Borrowing money is a commonplace thing to do for large purchases such as buying a new car or purchasing a home. In fact, it is so common that it’s become easy for unscrupulous and predatory lenders to take advantage of people who assume good faith when none is present.
At Addition Financial, we want our valued members to be aware that not every lender is the same and some do not have your best interest at heart. Practices such as loan flipping can be easy to miss if you don’t know what to look for. With that in mind, here are nine predatory lending examples to help you choose the best lending options.
#1: Loan Flipping
When you think about home loans, the word “flipping” might bring to mind HGTV shows where people buy a fixer-upper, put money into repairing it and then resell it for a profit. Loan flipping might sound benign but it is a predatory lending practice that’s common in real estate.
Loan flipping is the process of convincing a homeowner to refinance a property to a new flip loan with high fees. A house flipping loan is often combined with other types of fraud because the predatory lender needs to convince the borrower that there’s a benefit to refinancing. In truth, the buyer often ends up in the hole thanks to the closing costs, points and other fees that are built into the mortgage loan.
The best way to avoid loan flipping and mortgage fraud is to work with a reputable lender and always read the fine print before signing loan documents. If a lender or their representative tries to strong-arm you into refinancing, that’s a good sign that there’s a scam going on.
#2: Loan Packing
If you’ve ever taken out a loan, you know that loan contracts are long and typically written in legal language that can be confusing to anybody who isn’t a lawyer. Loan packing is a predatory lending practice that takes advantage of confusing language that people don’t want to read by packing unwanted services, add-ons, fees and penalties into your loan agreement.
For example, some car dealerships will include gap insurance or “appearance” packages that include unwanted elements such as racing stripes, tinted windows or mud flaps. They may also include pre-paid maintenance and road service or road club membership.
Most lenders who engage in loan packing focus on buyers who are payment buyers, meaning that they are concerned mostly with having an affordable monthly payment. The lender avoids talking specifics, highlighting the payment total as a benefit. To avoid loan packing, drill down into the specifics of a loan and ask for an itemized list of what’s included. Then, read the fine print and make sure you understand what you’re buying before you sign.
#3: Racial Profiling
In 2013, the Obama administration submitted a bulletin to the Federal Trade Commission entitled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” that was designed to monitor predatory lending as it related to racial discrimination and profiling. The Equal Credit Opportunity Act had loopholes that lenders were exploiting to charge higher rates to minorities who bought cars.
In 2018, Congress passed a joint resolution proclaiming that the bulletin would have no effect and President Trump signed it. The result is that the bulletin is no longer being used as a guideline although the ECOA remains in effect.
You can identify racial profiling by shopping around for a loan and always reading the fine print of the loan agreement to be sure you understand all rates and fees.
#4: Equity Stripping
Equity stripping is another form of predatory refinancing. People who have built equity in their homes can usually borrow money against the equity if they want to and can qualify based on their income and credit score. Some unscrupulous lenders may offer a loan even when there’s evidence that the homeowner won’t be able to pay.
The incentive for predatory lenders to engage in equity stripping is that they collect the closing costs and fees for the loan up front. If you fail to make your payments, they’ll simply foreclose and you will lose your home. They don’t care if you can’t pay because they have a reasonable expectation they can recoup their money by foreclosing and selling your house.
#5: Bait and Switch
The bait and switch is one of the oldest scams around and it takes many different forms. Simply stated, it’s what happens when you buy a product or schedule a closing in the belief that you’re getting one thing when in reality, you’ll be getting something else.
By law, lenders are required to disclose all loan terms to you on the Closing Disclosure. However, some unscrupulous lenders may change the loan terms, adding additional fees and services (loan packing) prior to closing. They may even backdate the documents to skirt regulatory requirements.
The result is that you arrive at the closing, eager to take possession of your new house or car, only to find that the agreement is not what you were promised and may cost more than you anticipated. You can avoid being taken advantage of by keeping copies of everything, reading everything before the closing and then comparing it to the documents you receive at the closing – before you sign.
#6: Hidden Balloon Payments
A form of predatory lending that is often combined with other forms on this list is the hidden balloon payment. By law, a mortgage lender must disclose a balloon payment on the Closing Disclosure. However, some lenders may flip a loan without disclosing a balloon payment that then takes the borrower by surprise.
Here again, the solution is to read the fine print and question anything you don’t understand. A surprise balloon payment can be enough to lead to a default on your loan and even to foreclosure. Any lender that glosses over the details or refuses to answer a direct question is not somebody you should trust.
#7: Payday Loans
Payday loans are one of the most common types of predatory lending. While many states have imposed limits on interest rates and added consumer protections, some have not – and even where protections are in place, the loan terms are predatory and borrowers can get into an endless cycle of borrowing and repayment.
Most payday loans have a loan term between seven and 14 days. In Florida, the interest rate is capped at 10%. That might not sound like much but remember, the interest rate is for 14 days. When you extrapolate that out over a year, you’re looking at an interest rate of about 240%. That still qualifies as predatory in our book and it illustrates why many of the so-called consumer protection laws are insufficient to shield people from predatory practices.
If you need money quickly, you would be better off seeking out a personal loan, borrowing from a friend or family member or even taking out a cash advance on your credit card. While the rate for a cash advance may be high compared to your regular interest rate, it will still be far lower than the rate for a payday loan.
#8: Title Loans
Title loans are like payday loans in that they offer quick money with little scrutiny. The other thing they have in common with payday loans is that they charge prohibitively high interest rates and fees that can trap consumers in an endless cycle of borrowing.
The additional risk with a title loan is that you will be required to use the title to your car – or sometimes your house – as collateral. If you fail to repay, the lender could seize your home or vehicle. That’s true even if the loan amount is significantly smaller than the value of the item being seized.
It’s a good rule of thumb never to use the title to something you value as collateral. Instead, seek out one of the alternative sources of money we listed in the previous section. Title lenders often offer to roll over an old loan into a new one and before long, the borrower has paid thousands of dollars in interest.
#9: Mortgage Relief Scams
It’s a sad fact that many predatory lenders focus their attention on people who are financially vulnerable. One predatory lending example that rears its head during tough economic times is the mortgage relief scam.
A mortgage relief scam targets homeowners who are struggling to make their monthly mortgage payments by offering to refinance your home loan at more favorable terms to save you money. The most important thing to know about this type of scam is that it is illegal for any person or company to charge you a fee without delivering a written offer for mortgage relief from your lender that you sign. The Mortgage Assistance Relief Services (MARS) rule also requires mortgage assistance companies to be transparent about their fees and to warn you that you can lose your home to foreclosure if you fail to make payments.
Most lenders are honest and adhere to the legal and regulatory requirements about disclosing loan terms and keeping fees reasonable. However, predatory lenders are out there. The nine predatory lending examples we’ve included here will help you to avoid exorbitant rates and fees and protect yourself and your credit. Remember that the best way to avoid predatory lending practices is always to read the fine print of a contract before you sign it. If you don’t understand something, ask for clarification or hire a lawyer to review the contract for you.
Are you searching for a loan with affordable rates that can help you buy a new car or home? Addition Financial is here to help! Click here to read about our loans now.
