Real Estate What is predatory lending? Look for these warning signs when you take out a mortgage

Predatory lending is any unfair practice that diminishes a borrower’s ability to repay debt and serves to benefit the lender. Predatory lending tactics may involve loans with high interest rates, hidden and excessive fees, undisclosed terms and more. Predatory lenders typically target vulnerable borrowers and trap them in cycles of debt that can lead to foreclosure and even bankruptcy.

“Sometimes, these can just be a hidden profit center,” Pizor says.

Identify these fees and how they differ across lenders. Comparing loan estimates can help you spot outliers.

Predatory lenders won’t disclose some fees upfront and try to hide them within your documentation. Examples of hidden fees may include prepayment penalties and balloon payments.

Prepayment penalties are fees lenders charge when you pay off your mortgage before its term

ends, which is known as the period of maturity. So, if you get a windfall and decide to pay off your 30-year mortgage after year two, you may face some unexpected fees.

Fortunately, federal law currently limits prepayment penalties. Lenders can charge prepayment penalties only within three years after your mortgage closes, and they’re limited to 2% of the loan balance within the first two years and 1% during the third year. Lenders must also disclose prepayment penalties within billing documents — but that doesn’t mean a predatory lender will make it easy for you to find the disclosure or understand it. Ask about prepayment penalties directly, or avoid loans with prepayment penalties.

Balloon payments are fees that pop up later in the loan term. In this case, you start off with a loan that has a low interest rate and low payments, but you may not be aware that fees will begin to inflate later in the term. Sometimes, these increases can get out of control. Borrowers who can’t keep making these payments can lose their homes to foreclosure. In some cases, the predatory lender will offer to refinance the loan into a new mortgage with a fixed interest rate, but the process would involve additional fees pocketed by the lender, who put you in the situation in the first place.

Loan packing occurs when a lender packs unnecessary financial products into your mortgage. One example is credit insurance, which pays off your mortgage at death, even if you didn’t know about the insurance or didn’t need it. Ask about additional components to your mortgage. Remember that lenders typically won’t require mortgage insurance (PMI) if you make a down payment of at least 20 percent.

Loan flipping occurs when a lender refinances your loan into one with a higher interest rate and a longer term. While refinancing can be legitimate and beneficial for many borrowers, the goal of refinancing is to pay less in the long run. A predatory lender could flip it into the opposite.

Reputable lenders generally would advise against refinancing unless it’s financially beneficial for you. Ron Wynn, a licensed real estate broker in Los Angeles, warns that you should beware of lenders who recommend refinancing multiple times.

“A predatory lender can show you that you should refinance again, while stripping you of more fees and up-front costs,” Wynn says. “They keep bringing you back to the table and making more money off you.”

Unless you willingly took out a loan that allows you to pay off interest first, your monthly payment should shave off interest and some of the principal balance on your loan. A predatory lender benefits from negative amortization, or when your monthly payment is too small to cover any portion of the interest, so the interest keeps compounding, and you end up paying significantly more in the long run.

Your lender can provide you with charts that show you how much of both the interest and principal balance you’re paying off throughout the term of your loan.

If a lender promises to extend an offer without checking your credit history, steer clear. Credit checks are conducted to evaluate your ability to pay off your mortgage within reasonable terms. A lender that avoids this step may offer you a loan you can’t afford and lock you into a cycle of debt that can lead to foreclosure.

While lenders can’t legally force you to provide your bank account number, they can offer to help you set up automatic payments from your account. A predatory lender may use this to force payments out at will, potentially emptying your bank account and leaving you with overdraft fees.

Do your homework. Even though there are predatory lenders in the homebuying space, there are also plenty of reputable ones that will offer you a reasonable loan based on your ability to repay it. Shop around and compare mortgage rates and fees to know the true cost of homebuying. If you’re having trouble finding good rates or terms, try improving your credit before applying for a mortgage. You can also search for government-backed loans like FHA loans and others, which typically have lower rates and less-stringent qualification requirements. When evaluating lenders, look them up on websites like those of the CFPB or BBB to see how they’ve treated previous customers.

If you suspect you’ve been a victim of predatory lending, contact the CFPB and your state consumer protection organization. The CFPB has a portal where you can submit a complaint, and they can also be reached by phone.

Bottom line, some of the best steps you can take are doing your research, comparing offers from different lenders and becoming an educated buyer.

“Talk to a certified housing counselor,” Pizor says. “They’re really good at spotting predatory lending. Or take a homebuying class. Most of them are lowcost or free.”