Protect yourself from predatory lenders
Laws That Protect Consumers
Various federal laws help protect consumers from particular predatory lending practices. The Truth in Lending Act, for example, requires lenders to provide timely information about loan terms and costs. The law gives consumers the right to cancel a home equity loan and certain other loans secured by a home up to three business days after signing the loan contracts. This is known as your right of rescission.
Also, under the federal Home Ownership and Equity Protection Act (HOEPA), if a refinancing or a home equity loan is classified as high cost, the lender must provide key information about the loan three days before closing on the loan. The HOEPA Act also prohibits lenders from making a home equity loan without regard to a borrower’s ability to repay.
How to Protect Yourself
The TLA and HOEPA provide important protections and information for consumers. There are also other important steps you can take to protect yourself and your home from a predatory loan, many of which can be useful for anyone thinking about obtaining a home equity loan or mortgage.
1. Ask yourself if you really need the loan.
Consider all of your options before you use your home as collateral for a loan. If you decide to get a home loan and can’t make the payments, the lender could foreclose and you could lose your home. Talk with someone knowledgeable and trustworthy before making any decisions.
2. Deal with a reputable lender.
Use caution when dealing with unfamiliar lenders, home improvement contractors or loan brokers, especially those who contact you out of the blue. Whatever you do, do not fall for a friendly voice or a great sounding sales pitch.
3. Ask questions and shop around
When in the market for a loan, don’t just settle for the first lender you contact. Most experts recommend getting quotes from a minimum of three lenders.
Find out about the different types of loans that meet your needs and financial situation, especially the loans that don’t require you to put your home at risk if you run into repayment problems. Be especially wary of offers to lend more than what your house is worth. That may sound like a good opportunity, but remember if you run into problems repaying the loan, you could lose your home and still owe money to the lender. That would be the amount of the loan above the value of your home.
Getting the lowest monthly payment shouldn’t be your sole focus. Consider the duration and other terms of the loan and the total cost of loan fees, especially those you’d be paying back (with interest) during the life of the loan. Negotiate and continue negotiating for the best deal just as you would for a new car. Let the lenders know you’ve been shopping around, as they may be willing to compete for your business by offering better rates or terms.
4. 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. For example, know whether your loan agreement contains a balloon payment or a prepayment penalty. If you’re not sure, ask. If there is something you do not agree to, do not give in to any pressure. Tell them you do not agree to those terms and/or you want to get a lawyer to sit in with you. This can also help to eliminate unethical companies from trying to take advantage of you.
Under federal laws such as the Real Estate Settlement Procedures Act and the Truth in Lending Act, you have the right to key information about how much you can expect to pay for a loan. An example is that you must receive a Good Faith Estimate of mortgage loan settlement fees and services early on in the process. You also have the right to get an introductory statement of final settlement costs (called the “HUD-1” form) the day before closing. You may want to ask an attorney or a housing counselor to review this document before closing.
When you have received these and other loan documents, look in the fine print for overcharges – such as, a payment to a broker you never met, a bill for a detailed appraisal when only a drive-by review was performed, and fees for credit reports that many times are above their actual cost. At closing, compare the interest rate, fees and other costs shown in the final documents with those given to you in preliminary estimates.
Again, never let a lender rush or pressure you into signing a loan contract; it could mean that the lender has changed loan terms and doesn’t want you to notice. Check that all the information in your application accurately reflects your financial situation, and never agree to falsify information on a loan application in order to qualify for the loan. If you are unsure about something, just say no. If they pressure you by stating that the rates won’t last for long, simply leave. You are better off allowing that great rate to pass by rather than signing a contract you don’t completely understand.
Don’t sign a loan contract if the terms have changed from what you were told previously and if the lender can’t explain to your satisfaction the reasons for the change. Moreover, make sure you only sign a complete and final loan agreement. Do not sign if there are blanks for dollar amounts or loan terms, even if someone offers to take care of things for you, they would likely end up making a pretty penny off you.
If you’re not comfortable going to the closing alone, have a lawyer there with you to examine the loan documents before you sign. Get a copy of the signed loan documents before you leave the closing and keep them in your files for future reference. Do not allow the lender to make a copy later and send it to you in the mail. They may send you a different contract. Should a predatory lender change the terms of the loan from what was agreed upon at the closing, contact HUD, a housing counselor or an attorney and provide a copy of your signed loan documents.
Important reminder: For certain loans secured by your home, federal law 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. The complicated part may come after you sign the contract, your lenders may be difficult, or impossible to contact during those three days.
5. Speak up if you think you’ve been treated improperly.
Try to resolve any problems with the lender but if that doesn’t work, consider asking for help from the appropriate state or federal government agency. A good place to start is your state’s consumer protection office or Attorney General. In addition, several federal government agencies also are good sources of guidance and assistance.
The bottom line is not to rush into a decision with any loan, but especially one where you can lose your home if you are unable to make your payments. Be aware of your options-especially the different kinds of loans available from reputable lenders. Review the terms and conditions of the loan before you sign on the dotted line. And remember that if you have questions or concerns, there are government agencies and other organizations in your community that can come to your assistance. Do not face a loan problem alone, there is help available.