signs of predatory lending |
|
| 1. You're being quoted an interest
rate of more than 10 percent to 11 percent even though you have
good credit. |
Although borrowers with foreclosures,
several late mortgage payments or other problems in their past
can end up paying as much as 14 percent or more on home equity
loans and first mortgages, low-risk consumers shouldn't be stuck
with an interest rate that's much higher than the going market
rate. |
| 2. The lender wants you to
pay several points but isn't reducing the interest rate much,
if at all. |
Lisa Donner of the Association
of Community Organizations for Reform Now says a call came in
from the activist group's Chicago office just before she was
interviewed. Staffers there were dealing with a borrower who
had been sold a loan with 5 points -- but an interest rate of
13 percent. "They weren't buying down an interest rate to 13
percent," she says. "That was just another way of sticking it
to them." |
| 3. Total fees are more than
5 percent of the loan amount. |
Yes, closing costs vary by
location and borrowers in high-cost states pay more to get mortgages.
But $5,910 in fees on a $60,000 loan -- something the National
Training and Information Center in Chicago saw in one recent
transaction -- should be looked upon as excessive. |
| 4. The loan has a long-dated
prepayment penalty or an especially expensive one. |
Borrowers can sometimes lower
their rates by accepting prepayment penalties. But subprime
borrowers who need that kind of help shouldn't accept a five-year
penalty when they can re-establish their credit and qualify
for a prime loan with as little as 24 months' or 36 months'
worth of timely payments. As for the size of the penalty, something
like 6 months' interest should be considered excessive. |
| 5. The closing documents refer
to an adjustable rate mortgage when the good faith estimate
was for a fixed rate one. |
Lenders sometimes pull a bait-and-switch
on unsuspecting borrowers between the initial consultation and
closing. Don't settle for a loan that's not what you wanted. |
| 6. There's a significant balloon
payment attached to the loan. |
Not all balloon loans are bad, as long as borrowers know
they'll either have to refinance at the end of the loan term
or come up with the balloon payment in cash. But unscrupulous
lenders will trick people who don't have a lot of money lying
around into getting these mortgages. When their balloon payment
comes due, these borrowers have to refinance, thereby generating
more fee income for the lender.
|
| 7. The proposed loan will raise
your overall debt-to-income ratio to 45 percent or more. |
Someone with pretax monthly
income of $2,000 shouldn't be paying more than $800 or, in extreme
cases, $1,000 a month toward credit cards, auto loans and a
mortgage. A lender who tells you not to worry about a 50 percent
debt-to-gross income ratio should be looked upon with caution. |
| SOURCES: National Training
and Information Center, Chicago; Community Reinvestment Association
of North Carolina, Raleigh, N.C.; Association of Community Organizations
for Reform Now, Brooklyn, N.Y. |
