Predatory Loans

The following article was published at the FDIC Web Site in their Consumer News section. For more information and consumer protection tips visit the FDIC Consumer News section.

How they work
An unscrupulous lender—typically a non-bank company that specializes in marketing to people with poor credit histories—dupes a homeowner into taking out a home equity loan or mortgage refinancing with unnecessary, excessive or undisclosed costs. Victims who have trouble repaying often face harassing collection tactics or are encouraged to refinance the loan at even higher fees. In the worst cases, people who can't repay end up losing their home. It's a problem known as "predatory" lending.

Examples of predatory practices include schemes where the lender promises one type of loan or interest rate but switches to another one that's more costly to the borrower, and "equity stripping," in which the lender deliberately makes a loan that is beyond the borrower's ability to repay in hopes of foreclosing on the loan and taking possession of the house. Predatory lenders primarily target consumers they believe are vulnerable, such as older people who need money for medical bills or home repairs. "It's particularly tragic when an elderly borrower who takes such pride in the home he or she worked many long years to acquire loses it to a predatory lender," says Elizabeth Kelderhouse, a Community Affairs Officer with the FDIC. 

Best Defense

Beware of a letter or phone call from an unfamiliar lender or loan broker with what appears to be a fantastic offer to consolidate your debts or pay for bills by refinancing your home. Think long and hard before taking out a loan where your home serves as collateral and can be lost if you can't repay. Talk to knowledgeable friends or professionals (perhaps your financial advisor or accountant) to discuss other options. 

If you decide to get a home loan, contact several banking institutions or other reputable lenders, not just one, and try to negotiate the best deal. Walk away from a lender who refuses to put all costs in writing, dodges your requests to explain loan terms, tries to pressure you into quickly signing a contract or discourages you from allowing another person to review the contract before you sign. Don't agree to a loan contract if you don't understand the terms or conditions, dollar amounts or other key sections are left blank, there is information you know is false, there are unexplained changes in terms, or you feel you're being pressured to sign quickly. Remember that for certain loans secured by your home, the federal Truth in Lending Act gives you up to three business days after signing a loan contract to change your mind for any reason and cancel the deal without penalty.