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Court Settlement Teaches Mortgage Caveats
- Misrepresented loan origination fees to be less than the actual amount.
- Misrepresented as "free" an initial no-payment period of one to several months. First Alliance told borrowers they didn't have to make payments for a month or more but the payments were actually financed with the rest of the mortgage, effectively granting advance mortgage payments to First Alliance, the suit alleges.
- Misrepresented interest rates as low, without disclosing they were teaser adjustable rates that within years could swell beyond what the borrower could afford and beyond going market rates the borrowers could likely land.
"From the experience that others have suffered, people should learn to exercise caution, particularly when you are refinancing. That's where the process works to hide the cost of the loan," said Hofmann.
Predatory lending practices
Norma Paz Garcia, an attorney with Consumers Union and author of "The Hard Sell: Combating Home Lending Fraud in California," said lenders also use several common practices to sell high-cost home-equity and refinanced loans to homeowners, regardless of their ability to repay the loan
- Lenders make loans in conjunction with home improvements that often never materialize.
- They sell loans under the guise of "rescuing" homeowners from foreclosure, when merely saddling owners with more debt.
- They offer high-interest, disaster-related home loans.
- They consolidate debt into unaffordable home-equity loans, again under a guise, "making life easier."
Garcia said much of the problem is related to lenders able to charge what they please. In most states, there are no limits on the points and fees lenders can charge.
Against sweeping legislation that would strip consumers' bargaining power, Jack Guttentag, the "The Mortgage Professor", says some of the blame is with consumers.
"Borrowers pay mortgage brokers an average $1,500 to $2,000 -- about what it costs to paint a modest sized house. But consumers wouldn't dream of hiring a house painter without the price in advance and in writing," he said.
"States should require that mortgage brokers operate the same way other businesses must in a market economy. Brokers should be forced to quote the price for their service and not be allowed to conceal it until the transaction is completed," he added.
Avoiding predatory lenders
Consumers Union teaches consumers how to spot come-ons, also offers tips to help protect you against predatory lending practices.
- Before you start looking for an equity loan (including those for reverse mortgages, bill consolidation or to stave off foreclosure) or home improvement loan, get free, independent loan counseling from your city or county's housing department, community or social group, credit counseling service or recognized consumer advocacy agency.
- Avoid door-to-door and direct-mail pitches for home-equity loans and loans connected to unsolicited home improvement contracts. Instead, get referrals from family members, friends, co-workers and others you trust.
- Avoid loans with interest rates high above market averages. Shop around to compare the going market rates among savings and loans, banks, mortgage lenders and brokers.
"The Internet makes this very easy today," says Hofmann.
- Avoid come-ons that begin "No credit? No job? No problem! Don't worry. You have plenty of equity in your home to qualify for a loan." What really "qualifies" you for the loan with a disreputable company is your inability to pay it. When you fail to meet payments, they can legally take your home.
- Avoid interest-only, non-amortizing or partially amortizing loans. After you make years of payments you will still owe the money you borrowed, often as one large "balloon" payment at the end of the contract's term.
- Avoid loans based solely on your equity, rather than your ability to repay.
- Don't apply to lenders or brokers who require a high, non-refundable application fee.
- Never allow yourself to be pressured into signing a contract unless you've read and understand every word. If the offer is good today, it should be good tomorrow. Likewise, don't sign anything with blank spaces. They could be filled in later with an amount you wouldn't agree to.
The U.S. Federal Trade Commission offers an on-line complaint form to report mortgage fraud and questionable practices.
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