predatory lending

How to Protect Yourself From Predatory Lending

Dan Rafter — Tue, 07 Mar 2017 10:31:34 +0000

Predatory lending has long been a problem for consumers. There is no exact definition of a predatory lender, but in general, these lenders either try to overcharge consumers for loans, or talk them into riskier loans that come with higher interest rates. Predatory lenders have one goal: They want to make as much money as possible on their loans, regardless of whether the loan product actually makes financial sense for the consumers.

How, exactly, do people fall for this? It's actually not surprising when you understand the degree of manipulation predatory lenders will use. By targeting mainly elderly, low-income, or simply uninformed victims, these financial predators bank on convincing folks with poor or no credit that they have no other options for obtaining financing.

If you don't fit the above criteria, don't think you're completely off their radar, either. Should you ever lose your job, need cash for an emergency, or suddenly find yourself facing steep medical bills, you just might be the next target of a predatory lender.

Worried that a predatory lender might have targeted you? Here are the warning signs.

The Lender Wants You to Sign Now

Honest lenders will never pressure you to sign loan documents before you are comfortable. Legitimate lenders give you time to study the paperwork and research the fees and rates associated with the loan.

Predatory lenders want you to sign paperwork as quickly as possible. That way, they can stick you with their high-cost loans before you have the chance to research lower-cost alternatives. Never do business with a lender who pressures you to act quickly. The odds are high that such a lender is a predator.

The Interest Rate Suddenly Rises

Predatory lenders like to entice new customers by advertising below-market interest rates on their websites or print ads. But when you actually call these lenders, you're told that you don't qualify for these low rates. Once these lenders have you on the phone, they'll try to convince you to sign up for a loan with a far higher rate.

Don't fall for this trick. Companies that advertise interest rates that are far lower than their competitors are usually not trustworthy. The odds are high that these are predatory lenders trying to trick gullible borrowers.

They Tell You Not to Worry About Your Credit Score

Legitimate lenders rely heavily on your FICO credit score to determine if you should qualify for a loan and at what interest rate. This score tells lenders how well you've paid your bills in the past.

Beware of lenders who say that your credit score doesn't matter or that they can approve you for a loan no matter how low your score is. Lenders who make these promises will charge you sky-high interest rates because they know that you're desperate for a loan. You're much better off working to improve your credit score than taking out a costly high-interest-rate loan. Pay all your bills on time and pay down as much of your credit card debt as possible. Slowly, but steadily, your credit score will start to rise, and you can avoid the high rates of predatory lenders. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

The Lender Asks You to Lie

Making false claims about your income or debt on a loan application is a crime, and you could face significant fines if you do. Predatory lenders, though, might encourage you to inflate your income or provide other false information.

Ignore this temptation. No legitimate lender will ask you to lie on an application. Instead, lenders will take extra steps to make sure that the information you do provide on an application is true. For instance, they'll ask you to provide copies of your most recent paycheck stubs, bank account statements, and tax returns to verify your income.

Your Lender Tries to Talk You Into a Riskier Loan

Be careful if your lender continues to push a loan that sounds risky. Maybe you want to apply for a fixed-rate loan with a term of 15 or 30 years. If your lender pressures you to instead apply for an interest-only loan with a balloon payment — or something equally as complicated or risky — walk away. Legitimate lenders will never try to talk you into a loan that you don't want.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Overdraft Protection Racket: Why Banks Want You To Overdraw, And How You Can Get Your Money Back.

Paul Michael — Mon, 30 Mar 2009 17:03:49 +0000

I know banks are hurting for money right now, but no more than the rest of us. And one aspect of modern banking that I find most disturbing is how banks allow you to go overdrawn so that they can charge you a hefty fee.

I found this out the hard way recently. I pride myself on keeping a close eye on my bank account. I check it daily, I know what is going in, what is coming out, and I had never been overdrawn until a few weeks ago. An unexpected, and large, bill came out of our account and I didn’t realize it until after I had received the receipt. By that point, it was too late. I was overdrawn, and even though I transferred money immediately to put our account back in good standing, the damage had been done.

