Avoiding Predatory Lending and Getting a Good Loan

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Predatory loans

The term predatory loan refers to many abusive lending practices. Predatory lenders use high-pressure sales tactics and steer you into high-interest loans with lots of junk fees tacked on, even though you may qualify for a better loan. High-interest rates and unnecessary fees raise the amount you must borrow, and make it hard for you to make your monthly payments. This puts you at risk of losing your home and the money you have paid into it.

You won’t know if a lender is legitimate or predatory until you shop around and get quotes from several lenders. If you are buying a home, or simply refinancing your current loan, it’s important to compare different loans and the cost of each.  Even if you have good credit, you can fall victim to predatory lenders.  Protect yourself by shopping for loans at different banks, credit unions, and other lenders.

Predatory lending tactics

Predatory lenders:

• Don’t tell you about lower rate loans you may qualify for.
• Add unnecessary fees, commonly called “junk fees” to pad their profit.
• Encourage you to repeatedly refinance. This allows them to collect more loan fees from you.

How to get a good home loan

Predatory lenders prey on people who don’t know how good a loan they qualify for. You can protect yourself by doing the following:

Get a copy of your credit report and FICO score. The higher your FICO score, the better the loan you can get. If your FICO score is low, you can learn how to improve your score.

Shop for a loan like you would any other major purchase. You won’t know how good a loan you can get until you have several quotes. Contact three or more lenders and compare the interest rate, points, and fees. You must receive a Good Faith Estimate, which clearly explains the loan’s details, from a lender within three days of applying for a loan.

Compare the quotes you’ve gotten from different lenders. Look at the loan terms and fees. It should be easy to tell which ones are “predatory.” Choose the best loan with the lowest interest rate and fees.

Subprime loans

If you don’t have good credit, lenders consider you a high-risk borrower. The higher the risk you are, the higher the interest rate you will be asked to pay. They are not going to offer you the best loans with the lowest rates.  However, you may qualify for a subprime loan. A subprime loan has a higher interest rate and fees than prime loans that are offered to homeowners with a good credit rating.  You should think of high-interest subprime loans as being short-term. When your credit rating improves, you can and should apply for a better loan.

Recognizing subprime loans

Subprime loans have:

• High-interest rates and fees.
• Monthly payments that may only cover the interest and do not reduce the principal balance.
• Balloon payments that have a large payment due in one lump sum at the end of the loan.
• Adjustable interest rates that can increase the amount of your monthly payment.
• Prepayment penalties if you pay off the loan early, even if it’s to refinance the loan for better terms.

Negotiate loan costs and fees

Most banks, credit unions, and loan brokers charge points and fees to get you a loan. There are no set fees and charges. Loan charges are negotiable and will vary from lender to lender. You should negotiate the amount of these charges as you would any other major purchase.

Before you sign

Everything you were promised should be in writing on the loan documents. If you do not understand something, do not sign.  Ask for an explanation.  Review the loan documents carefully.

The Truth in Lending Disclosure has the basic terms and conditions of the loan.  Make sure it lists the interest rate and monthly payments you were promised.

The Settlement or Closing Statement shows the fees you are being charged for the loan.  You can question the fees and ask that they are reduced or removed.

New Protections

It is now a felony for anyone involved to purposely misstate, misrepresent or leave out information when you apply for a mortgage loan.

Prepayment penalties can be no more than 2 percent of the loan balance.

Negative-amortization loans are not allowed.

Call us for help

Our staff will review your loan documents before you sign. Our services are available to all Los Angeles County residents.

SB 239, AB 260

County of Los Angeles Department of Consumer and Business Affairs. Last change: Dec. 1, 2013