Beware of Predatory Lending Practices


home loan graphicOne recent radio ad caught my attention. “Reduce your mortgage payment by up to 45 percent. Save hundreds of dollars a month.” Even the most cynical listener would want to know how to save so much money each month. The ad went on to talk about refinancing, and what you needed to do.

 

I kept waiting for the final punch that told me how to save money. Finally it came. “Once you’ve refinanced, you only make interest payments on the family mortgage”

 

Aha! What the ad didn’t mention is that your mortgage principle balance never goes down. You could be making interest payments for the rest of your life and never reduce the balance of your mortgage. Years later you would still owe the same amount.

Predatory lending

This example falls into the area of predatory lending. In his article “The Poverty Sharks,” Dan Allsup writes about how some lenders make a staggering 104.3 percent on cash advances. Other examples note that your interest rate on a credit card can be well over 20 percent, and if you miss a payment, or are late, that rate can be increased automatically.

 

If you ever read the very small print on your credit application, it’s all spelled out for you - if you understand the credit-ese.

 

Predator tactics: refinanced mortgages, cash advances, consolidation loans, payday loans

More and more Americans who find themselves in financial trouble fall prey to offers for refinanced mortgages, cash advances on their credit card, and consolidation loans. In some geographic areas, “payday loans” can cost a borrower 400 percent for just a few days’ advance on a paycheck. Asks Allsup, “If you can’t make it on a full paycheck this week, what chance do you have with a smaller one next [week]?”

 

Although 15 states forbid payday lending, New Hampshire allows the practice. The Center for Responsible Lending conservatively estimates that predatory payday lending practices cost American families $3.4 billion annually. Only 1 percent of payday loans go to one-time emergency borrowers.

 

‘Flipping’

One of the most common predatory lending practices is known as ‘flipping’ or ‘repeated financing.’ The lender gets all the benefits and the consumer often ends up owing more money. The carrot for the consumer is a reduction in monthly payments, similar to the ad described above. What the lenders don’t tell you is that you will end up paying more over a longer period of time.

Up-front credit insurance

Another predatory lending practice involves bundling a loan with additional products. One that has proved very costly for consumers is the practice of bundling up-front, lump-sum credit insurance with a loan. If you ever chose to refinance the loan, you in essence will also refinance the insurance, and if your next lender also bundles up-front insurance, you end up financing and paying the new lump-sum insurance coverage. This can add thousands of dollars to each loan. It makes more sense to purchase a separate "credit life" policy, paid in installments throughout the life of your loan, which will pay the balance on your loan to your lender if you should die .

 

Targeting vulnerable populations

Other predatory practices include targeting vulnerable borrowers, such as elders and low-income families, with offers for high-cost loans, and charging and/or financing excessive points and fees.

As a consumer you need to be aware of high-pressure sales tactics, high interest rates, balloon payments (low monthly payments with a big payment due at the end of the loan), and promises to refinance the loan at a lower interest rate in the future.

The predatory lending industry has grown so quickly that local, state and federal agencies haven’t been able to enact laws fast enough to protect us. But last June the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development urged Congress and individual states to adopt laws banning excessive fees, credit insurance, balloon payment and other predatory practices. Since North Carolina enacted such legislation last fall, at least six lenders have moved out of the state. Currently New Hampshire places no limit on how much interest can be changed on credit cards.

 

Avoid falling victim to predatory lenders

HUD offers several tips that can help you avoid predatory lenders:

Empower yourself

The best way to deal with your debt load: empower yourself. Take a money management class such as Making Money Work for You offered by UNH Cooperative Extension Family & Consumer Resource Educators throughout the state. You can check for upcoming classes on our Family Development Event Calendar.

Take a good look at your spending habits, develop financial goals, determine your actual needs and wants, talk to your family about doing with less and protect the money you do have now and will have in the future.

 

by Deb Maes, Extension Educator, Family & Consumer Resources

 

More resources

 

Home | UNHCE Intranet | About Us | Counties | News | Events | Publications | Site Map | Contact Us

©2004 UNH Cooperative Extension
Civil Rights Statement