Predatory lending is the use of unfair and abusive lending practices that result in the borrower paying more through high fees or interest rates than his credit history warrants. It is any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions. It is also any practice that convinces a borrower to take a loan that he doesn’t need, doesn’t want or can’t afford. Predatory lending benefits the lender and negatively impacts the borrows ability to repay the loan often with severe repercussions.
Predatory loans often are aimed at minorities, the elderly or the less educated who do not understand the complexities of the loan – particularly in mortgages where it often is difficult to spot a predatory loan. The New Jersey Home Ownership Security Act became law in 2003 and provides New Jersey citizens with some of the strongest safeguards in the nation. The law is designed to stop predatory lending practices and keep homeowners from unfairly losing their homes and assets.
Predatory lending, however, is not limited to mortgages. It can also show up as payday loans, tax refund anticipation loans, or car loans. In fact, Uber’s auto-financing division, Xchange Leasing, has recently drawn fire for its predatory practice of targeting customers who don’t have the necessary credit scores to qualify for conventional auto loans.
Common Predatory Lender Actions:
Inflating the appraisal value of a real estate property.
Encourage borrowers to lie about their income, expenses, or cash available for down-payments in order to get a loan.
Knowingly lending more money than a borrower can afford to repay.
Charging high interest rates to borrowers based on their race or national origin and not on their credit history. This is illegal under the Equal Credit Opportunity Act.
Setting the loan up with low initial interest rates that jump to above market rates after an agreed up period or pressuring borrowers to accept higher-risk loans such as those with balloon payments, interest only payments, or steep pre-payment penalties
Charging fees for unnecessary or overpriced add-ons. This is more common with car loans and these are often sold as packages - including “GAP” insurance, vehicle service contracts, rust proofing, theft deterrent packages, or “window etching.”
Hidden or unexplained fees. The lender is required to clearly explain all fees to you. If these fees seem abnormally high, compare them to those of other lenders.
Using mandatory arbitration clauses.
Equity Stripping - convincing borrowers to refinance their home again and again when there is no benefit to the borrower.
Your defense:
Check your credit reports and understand your FICO scores before starting the process. Correct any errors on those reports because the interest rates you will be quoted are based on your FICO scores.
Take your time, shop around and get at least 3 written quotes and compare the APRs (annual percentage rate) and any additional fees.
Thoroughly read the sales contract or loan documents. Make sure there are no blank space and that all the information is correct.
Be sure you know what the payments will be and that you can afford to make those payments each month until the end of the loan.
Avoid pre-payment penalties - these must be disclosed in the loan documents.
Do not sign if the cost or loan terms at closing are not what you agreed to.
Although you can change your mind within 3 days of signing a mortgage (this does not apply to other types of loans), it is better to be sure you understand what you are signing before signing.
Avoid mandatory arbitration clauses - An arbitration clause requires you to give up your right to go to court if you have a dispute with your lender. This clause is one-sided. The borrower must give up the right to a trial in court while the lender often keeps its right to go to court if it wants to. The arbitrator’s decision usually cannot be appealed.
If you have any questions about this or would like to discuss a potential loan, please call me at 973-509-8500 x213 or email me at: LFarber@LFarberLaw.com.
The contents of this writing are intended for general information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.