Q&A: The Truth Behind Predatory Lending

What is Predatory Lending?

Predatory Lending is a practice wherein a lender forced you into abusive or unfair lending terms. This can be in the form of high interest rates, unreasonable penalties, and hidden fees that aren’t part of the mortgage contract. Often, the contract is written out so that it’s all but impossible for the borrower to get out of it, even when it puts them under financial stress. In fact, studies show that most of today’s foreclosures and defaults can be traced to some form of predatory lending.

How do I know I’m a victim?

Many predatory mortgages are so subtle that the borrower doesn’t know it—until things get out of hand and they’re facing foreclosure. But the earlier you take action, the faster you can set things right. Here are some signs that tell you if you’re on the losing end of the deal.

Excessive fees. Some fees can be financed but are not directly affected by the interest rate. This makes them easy to disguise or manipulate. Fees below 1% of your loan amount are usually no cause for concern, but if they add up to more than 5%, you should get suspicious.

Prepayment penalties. It’s common for lenders to charge you a penalty if you pay off your loan in advance. This is to make up for the interest they lose by letting you off early. The penalty is considered abusive if it’s effective for more than three years or is worth more than six months of interest.

Yield Spread Premiums. This is a fancy name for the kickbacks your lender pays a broker to steer you into a high-interest or sub-prime loan. If you see this term on your bill, you’re probably paying more interest than is legally acceptable.

Refinancing offers. If your lender offers you a tempting refinance package, think twice about it. It may be a form of loan flipping, a practice they use to generate income without giving you any tangible benefits. In the long term, the refinance can simply drain your equity and increase your monthly payments.

Mandatory arbitration. This is one of the most common predatory practices. Mandatory arbitration is a provision in many contracts that bans you from going to court if you find the terms abusive. You’re basically being denied of your rights to justice.

What are my rights?

Most cases of predatory lending violate the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). These laws were put in place to protect borrowers like you, but lenders continue to violate them every day and trick millions of people out of their money. The best way to protect yourself is to know these laws and the rights they give you.
For one thing, you always have the right to speak up whenever you feel you’re being cheated. Sometimes it’s as simple as calling your lender and asking them to explain vague or overly high charges. They may or may not give a useful answer, but it’s important to let them know you’re not being fooled.
Even if you’re already in foreclosure, there are always steps you can take to correct the situation and save your home. Find a competent lawyer to help you out and look for RESPA and TILA violations in your contract. In most cases, the laws can help stop foreclosure and even give pay you back in damages.

What can I do?

If predatory lending has put you in serious financial trouble, one thing you can do is apply for a loan modification. This is a simple way to restructure the terms of your loan into something more reasonable and helps you stop foreclosure. All you need to do is call a loan modification attorney, a person who specializes in talking to lenders and negotiating for proper mortgage assistance.

You will have to provide some documents so that they can properly assess your case, including a hardship letter that explains your situation. Your loan modification attorney can use violations to negotiate better settlements with your lender. These may include misleading disclosures, exorbitant fees, or any of the signs mentioned above. Nearly every mortgage has at least one violation, but it takes a good understanding of the law to point them out.

After submitting your application, your attorney will start negotiating for better rates. When needed, they will use RESPA and TILA violations as leverage for getting the best loan modification offers. When it’s approved, you’ll receive a document detailing the mortgage modification, whether it’s a a lower interest rate, or some form of mortgage assistance. Once you approve it, you can keep your home and start paying off your mortgage at a comfortable pace.

Loan Modification: 5 Things To Consider Before Applying

Choosing a loan modification isn’t a decision you make overnight. Sure, it can be your ticket to a better mortgage, but it’s not a surefire way to solve your money problems. Like any other transaction, it has its challenges, and it suits some people better than others. If you’re not the right candidate, even the best loan modification attorney can’t guarantee the results you want.

Remember, loan modification is as much a commitment as it is a solution. If you’re considering a loan modification, here are some things you should ask yourself before making any decisions.

1. Do I qualify?
Each lender has its own policies, but the general requirement is that you have a job and be able to prove your financial hardship. This tells your lender two things: first, that falling behind wasn’t entirely your fault, and second, that modifying your loan can really help you back on your feet. If you’re still unstable or have no reason to request mortgage assistance, your loan modification firm won’t be able to help much.

2. How far behind am I?
It’s important to build a strong case to persuade your lender, but there are limits to how far behind you can be. It’s one thing to miss a few payments because you lost your job, but it’s another to deliberately miss half a year because of bad spending habits. As your debt accumulates, your lender perceives you as a high-risk borrower and may be less willing to work with you.

3. Can I afford it?
Depending on your situation, a loan modification can cost you anywhere from $2,000 to $5,000. But it’s not just a matter of having that much money in the bank. If you’re in a really tight fix and it’s the last of your funds, you may want to wait a bit so you’re not left with nothing in case your bank rejects your application. Your loan modification attorney can help you figure out a budget so you can plan it out better.

4. How much equity do I have?
Your equity value is probably the biggest factor affecting your lender’s decision. If you have enough equity to cover foreclosure expenses and deferred interest, foreclosure may actually be cheaper for your bank. However, equity is determined by the value of your property, which your lender can easily overestimate. Do some research beforehand to see how much your home is really worth, so you can face your lender with hard facts.

5. Can I stay on track?
A loan modification won’t free you of all responsibilities; it only allows you to meet them more comfortably. Once it’s granted, it’s no longer your attorney’s job to keep you on track. Make sure you have enough money saved up to cover initial payments when the mortgage reinstates, as well as an emergency fund. If something comes up and you fall behind again, the whole loan modification process will have been useless.