Rather than reject any subsequent debits after the bill that put us overdrawn, my bank (Compass Bank) simply let everything go through. Then, they added a $38 overdraft fee to each debit. Is this my fault? Partly, I admit that even though the debit was unexpected, I should have had a bigger buffer in the account.

However, if I had known that the few things I had bought that morning were going to cost me a whopping $38 on top of the price, I wouldn’t have spent the money.

Some of the things I bought that day included:

A tank of gas - $36.65 + $38 NSF fee
Breakfast – $19.99 + $38 NSF fee
Lunch - $8.95 + $38 NSF fee

All of those transactions were electronic. I carry two debit cards, one for my home checking, one for my business. Had I paid with my business checking, there would have been no problem. And if I had been told in any of those situations that the debit was going to cost me $38 extra, I obviously wouldn’t have used the home checking account. Yes, it would have been a little embarrassing to have hard my card declined, but I can handle that compared to the fees that totaled $228 dollars on top of the small items I had bought.

Considering I was only in the red for a few hours, the fees I paid were equal to something like a 4000% interest rate! That makes loan sharks look like Finding Nemo.

In these days of electronic funds transfer, banks know exactly what you have in your account. And it seems there are three options open to our institutions:

1: Simply deny the debit
2: Allow the debit to go through, but require authorization from you, the customer, to proceed and pay the overdraft fee
3: Let the debit go through, say nothing, and ding your account for a whopping fee.

Guess which one our banks have chosen? That’s right, option three. They would rather not tell us about a charge, as most of us would probably not make the purchase. And this is an opt out “service” that almost all banks have on your accounts. You have to inform them that you don’t want this service, but how many of us read the fine print in the pages and pages of legal jargon that you have to sign when you open an account? In some instances, the banks won’t even let you opt out. You have to have the service to have the account. They say it’s for our convenience, but come on, we all know how bastardized that word has become these days.

A recent story on MSNBC highlighted the case of a guy called Clifford Phillips, who used his debit card to pay for a latte. There wasn’t enough money in his account, so his $4 coffee ended up costing him $38 (hmm, I should switch to his bank, their NSF fee is $4 lower than Compass Bank’s). As Herb Weisbaum reported:

Phillips didn’t know his account had this overdraft feature and doesn’t want it. He tells me he prefers “the embarrassment of having the transaction denied” to being socked with a $34 fee. But the bank won’t let him cancel.

“That’s not customer service, that’s exploitation,” he says. “I should have the right to say I don’t want it.”

And this is big business for the banks, too. According to Weisbaum’s article, “Consumers Union figures the nation’s banks collected about $7.8 billion last year in overdraft fees related to debit cards and ATM withdrawals. If they changed the opt-out service to an opt-in service, they would no doubt lose billions in fees. “

So, what can you do if you have been hit with these massive fees? Well, in my case I called Compass Bank and complained. I eventually got two of the six fees debited back to my account. Not good enough for me, but that’s all I was getting.

However, a video I saw recently had the protagonist going one step further. He took the bank to court. And rather than paying a high-priced lawyer to go to court and fight the suit, the bank simply called back and refunded all of the overdraft fees, plus the costs of filing the lawsuit.

There are also a bunch of great books out there covering this growing consumer problem. Some touch on it, others go in depth. Amazon has the following books that I heartily recommend.

Gotcha Capitalism: How Hidden Fees Rip You Off Every Day-and What You Can Do About It

Fight For Your Money: How to Stop Getting Ripped Off and Save a Fortune

I Will Teach You To Be Rich

1,001 Things They Won't Tell You: An Insider's Guide to Getting the Most Bang for Your Buck

Bottom line is this. Ultimately, it’s your money and you should keep a close eye on it. Don’t go overdrawn. However, these things do happen, and you don’t want to be hit with multiple NSF fees. Instead, opt out of that service and ask your bank about other forms of overdraft protection. Most are based around a credit account that charges you a substantial rate of interest, but it’s much cheaper than $38. If you have the option, link your savings account to your checking account; when you do overdraw, the bank will simply start pulling money from your savings account. A much better, cheaper option, but one that my bank does not offer.

These are hard times. We don’t need extortionate fees at a time when most of us are already feeling the pinch of a tight economy. Stand up to the banks, and fight every fee.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Avoid Foreclosure

Andrea Karim — Thu, 22 Mar 2007 20:46:15 +0000

What would you do if you were about to lose your home? What would you be willing to do to keep it? Is it even possible to keep it once you've missed a few payments?

