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FDIC Consumer News
Special 10th Anniversary Edition - Fall 2003
High-Cost "Predatory" Home Loans: How to Avoid the Traps
There is no clear-cut definition of a "predatory" loan, but many experts agree it is the result of a company misleading, tricking and sometimes coercing someone into taking out a home loan (typically a home equity loan or mortgage refinancing) at excessive costs and without regard to the homeowner's ability to repay. Victims who have trouble repaying often face harassing collection tactics or they refinance the loan at even higher fees. And if you pledge your home as collateral for a loan, and you can't repay, you could lose your home.
Predatory mortgage lending primarily has been a problem with some mortgage brokers and finance companies that specialize in marketing to people with poor credit histories. Obviously, not every lender is unscrupulous, but you need to be informed so you can avoid doing business with those that are.
Reports also indicate that predatory lenders target consumers they believe are in need of cash or are otherwise vulnerable. Examples include older people who need money for medical bills or home repairs, and lower-income or minority communities where there may be limited competition from more reputable lenders.
Here are suggestions for protecting yourself:
Ask questions and shop around.
If you need to borrow money, contact several banking institutions or other reputable lenders, not just one. Find out about the different types of loans that may meet your needs and financial situation, especially the loans that don't put your home at risk if you run into repayment problems. Be careful when dealing with unfamiliar lenders or loan brokers, especially those who contact you out of the blue.
Know what you are signing.
Read the loan documents carefully, especially the fine print. Only sign a loan agreement after you understand the terms of the loan, the fees, and your obligation to repay. Never let a lender rush you or pressure you into signing a loan contract. If you're not comfortable going to the closing alone, consider having a lawyer there with you to examine the loan documents before you sign.
Remember that federal laws help protect consumers.
Important: For certain loans secured by your home, the 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.
Excerpted from "High-Cost 'Predatory' Home Loans: How to Avoid the Traps," Summer 2002.
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