Predatory Lending are you a Victim?
All the talk from the Federal and State levels about Predatory Lending has me scratching my head. How do you know if you are or have been a victim of Predatory Lending? Predatory Lending is not easy to define. It’s like a bad smell-you’ll know it when you smell it. Predatory Lending takes all shapes and forms and occurs at all levels. It has had an impact on rich and poor, educated, and the young and old. In its most basic form, Predatory Lending occurs when you are looking to refinance your home with another mortgage company. Predatory Lending takes something away from you that you had before; such as a great mortgage rate, equity in your home, or a longer loan term and replaces it with something that puts you, the homeowner, in a worse position than when you started the refinance process. It may result in a higher rate, no home equity, a shorter loan term, and higher payments. Most people never know they became a victim of Predatory Lending because the exact definition is so elusive and there are so many ways to become a victim. The following examples are early warning signs of Predatory Lending. Remember, not every mortgage loan refinance that falls into these categories is Predatory; there could be legitimate financial reasons for doing the mortgage refinance, however beware!
- Bait & Switch - This is the number one tactic used by Predatory Lenders. On the initial application they promise you a low interest rate and assure you that your property will appraise at whatever value is necessary to meet the needs of your particular financial situation. They may even put it all in writing on the Good Faith Estimate (GFE). As you draw closer to closing on your loan you receive a call advising you that a problem has come up. They can still do the loan but the rate is going up or they need to raise the loan to value (LTV) in order to give you the cash out you required. Finally, you are at the closing table and the numbers they gave you on the Good Faith Estimate do not match up with the numbers on the HUD Settlement Statement. The interest rate has risen, other loan terms have changed, and their fees have gone up. STOP! Walk away or sign and remember that on a refinance you have 3 business days to RESCIND the loan. This requires that you sign the Right to Cancel (Rescind) paperwork and fax it back to the Lender and the Closing Agent that closed your loan and call the loan professional and his manager. Full details of rescinding your loan are always included in your loan closing package.
- Interest Rate & Payment are higher than your current rate and payment - This is a warning sign and one you must pay attention to. Remember what you were initially trying to accomplish. If you are consolidating your credit card debts and other bills and the total sum of these payments plus your house payment is not less than your total bill payments plus your house payment, then you need to stop. What have you accomplished? If you are not saving substantial dollars there is no benefit to refinancing. Likewise, if you are receiving cash out from the refinancing and the rate is higher, you may have been better off just obtaining a 2nd mortgage or home equity loan rather than refinancing a 1st mortgage.
- Shorter Loan Term - Many mortgage professionals (Predatory Lenders) will tell you that by refinancing your mortgage with a shorter term, (i.e., a 30 year fixed rate loan to a 15 year fixed rate loan) will save you money. Obviously, with a shorter rate term the payments will go up and in today’s rate environment (mortgage rates rising) your interest rate may also rise. Be suspicious when all you want to accomplish is to pay down the principal on your mortgage faster and the loan professional offers to refinance your loan. You can always send in extra money at any time to reduce your principal payment. All Lenders are happy to take your money to reduce the principal on your loan. So remember, you do not need to refinance if you want a shorter term of loan - you just need to make extra payments or send additional money with your monthly payment.
- Equity Stripping . Equity is the difference between the value of your home and the amount of mortgages on your home. If your home is worth $200,000 and you have a 1st mortgage of $100,000 plus a 2nd mortgage or home equity loan of $50,000, then you have equity in your home of $50,000 ($200,000 less $100,000 & $50,000). What the Predatory Lender does is strip you of the $50,000 equity in your home. He accomplishes this in several ways charging huge fees up front and/or placing more of a debt burden on you than you can really afford. Again, look at what you are going to be paying after your home is refinanced; can you really afford to make that payment along with any other payments? If not, you need to stop the process and reanalyze what you are trying to accomplish. Equity stripping puts you in a very vulnerable position. If they inflate the value of your property to obtain a greater loan amount, then you may not be able to later sell or refinance your home since your mortgage debt is higher than the home is actually worth. In the event of an emergency, you will have no equity in your home to borrow against.
- High Interest Rates - Higher rates generally mean more profit to the loan professional. In a rising rate environment higher rates are the norm, but are you paying a higher rate than you deserve? First, you need to know your credit worthiness. If you don’t know your score go to: www.annualcreditreport.com/cra/index.jsp. This can be done for free. Generally, if you paid your mortgage on time as well as your other bills you will receive a favorable rate. If you have been late on your mortgage two or more times over the last 12 to 24 months your rate will be higher. The question is how high? If 30-year fixed rates are being advertised at 6.00% in your local newspaper or the internet www.bankrate.com you probably should not be paying more than 3% points higher than these rates (as a rule of thumb) or 9%. There are many other factors going into determining the rate but based upon today’s rates anything over 9% -ASK QUESTIONS!
Part two of Predatory Lending will discuss what you can do to protect yourself from Predatory Lending. Until then stay informed, ask questions, know your own situation, and take your time-this is one of the most important financial decisions of your life.
Predatory Lending is not easy to define as it takes all shapes and forms and attacks the rich, poor, educated, uneducated, young, and elderly, and occurs in all types of neighborhoods. Predatory Lending is an economic cancer that can rob a homeowner of the equity in their home or take a great interest rate and convert it into a rate that you, the homeowner, cannot afford. Whatever form Predatory Lending takes, it is preventable and in many cases it is curable. Your best defense against Predatory Lending is to be an informed borrower. You begin the process by determining what kind of mortgage you need and what kind of mortgage you want.
