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How To Avoid Predatory Lenders

[Apr 28, 2008.]


Mortgages are a popular way for homeowners to secure a loan by using their property as security. While there are many services and companies that can provide mortgage loans to homeowners there are a few of them that may not have the home owner's best interest in mind. When this occurs, the home owners are subjected to unfair practices that take advantage of the home owner’s situation for the benefit of the lender.

This means, the lender is practicing predatory mortgage lending which is highly illegal but very common in today's market. There are many reasons why predatory lending practices are so prevalent in the financial market even though there are several laws in effect that target the specific practices of predatory lending.

Predatory lending takes many forms and includes many practices all of which take advantage of the borrower in an unfair and unjust manner. There are many signs of a predatory lender which can be easily spotted if the borrower has some knowledge of mortgage practices and how to protect themselves from becoming victims.

A certain amount of fees should be expected when dealing with a mortgage broker. For instance, the Mortgage origination fee is a common fee that is legitimate, but only if it is between 1% and 2% of the total loan amount; anything above this is considered unfair and can be a sign of predatory lending.

Many mortgages do carry a clause discussing penalties of prepayment. Borrowers who pay back all of, or most of their loan, before a certain date can incur penalties so it is important to read the contract and understand if there are any of these penalties stated. Predatory lenders often use this practice in an abusive manner that traps the borrowers with incredibly high interest rate no matter how well the borrower's credit is or how much it improves over the course of the loan.

It is not uncommon to see a mandatory arbitration clause on the mortgage agreement. In fact, most loans will have this clause, and when dealing with legitimate and fair mortgage brokers, this clause represents little risk and is really just added for the benefit of the broker should something unforeseen occur. However, when a borrower goes through a predatory lender that mandatory arbitration clause can cause huge problems. The clause simply states that should the borrower have a problem with the lender or the agreement then the borrower can not take the lender to court. Instead, the borrower and lender must use private arbitration that will more than likely favor the lender and cost the borrower additional charges and fees.

It is important to be very cautious when searching for a mortgage loan lender due in part to the mandatory arbitration clause. The borrower will have no legal recourse should the lender prove to be unscrupulous and unjust.

Predatory mortgage lenders often target the same group of people who find it difficult to find mortgage loans that are affordable and suited for their needs. The elderly is a popular group that the predatory lenders exploit by confusing them with complicated terms and a fast paced sales technique. There are now several programs that offer aid to the elderly who are looking to mortgage their home to protect them from being taken advantage of.

There is pretty much only one way to avoid predatory loan techniques, and that is with knowledge. Knowledge is vital whenever home owners, no matter the age or demographic, are seeking a mortgage loan. Knowing what to look for is crucial to avoiding predatory lenders. Most of the tips for avoiding these lenders are common sense and yet are often ignored.

  • Never borrow more than you need

  • Never sign a blank document

  • Never forge any part of the document or allow yourself to be convinced to lie on any portion of the agreement.

  • Read everything. Read it twice if necessary.

  • When in doubt find another lender.

There are many resources that aid home owners in finding a credible mortgage lender, in addition to educating home owners in recognizing predatory lenders. The Department of Housing and Urban Development or HUD, website is full of valuable information directed at consumers and home owners. While it may be easy to spot a predatory lender, most home owners will only recognize their mistake after the fact when it has already cost them a lot of money and will cost a lot more just to rectify the situation; so take your time and be smart when choosing a lender.


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