What Is a Predatory Mortgage Loan?
For most people, obtaining a mortgage is a necessary step in the process of buying a home. Shopping around for a mortgage can be intimidating. With all of the confusing jargon and varying interest rates, it’s hard to know you’re getting the best deal. Just when you think you’ve found an impossibly good mortgage, you could be getting scammed by a predatory mortgage company.
The majority of lenders in the mortgage realm follow a set of rules and guidelines that are set and enforced by both state and federal laws. Lenders who are dishonest and not acting on a buyer’s behalf are considered predatory lenders. Learn more about how these lenders operate and what to look out for when you’re in the process of obtaining a mortgage.
Table of Contents
- 1 History of Predatory Mortgage Lending
- 2 How to Recognize Predatory Mortgage Lending
- 3 How to Report Predatory Lenders
History of Predatory Mortgage Lending
There are occurrences in history that are products of predatory lending. Below, we’ll outline the history of predatory lending and how events stem from predatory mortgage lending.
- 1980: Congress established the Depository Institutions Deregulation and Monetary Control Act of 1980, made changes to the financial system, and barred states from limiting the interest rates on mortgages. Twenty years later, the subprime lending industry took off, charging people interest rates of 20 to 60% on mortgages.
- 1982: The Alternative Mortgage Transaction Parity Act was passed, allowing lenders to offer mortgages with different terms outside of the typical 30-year, fixed-rate loans.
- Late 80s/Early 90s: Congress stepped in again after a growing concern among consumer advocates urged people to be wary of predatory practices.
- 1994: Congress established the Home Ownership and Equity Protection Act, or HOEPA, which was meant to discourage predatory lending.
- 1994-2005: According to reports from the Center for Responsible Lending, the mortgage market increased $35 billion to $665 billion.
- 2006: Subprime mortgages accounted for 23% of the market.
- 2008: A financial crisis swept the nation. Former Federal Reserve Chairman Alan Greenspan testified that subprime mortgages were the source of the financial crisis, blaming excess demand from securitizers for the expansion of subprime lending.
How to Recognize Predatory Mortgage Lending
There are some warning signs to keep in mind to help avoid predatory lending. Below are the most common signs of a predatory mortgage and what you can do if you notice this suspicious activity.
Unusually High Rates and Fees
If the interest rates and fees differ significantly from lender to lender, this should raise a red flag. Make sure to read your agreement thoroughly and carefully, as these rates and fees can be hidden deep within the fine print of the loan. If you notice high rates or unexplained fees, don’t be afraid to ask questions. For clarifications, ask for a copy of your FICO credit score and ask why the rate is the way it is.
A proper mortgage lender will never pressure you into a decision. If the lender is encouraging you to make the decision and sign right there, something is fishy. Usually, if you do simple research prior to deciding, it will reveal the reason why the lender is pressuring you. Before you consult a lender, research their history and read reviews from past customers to get a better idea of how they operate.
Lender Encourages Dishonestly on Application
Applying for a mortgage requires full disclosure of your personal records. If a lender encourages any bit of dishonesty on an application, they are not a reputable lender and are not adhering to lending laws. If they are encouraging you to be honest, there is a good chance they are not being honest.
If Fees and Charges Change From What Was Agreed Upon
Just like the car salesman who tells you $1K on the lot, then tries to write $1.5K on the paperwork, if anything changes from what was agreed upon, a big red flag is waving. Similarly, they might try to add on additional insurance or other fees without your knowledge. Before you sign anything, review all of your paperwork thoroughly.
If You Are Told “Bad/No Credit Is Fine”
Credit is always something a reputable lender takes into account when you’re applying for a mortgage. If credit isn’t taken into account, you can be put into a situation you are unable to handle financially. Inquire about a credit check and if the lender says none is needed, you know something is amiss.
If the Lender Tries to Control the Conversation
Smooth-talking, rehearsed lenders will control the conversation to avoid questions being asked. When a lender is spending less time asking questions or making sure you are clear on everything, warning signals should pop up. Be sure you have all of your questions answered before making a decision.
Blank spaces should immediately concern you. If you notice missing signatures and other missing information on your forms, there could be a problem down the line. While most states have notary rules concerning blank spaces, it is a good thing to write “N/A” over blank spaces, cross them out, or avoid signing until it is fixed.
How to Report Predatory Lenders
If you come into contact with a predatory lender, report them immediately. The way to report predatory lenders is very simple: contact the Federal Trade Commission as well as your state’s attorney general and file a claim.
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This post was updated December 4, 2019. It was originally published December 4, 2019.