Predatory Lending

No profession or industry is immune from those who violate the spirit, ethics and sometimes the laws relating to their profession. So-called predatory lenders are the mortgage lending industry’s poster children for this dubious distinction. Stated simply, predatory lenders are those who take advantage of unsuspecting consumers by inflating closing costs and charging interest rates that are above market rates , often in a substantial manner.

The solution to predatory lenders is simple: be an educated consumer. Does this mean that you need a degree in finance in order to protect yourself in this situation? Absolutely not! In fact, an average consumer, who is willing to take the time to familiarize herself or himself with this process will, in all likelihood, make it through the mortgage process just fine.

In fact, mortgage brokers are regulated by the federal Real Estate Settlement Procedures Act (RESPA) and the Texas Savings and Loan Department which requires that they disclosure their costs -- in the form of a written Good Faith Estimate and a Truth-In-Lending document, shortly after a loan application is made. The consumer must then be diligent to insure that they actually deliver what is promised on those documents.

Here are three areas where predatory lenders make money, as well as, the major terms over which mortgage seekers can familiarize themselves so that they can be better consumers of mortgage loan services:

Closing Costs: There are many ways that lenders can inflate your costs. One tactic is to actually waive many of the closing costs, while, at the same time, charge a higher interest rate. In the long run, this is a much more expensive proposition for the consumer. Loan applicants should be assertive in asking questions that clarify and/or shed light on any charges that seem inflated. Applicants should also look closely to see that all services charged for where actually performed.

Origination Fees: One percent is considered a fair profit for the costs associated with loan origination. However, one percent is excessive when combined with premium interest rates and inflated closing costs.

Discount Points: Sometimes a lender will quote one rate at the time of loan application and something very different at closing. Usually, the reason given is that a past credit problem renders you ineligible for the previously quoted rate. As a “solution,” you are given the option of paying additional points in order to keep the lower rate.

Remember, each point is one percent of the loan amount, payable at the time of closing. Or, alternatively, you will most likely agree to a higher rate. What you are not told is that, as a result of your “choice,” the broker receives a substantial bonus in the form of a rebate called a Yield Spread Premium.