There's been a lot in the news lately about predatory lenders. But how easy are they to spot and what tactics do they typically use to capture and take advantage of unwitting mortgage consumers?

First, it's important to realize that, like other professions, there are only a handful of bad apples spoiling the mortgage lender barrel! Unfortunately, this unscrupulous, unethical handful is making quite an impact on how the majority is perceived by consumers. That's why The Mortgage Bankers Association (MBA) has launched a campaign to inform consumers about inappropriate and illegal practices and help eliminate abuses in mortgage lending. Although you won't catch predatory lenders advertising as such, the MBA pinpoints twelve lending practices that encompass the majority of improper actions. Divided into timeframes in the mortgage process, they include:

When locating a lender and shopping for a loan---

1) Lenders who steer borrowers to high-rate programs: Borrowers with credit problems and/or who already have first and second mortgages may be led to believe that paying an astronomical interest rate is the only way they can tap into additional equity in their home. The key is to comparison shop loan programs between various lenders to ensure you receive the most affordable loan.

2) Falsely identifying loans as line of credit or open-end mortgages: In order to entice a consumer to take a loan, a predatory lender might claim or infer that a loan has the flexibility of an open line of credit where the borrower makes payments based only the outstanding loan balance each month and is not penalized for making pre-payments to the principal. Once the loan is closed, the borrower realizes that payments are based on the entire amount borrowed, perhaps with hefty prepayment penalties to retire the loan early. Complete review of all loan documents prior to closing can help sidestep this problem.

During the mortgage process and prior to closing---

3) Intentionally structuring high-cost loans with payments the borrower can't afford: While it's true that some credit-damaged borrowers may only qualify for sub-prime mortgages bearing higher-than-average interest rates, this unscrupulous practice is much different. A predatory lender might purposely place a consumer in a mortgage where interest rate increases and/or other negative aspects of the loan make the payment impossible to pay over time. After foreclosure, the lender would financially benefit by reselling the property. It's in a consumer's best interest (especially for someone with blemished credit) to ask an attorney or other knowledgeable third party to review loan documents prior to closing.

4) Falsifying loan documents: Even though this practice is illegal, it can occur when a mortgage has unfavorable terms that the lender believes the consumer wouldn't otherwise agree to. The best bet is to have an impartial third party closing company review all documents with you, and then ask to receive another complete set of documents from the lender a week or so after closing to compare with those received from the closing company.

5) Making loans to mentally incapacitated homeowners: Perhaps the most despicable of practices, a predatory lender could find unassisted mentally-challenged consumers vulnerable, willing to take any loan at any price. Just as it's wise for all consumers to have a third-party advocate review mortgage documents prior to closing, a mentally incapacitated borrower should seek assistance in the mortgage process from beginning to end. A real estate attorney aware of the borrower's situation is often best. And

6) Forging signatures on loan documents: and/or when additional mortgage riders are added on to the loan package after the borrower has signed the closing papers. As referenced previously in #4, obtaining a second set of document copies from the lender a week or so after closing can help ensure that the borrower's signature has not been forged.

In Part II of this article that follows on Friday, Sept. 15, we'll cover five additional instances when consumers could fall prey to an unscrupulous, unethical mortgage lender.

Published: September 11, 2000

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