Before you begin the refinance or purchase process, you need to think about and answer some questions that are listed below. If you do not answer them honestly, then you might be swayed and lead down a mortgage process path that is not the best financial solution for you, and thus not the right mortgage. This could cost you thousands of dollars over the term of the mortgage.
Answer the following questions:
A. What is my current mortgage rate?
B. Do I just want a lower mortgage rate?
C. Do I escrow for real estate taxes and insurance?
D. Do I want to receive cash out at the closing?
E Do I want or need to pay off some credit cards or other debts?
F. Do I have Mortgage Insurance on my current loan?
G. How long do I intend to live in my home?
H. What is my annual income and what is my spouse’s annual income?
I. Will our incomes remain steady? Will our jobs remain constant?
J. If you are purchasing a home, how much money do you have for a down payment; how much money do you want to put down?
K. How much house can I really afford to buy?
L. Are you a Veteran and do you qualify for a VA loan?
M. Are you a First Time Home Buyer?
N. What are my (our) credit scores?
O. Do I have anything on my credit report that might cause a Lender alarm?
P. What are the real estate taxes on the property and what will the home owners insurance cost on the property?
Q. What is my home really worth?
By honestly answering these questions, you are on your way to determining the type of mortgage that best fits your financial circumstances. You are taking control of the mortgage process and not allowing it to take control of you, and thus you have provided yourself the best defense against predatory lending. You are an informed borrower. You know exactly what your financial situation is rather than being told by someone else what they think of your financial situation. You are taking control of the mortgage loan process.
How do you answer the above questions? You need to gather all of the following paperwork:
LET’S GET ORGANIZED
a. Income documents - Copies of last two paychecks.
b. Income documents - Copies of last two years W-2 forms.
c. Income documents - Copies of last two years Federal Income Tax returns.
d. Mortgage documents – If refinancing, a copy of your previous HUD-1 Settlement Statement .
e. Mortgage documents - Copy of last month’s mortgage statement.
f. Mortgage document - If on Land Contract; Copy of Land Contract.
g. Mortgage documents - If paying on Land Contract, copies of last 12 months cancelled checks to Land Contract holder.
h. Miscellaneous documents - Copy of last months bank statement.
i. Miscellaneous documents - Copy of most recent 401-K statement.
j. Miscellaneous documents - Copy of most recent investment statements.
k. Miscellaneous documents - Copy of Homeowners Insurance front page.
l. Miscellaneous documents - Copy of real estate tax bill.
m. Miscellaneous documents - Copy of Divorce Decree, if applicable.
n. Miscellaneous documents - Copy of Child Support Agreement, if applicable.
o. Miscellaneous Documents - Copy of Drivers License.
p. Miscellaneous Documents - Copy of Bankruptcy papers, if you filed in the past 5 years and/or information is still being shown on your credit report.
q. Miscellaneous Documents - Copy of the last appraisal on your home, if available.
r. Miscellaneous Documents - Letter of explanation detailing the reason for any dings/challenges on your credit report - i.e.,You were out of work for 3 months because of illness or there are two late payments on a credit card and they are being disputed because the charges were not yours in the first place, etc.
If you need a free credit report, go to: www.annualcreditreport.com/cra/index.jsp . Once the questions are answered and you have gathered all of the above information, you are prepared to schedule a meeting with the loan professionals. Right before your meeting, check out mortgage rates for your particular financial situation by going to www.bankrate.com and see what the national averages are for your type of loan.
Lenders come in many different shapes and forms, from your local bank, Savings & Loan, Credit Unions, National Mortgage Lenders (i.e., Countrywide, Washington Mutual), Internet Companies (LendingTree, E-Loan), to Mortgage Bankers and Mortgage Brokers. As a consumer you have a wide selection. Each of the above can give you a great mortgage loan - if you have done your job and have determined in advance what you need and what type of mortgage loan you qualify for!
You’ve made your decision on the Lender you will use, checked the average rates, and now it’s time for your initial meeting. The loan officer will begin by asking you many questions or start taking an application. You have at your fingertips all of the answers-this will be a surprise and thus will put the loan officer on the defensive since he is now dealing with an informed consumer. Inform him of the type of loan you are looking for (example: I want a 15 year fixed rate and I want $10,000 cash out after all expenses are included in the loan.) You have taken charge; you have directed him to one product and thus made his life easy. He should come back with a rate quote or payment based upon the information you’ve given. You should not have been charged one penny at this point in time. Once he quotes the rate, you need to ask him what he charges and a breakdown of the fees associated with the loan. You do not want this verbally but on a GOOD FAITH ESTIMATE (GFE) and a TRUTH IN LENDING STATEMENT (TIL). He is required by law to send you these documents within 3 business days of taking an application from you; if he does not or is reluctant to give you the GFE and TIL, move on to another Lender. The only way you can see or compare if you are receiving a great mortgage loan is by having the GFE and TIL to compare to another. These documents level the playing field. It gives you, the consumer, the ability to analyze which Lender’s deal is best for you, or at the very least, what the costs are that are associated with the loan.
Once these documents are received take time to review them in detail. Ask questions about each item that is listed on the Good Faith Estimate, after all, this is your money. At this point you have enough information to compare one quote against another. Should you obtain another quote on your loan? Absolutely! This is another way to make sure you are not being taken advantage of by a Predatory Lender.
Part three of Predatory Lending will discuss what you can do if you have fallen prey to Predatory Lending. Until then, stay informed, ask questions, know your own situation, and take your time. This is one of the most important financial decisions of your life
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