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20 red flags for predatory loans

Lately 'subprime mortgage meltdown' is the phrase on everyone's lips. Aggressive marketing tactics, scant industry oversight and investors who wanted to put their money into real estate instead of the stock market all contributed to an ideal environment for predatory lending.

Some of the deals they offered were obviously too good to be true -- nowhere more than in the subprime market, which serves lower-income individuals with credit problems.

Respectable subprime lenders serve important social and financial functions by offering credit on fair terms to individuals who otherwise might never be able to build home equity. Predatory lenders, however, are a scourge on these same neighborhoods, taking advantage of elderly, less-educated and non-English-speaking individuals by offering egregious loan terms that would drain equity and eventually lead to foreclosure on their homes.

"Not all subprime loans are predatory," Norma Garcia, senior attorney with Consumers Union, points out. "But virtually every predatory loan we have seen is a subprime loan."

That's because shady lenders, like predators everywhere, tend to target the easiest prey: people with poor credit who have few other options. But Garcia notes that individuals with spotless credit also fall victim to bad loans. "Loans that are good subprime loans might in another sense be predatory for someone who has good credit," says Garcia. "We see this often among the elderly and in communities of color -- people with perfectly good credit who don't have a sense of what's happening out there in the lending world."

To simply spout "buyer beware" isn't enough, she insists.

"There are definitely people who are ripping others off. To the extent that there are individuals who are being placed in loans with interest rates and fixed fees that are much higher compared to that person's credit-risk profile, that should be a crime," she says.

Think you're being scammed?

"There are some extremely abusive, one-sided contract terms consumers sign because they think that's what they have to do to get the money," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. But often you can find a better deal if you shop around.

Here are some loan conditions that should make you think twice:

Upfront money
"Money upfront is a really bad sign," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a financial services trade group, "possibly even of fraud." One nominal application fee is fine, he says. But the point of a loan is that they are supposed to be giving you money, not the other way around.

Changing interest rate
An adjustable-rate mortgage can be a good thing for some borrowers. But it should be a trade-off. In return for accepting a little uncertainty, the borrower gets favorable terms, like a lower rate. Too many times in the subprime market, borrowers are saddled with adjustable-rate mortgages simply as the cost of getting a loan, says Michael Stegman, professor of public policy and director of the Center for Community Capitalism at the University of North Carolina at Chapel Hill.

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