myConsumerRights

Key Consumer Issues - Predatory Lending

Predatory Lending: Don't Become a Victim

Overview
Types of predatory lending
Tips for avoiding predatory lending
Your rights and protections

Predatory lending is the practice of lenders targeting vulnerable individuals and convincing them to take loans with incredibly high interest rates and other abusive terms.

Sometimes, the victims of predatory lending may have less than perfect credit, so they can’t get a standard loan. In other cases, they may actually be able to get a standard loan but are misled by the lender or broker into believing they can’t. They are often hardworking people with limited incomes. An extra expense or setback, such as an unexpected medical bill or a car accident, may leave them unable to pay their bills. With their back against the wall, they become perfect targets for predatory lenders.

Some of the most common forms of predatory lending include payday loans, car title loans, and predatory mortgage lending.

Payday Loans
A payday loan is a small short-term cash advance until payday. Typically, you write a post-dated check and the lender gives you cash for the amount of the check minus a fee. For example, if you need $500, you might have to write a check for $625. Ideally, when the date on the check arrives, you’d have enough money to cover the check and the lender would deposit it (although you’d still be out the steep $125 fee). In reality, when your next payday comes, very little time has passed and circumstances haven’t changed much. You’re still financially strapped, so you’re forced to extend the loan by paying an additional fee. If you don’t, the lender threatens to deposit your check and file criminal charges when it’s returned for insufficient funds. You literally get trapped in a cycle of high interest loans, on which you’re probably paying triple digit interest rates, and you spiral further into debt.

Keep in mind that each time you have to extend the loan, you’re not getting more money to help you out of your difficult circumstances. You’re paying more money for no additional benefit. In the example above, over a period of just a few weeks, you’ve added $250 in fees and haven’t reduced the original debt at all.

Car Title Loans
Car title loans are similar to payday loans. They’re usually short-term (several weeks), for relatively small amounts of money, and require the borrower to pay high fees. The main difference is that the car title is used as collateral for the loan. If you can’t pay the loan back when it’s due, you have to pay more fees to extend it, or you lose your car. To make matters worse, the amount of the car title loan is often a lot less than the car is actually worth.

Predatory Mortgage Lending
Predatory mortgage lending involves home equity loans, home improvement loans, and refinancing deals with expensive and oppressive terms. Because homeownership and financing are extremely complicated, predatory mortgage lending practices can be difficult to understand and detect. Often, once people discover they have been a victim, they are too embarrassed to speak up -- until it's too late. For that reason, and because your home may be at risk, you should always seek advice from someone you trust before signing any loan contracts or other agreements related to your home.

As a starting point, here is a list of some common signs of predatory mortgage lending:

Loans with extra fees
Loans with higher interest rates or fees instead of interest
Mortgage brokers or home repair contractors have special relationships with lenders
Marketing that targets minorities, members of the military, and the elderly
Loans made without considering whether borrowers can realistically repay them
Loans with monthly payments the lender knows borrowers can’t afford
A lender who refinances your loan over and over
Getting you to sign blank documents
Telling you information on an application doesn't have to be accurate
Giving you more money than you asked for
A loan that exceeds the value of your house
Loans with very high prepayment penalties
Convincing you to consolidate other debts (for example credit cards, car loans) with your mortgage
Loans with large balloon (lump-sum) payments at the end of the loan term
Requiring or pressuring you to buy credit or other types of insurance with the loan
Purchasing homeowner's insurance for you.

Tips for Avoiding Predatory Lending

Be sure anyone you're thinking about getting a loan from is licensed to do business in your state. In Georgia, check with the Georgia Department of Banking and Finance (http://www.ganet.org/dbf/regulated_institutions.html) and/or Georgia’s Secretary of State (http://www.sos.state.ga.us/securities/) to be sure the lender is licensed.
Beware of loans made over very short periods of time. A loan you have to pay back very quickly may not give you enough time to get back on your feet if you're having financial difficulties. It may just make matters worse.
Be aware that predatory mortgage lenders often target people who have paid off most of their original mortgage. After a disaster, they may target and prey upon those who have suffered most.
Be suspicious of technical, complicated language in the loan contract that you don't understand. Predatory lenders often hide extra fees here, as well as requirements such as binding mandatory arbitration that take away your ability to sue.
Be wary of any extra, unexpected fees or expenses that appear when you get ready to sign your loan agreement. Demand an explanation and be sure it makes sense to you. Lenders are required to inform you of certain fees and costs associated with your loan up front. However, predatory lenders may wait until the last minute, hoping you'll be under pressure and won't walk away at that point.
Be suspicious of anyone who calls you on the phone or comes to your door trying to convince you to refinance a loan you already have or who offers to do repairs at low cost and to help you find financing for it.
When you get ready to take out a loan, don’t just trust the lender or broker to help you make a decision that’s in your best interest. Look at the contract yourself to be sure you understand it. Ask questions. Look at the numbers too – can you realistically make the payments required? If not, look elsewhere. (NOTE: loan contracts can be very difficult to understand. However, there are consumer advocacy agencies and other public and private organizations that offer credit counseling services and may be able to answer questions about a loan you’re considering or help you find one that’s good for you.)
Beware of a lender or broker who suggests you refinance a loan you’re having trouble paying off.
Never sign a document with blanks that haven’t been filled in.
RUN from any lender or broker who suggests you put false or misleading information on a loan application.
Shop around. This may be your best protection. It allows you to compare your options and to know if one lender is offering you a bad deal. It also forces lenders to compete for your business.
Be sure your lender/broker gives you all disclosures required by law. ASK ABOUT THEM. This will let the lender know that you are an informed consumer. If a lender makes excuses about not being able to give you the disclosures when you ask for them, WALK AWAY!
Don’t get talked into buying insurance products you don’t need. If you think you might need or want insurance recommended by your lender, shop around for it. You may be able to get it cheaper somewhere else. Plus, lenders often try to "bundle" unncessary products that they add to your loan amount, which makes the whole deal more expensive for you.
Check your credit report and credit score once a year. Lenders use this information to help them determine your interest rates. You need to be sure they’re using the correct information and giving you a fair rate. And, you need to know if there is anything inaccurate in your credit report that needs to be corrected. Under Georgia law, you are entitled to receive a free credit report every year.
If you need a small amount of money for a short period of time, consider borrowing from a friend or family member or even going to a charitable organization for help. Many religious and other charitable organizations have programs to assist people who need emergency help with utility bills, mortgage payments, or other expenses. One resource that can help you find such organizations is United Way 211. You can use the following link to help you find your local number: http://www.211.org/ReferWeb/MainForm.aspx. Don’t be ashamed to ask for help. You can always return the favor when you’re back on your feet by making a donation to the organization that helped you.
After you’ve signed any loan agreement, be sure to get copies of all documents you signed.
Beware of ANY internet loans. Often, your state consumer protection laws do not apply to these lenders, including the amount of fees or interest that can be charged.
If it seems too good to be true, it is!