The recent rash of stories about subprime lending, housing market crashes, and the subsequent stock market fluctuations has made me a touch nervous. If you think that only the poor, old, and mentally disabled have been targeted by subprime predatory lending, then you'd be wise to note that that's not true (thanks, Consumerist, for the link).

If you haven't been following the story, American Public Media's radio show Marketplace has an excellent summary of the situation here. Especially tragic is how the practice of selling chunks of mortgages to investors (rather than having a bank back them entirely) was started to help more people buy homes.

At least 4 properties (all rentals, all owned by the same person) on my street alone are being auctioned off within the next month, and that kind of activity is going to affect my property values (which are probably never going to be as high as they were when I bought the house anyway).

How can you avoid foreclosure, if you've been recently hit by high interest rates or financial disaster? For people who bought homes for the purpose of reselling them (otherwise known as 'flipping'), it might be difficult to avoid foreclosure. However, there are a few things you can do to try to keep your home.

1. Don't ignore the problem! Are you getting letters from your lender? Don't ignore them! The worst thing you can do is hope that this problem is going to go away. All lenders have a Loss Mitigation Department - call them immediately if you think you are going to fall behind on your payments. And make sure that you get to the Loss Mitigation department, and not just the collections department. Loss Mitigation departments will often work with borrowers to work out a payment plan.

2. Don't take any more loans! You're in deep enough trouble as it is with banks, and the only institutions who will want to loan you money now are the scammers who will do everything in their power to take away all of your assets, including the shirt off your back. That includes the loan sharks who are probably publishing the ads that are popping up all over this blog post right now ("Avoid foreclosure??? Low interest loans, fast, over-the-phone!"). Stay away from these bastards.

3. Rent! If you own more than one property that's languishing on the housing market, and the mortgage is not astronomically high quite yet [but still too high for you to pay along with your other mortgage(s)], you may consider renting it. There are costs and benefits to renting a property. Smart Money lists some here. For instance, you can deduct out-of-pocket expenses, such as mortgage interest, repairs, advertising fees for listing the rental, cleaning services, utilities and more.

Then there's the "phantom deduction" called depreciation. Just divide the fair market value of the property at the time you start renting it out (excluding the cost of land) by its recovery period — which is 27.5 years for residential rental property. Bingo! There's your annual depreciation. For example, if the home is worth $550,000, you divide that by 27.5 and get a $20,000 annual deduction. "The depreciation deduction will cover a lot of the [rental] income you're receiving, so it's a nice tax shelter," says Jeff Callahan, a CPA with Bederson & Co. in West Orange, N.J. "If you have another $10,000 in out-of-pocket expenses, which are also deductible, you can get $30,000 in rent tax-free," he says.

There are other things to consider when renting a property, too. The rental market matters, as does your area, the home's potential appreciation all factor in to the equation, as well as your ability to be a no-nonsense landlord to possibly unreasonable people.

In application to the home you live in, roommates (although incredibly annoying) are a great way to supplement your mortgage.

4. Call an HUD-approved housing counseling agency. They might be able to point you in the direction of government and community programs that can help you.

5. Additional Options: There are some other options that you may qualify for, that will help you avoid actual foreclosure. They're not ideal, but they are less damaging to your credit in the long run than actual foreclosure.

Special Forbearance: Payment plan that may even allow a temporary suspension of payments.
Refinancing: This is unlikely given today's market, but might be a possibility for people who have built up their credit score since they purchased their home.
Partial Claim: U.S. Department of Housing and Urban Development (HUD) will pay your lender to bring your mortgage up to date, but a lien is placed on your property.
Pre-foreclosure sale: Sell your house for less than it is worth in order to avoid a full foreclosure - pay off part of the loan. There are obvious downsides to this, and you will still owe some money to the bank, but it's probably preferable to foreclosure, too.
Deed-in-lieu of Foreclosure: This is where you give your property to your lender before it is foreclosed on. It may seem as hideous as losing your home to foreclosure, but it won't hit your credit as hard.

This article is from Andrea Karim of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: