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Avoid predatory lenders

August 02, 2002|by LYNN F. LITTLE

It's a fact of life - Americans have many needs and many desires. The dream of home ownership or situations resulting in unforeseen expenses force most of us into borrowing money at some point in our lives. Flexible terms make it relatively easy to obtain loans, provided certain income guidelines are met.

However, consumers with less than stellar credit histories or those whose incomes fall short of qualifying for conventional loans, may find themselves lured by offers of "bargain" loans by companies who aggressively solicit over the telephone or door-to-door.

Such offers can be risky. Borrowing from companies who advertise easy-to-qualify loans could end up costing you a bundle and, in some cases, your home.

Referred to as predatory lending, the practice of unscrupulous loan-making is on the increase. Credit card over-spending puts an increased number of Americans in debt each year and may make them vulnerable to predatory lenders. Although methods may differ, there are distinct characteristics associated with predatory lending that differentiate it from the practices of more credible lending institutions.

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To inform the public of these differences, the Federal Trade Commission has identified the following deceitful and, in some cases, unlawful behaviors associated with predatory lending operations.

One very common practice perpetrated by predatory lenders is awarding a loan based on the equity in a home, or on the assets of the borrower, rather than on the borrower's financial ability to pay back the amount.

In the case of a mortgage loan, the borrower may expend all of the equity and, in some instances, may even lose the home. Women, the elderly and low-income groups are particular targets.

Predatory lenders often pressure the borrower into continuously refinancing the home, each time charging high points and origination fees that are pocketed by the lender.

Although home refinancing can be advantageous when interest rates drop, costs incurred by the borrower through frequent refinancing actually negate or reverse any financial gain.

Added costs for credit insurance is another tactic used to bump up loan fees each time a home is refinanced. In many instances, credit insurance is not necessary.

Advertising low monthly payments is one of the lures predatory lenders use to attract fixed-income borrowers. The widespread practice in this instance is to include "balloon" payments at the end of the loan at unaffordable rates. In general, a balloon payment offers flexibility for young people or couples whose income is likely to increase over the term of the loan.

Elderly homeowners are specific targets of predatory lenders, despite the fact their earnings are, for the most part, fixed.

Another example of predatory lending is enticing potential borrowers with appealing loan terms and then increasing the rates at the time the contract is signed.

Many dishonest lenders don't reveal the true amount of payoff, or keep borrowers in the dark by not providing accurate account information.

There are many things a borrower can do to avoid entrapment by a predatory lender.

AARP offers these practical suggestions:

1. Beware of buzz words or phrases used by aggressive sales people, such as "bargain loans" or deals that are "good for a very short time." "Easy credit" is another frequently used phrase that should raise suspicions.

2. Avoid high-pressure telephone sales, especially from callers who offer next-day approval for fees paid up front, or take applications over the phone. Most respectable lending institutions do not solicit over the telephone.

3. Research good lending institutions in your community such as banks, credit unions or mortgage companies when you've determined that a loan is what you need.

4. Refrain from rushing into an agreement until you've had a chance to calculate what your debt-load will be. Make certain you understand the total amount to be paid and negotiate a repayment schedule that is achievable.

5. Finally, read carefully before signing any document. Terms and conditions are negotiable and should be clearly understood. Under the Truth in Lending Act, you have three days to reconsider after signing a contract, provided you are using your home as security.

Like many things in life, consumer debt is an undeniable reality. Even by today's standards, managing debt wisely is possible given the flexible loan options that exist through trustworthy lending institutions. The key is in making the right decision about the lender and knowing whom to trust.

Lynn F. Little is the family and consumer sciences educator with the Maryland Cooperative Extension, Washington County.

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