Your Rights & Protections
Below are descriptions of some of your rights with respect to various types of loans and different parts of the loan process. These descriptions are not a complete list of your rights; they are only an overview.

The loan application process in general-your rights and protections:

The Truth in Lending Act says that when you apply for a loan, the lender has to tell you, in writing, both the finance charge and the annual percentage rate before you sign a contract. The finance charge means the total fees and other costs the lender charges you for the loan, not including the amount of the loan itself. It includes things like interest, service charges, origination fees, etc. The annual percentage rate is the average rate of interest you pay on the loan each year. The APR can be much higher than the interest rate if the lender has added extra things to your loan.
You have the right to be considered for credit without regard to your sex, race, marital status, religion, national origin, age, or receipt of public assistance. You cannot be denied credit for any of these reasons.
Anytime you’re denied credit, you have a right to a written explanation.

Mortgage loans-your rights and protections:

The federal Home Ownership and Equity Protection Act of 1994 (HOEPA) says that for certain high-rate, high-fee home loans, the lender is required to give you specific written information/warnings about the loan three days before it’s finalized. These are called Section 32 disclosures and they must tell you:

That you have three business days after getting the disclosures to decide not to go through with the loan, even if you’ve already signed the application
That if you don’t make your payments you could lose your home
What the annual percentage rate, regular payment and loan amounts are
That credit insurance premiums are included in your deal (if they are)
If it’s a variable rate loan, the disclosures must tell you that the interest rate and the monthly payment amount could go up and must also tell you what the maximum monthly payment could be.

Georgia’s Fair Lending Act makes certain home loan practices illegal:

Financing various types of insurance premiums in the loan
Charging late fees unless the loan contract specifically allows them
Charging late fees when the payment is less than 10 days late
Charging late fees higher than 5% of the amount of the monthly payment
Charging more than one late fee for a particular payment.

For high cost loans, the Fair Lending Act:

Makes it illegal for a lender to intentionally “flip” a loan (refinance a home loan made within the last 5 years with a high cost loan that doesn’t really benefit you)
Limits the amount of prepayment penalties that can be charged
Makes a loan illegal if the principal amount increases over time because your regular payments don’t cover the interest charges
Says a lender can’t make a loan they know you can’t afford
Says that if your lender plans to foreclose because you’ve defaulted on your loan, you have the right to “cure the default” by bringing your payments up to date. The lender must notify you of your right to cure the default even after a foreclosure.

If a lender violates the Fair Lending Act, you have the right:

To sue for damages including actual damages, twice the amount you’ve paid in interest, punitive damages, and attorney’s fees
To get out of the loan for up to 5 years, if the lender violated certain specific provisions of the law.

Georgia law also says that mortgage lenders and brokers must tell borrowers the fees they will have to pay, how those fees are determined, and under what conditions they may be refunded. These individuals cannot:

Make false or misleading statements to you
Allow blank spaces on loan applications
Make a mortgage loan they plan to foreclose on.

Payday loans-your rights and protections

Georgia law makes payday loans that meet certain criteria illegal. In general, loans for $3,000 or less with interest rates higher than 16% are illegal in this state. After May 1, 2004, if someone makes an illegal payday loan to you, you may have the following remedies:

Cancel the loan without repayment
Can sue the lender for up to three times the amount of any interest you’ve paid on the loan plus attorney’s fees and court costs.

Debt collection-your rights and protections:
Predatory lending often forces vulnerable people into serious debt. If you find yourself struggling with debt or in danger of losing your home or other property, you should know there are laws that protect your rights. For more information on debt collection and your rights, click here.