In order to obtain assets like homes, vehicles, boats, or other property of significant value, it’s often necessary for consumers to take out loans.
Consumer loans are big business. Even in the wake of the financial crisis of 2008, the mortgage industry in particular has been prospering, and banks are making billions of dollars every year in interest on home loans. Most US homeowners rightly view mortgages as a tool to use in order to pay, over time, for what is the biggest purchase most of them will ever make.
The good news is that most lenders operate ethically and follow strict guidelines that are meant to ensure that the borrower can actually pay back the loan they’re getting. However, there are those unscrupulous lenders that employ practices that are designed to entice, lure, or in some other way coax a borrower into taking on a much larger financial obligation than they can manage.
These types of lenders are often referred to as ‘predatory lenders’, as they ‘prey’ on borrowers who may not know any better. Make no mistake: what these lenders are doing is wrong, and they should be called out for their mistreatment of the borrower. Furthermore, most predatory lending practices are sharply illegal, and you as a consumer have the right to stand up against them should you find yourself a victim of any predatory lending practice.
Examples of Predatory Lending
To help protect yourself from predatory lenders, it can help to know about some of the most common schemes they use to attract hapless consumers.
Some of these tactics include:
- Bait-and-Switch Scams. As the old saying goes, if it sounds too good to be true, it probably is. When predatory lenders conduct bait-and-switch scams, they often promise absurdly low interest rates or curiously low monthly payments, only to jack up both after a short ‘promotional’ period comes to an end.And, because virtually all mortgage agreements are contractually bound between the borrower and the lender, there’s rarely ever a way out after the price hike kicks in.To avoid bait-and-switch scams, be sure you read all lending documentation thoroughly, and if you do suspect that the lender is trying to pull the wool over your eyes, contact a law firm like ours for peace of mind before signing or agreeing to anything.
- Covert ‘Loan Flipping’. Similar to a bait-and-switch, a loan flip is when the lender suddenly refinances your loan with a longer term, higher cost loan without you being made aware of what is going on.Doing this can also result in point or fee assessments that you didn’t sign up for in the first place.
- Loan Stuffing (or ‘Packing’). It’s one thing when a lender includes optional financial services or features as component parts of a loan package. It’s another thing entirely to make you think that these features are required in order to have your loan qualified or approved.A good example of a paid-for add-on to a mortgage is credit insurance. You might be told that you won’t be approved unless this insurance (which you’ll pay for every month) is included, when that isn’t necessarily the case.
- Obscured Balloon Payments. Here’s how this trick works: first, you’re told you’ll be getting a long-term loan at a low interest rate. Then, at closing, you learn that the loan is actually a short-term loan that will require refinancing after just a few years. The refinance will come with closing costs of its own—costs you will be responsible for paying.
- Equity-Based Lending (also called ‘Equity Stripping’). Instead of using the market value of your home, the lender uses the amount of equity you have as the basis for the loan. At first, this may seem like a great deal for you, but the consequences of defaulting on the loan could mean forced foreclosure and a ‘stripping’ of the equity from you.
Even though most of us would like to think that we’re wise to tricks like the ones listed above, lenders can be incredibly crafty in their advertisements and sales tactics. Some predatory lenders will intentionally target certain demographics that may be more prone to believing their misrepresentations (i.e., elderly or lower-income communities).
What to Do If You Suspect Predatory Lending
You don’t have to be a victim of predatory lenders. If you come across one, take action immediately by filing a complaint with the Colorado Attorney General.
If you have already engaged in a contractual relationship with what you believe is a predatory lender, contact our offices to schedule a consultation.