Are you at risk?

Posted: Thursday, February 13, 2003

Did you know that predatory lenders are increasing their focus on Alaska and Alaskans?

More than 65 percent of Alaskans now own their own homes, up nearly 10 percent in a decade, the second highest growth in home ownership rate in the nation.

Despite these gains, too many low- and moderate-income families have seen the dream of home ownership become a nightmare because of predatory or abusive lending practices. Predatory lending generally occurs in the sub prime mortgage market, where most borrowers use collateral in their homes for debt consolidation or other consumer credit purposes, or first-time homebuyers whose past credit practices make them targets for high risk or predatory loans. Sub-prime lending serves an important role by providing loans to borrowers who do not meet the credit standards for the prime mortgage market; however, some borrowers in the sub-prime market may be particularly vulnerable to abusive lending practices.

A local representative from Consumer Credit Counseling Services reported a dramatic increase in the number of cases where Anchorage homeowners are losing or have already lost their homes as victims of predatory lending practices. In October of 2001, three active cases were reported; as of January 2002, an increase of 25 cases was reported. Two of the cases were home improvement loans and involved the contractor and the lender.

What is predatory lending?

Whether undertaken by creditors, brokers, or even home improvement contractors, predatory lending involves engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower's lack of understanding about loan terms. These practices are often combined with loan terms that, alone or in combination, are abusive or make the borrower more vulnerable to abusive practices.

And predatory lending is not just limited to mortgage loans. There are other sharks in the financial waters, such as payroll advance companies, rent-to-own, title loans and check cashing agencies -- all of which are high interest, high fee lenders.

Predatory lending practices tend to fall into four main categories:

Loan Flipping -- Some mortgage originators refinance borrowers' loans repeatedly in a short period of time. With each successive refinancing, these originators charge high fees, including sometimes prepayment penalties, that strip borrowers' equity in their homes.

Excessive fees and "packing" -- While subprime lending involves higher costs to the lender than prime lending, in many instances fees far exceed what would be expected or justified based on economic grounds, and fees are often "packed" into the loan amount without the borrower's understanding.

Lending without regard to the borrower's ability to repay -- This practice involves lending based on borrowers' equity in their homes, where the borrowers clearly do not have the capacity to repay the loans. In particularly egregious cases, elderly people living on fixed incomes had monthly payments that equaled or exceeded their monthly incomes. Such loans can quickly lead borrowers into default and foreclosure.

Outright fraud and abuse -- In many instances, abusive practices amount to nothing less than outright fraud. Unscrupulous mortgage brokers, lenders, home improvement contractors, or appraisers may take advantage of a borrower's lack of financial sophistication or vulnerable situation by using deceptive or high-pressure sales tactics. They may hide disclosures from borrowers, begin work on the borrower's home and then bait and switch with new loan terms before the loan is closed, include finance fees without borrowers' knowledge or lead them to believe that they must purchase products such as credit insurance in order to close the loan.

Who is targeted by predatory lenders?

Minorities, women, disabled persons and the elderly bear the brunt of abusive mortgage lending practices, particularly those with lower incomes and less education who do not qualify for the prime mortgage market. In many instances, these individuals are not sufficiently experienced or knowledgeable about complex financial transactions to understand the potentially devastating implications or are not offered the full range of financial products available to other borrowers. Additionally, many consumers utilize sub-prime mortgage loans to consolidate debt or to fund other non-home purchases.

While this may offer individuals in a difficult situation a way to access their housing wealth to meet their financial needs or get them through a bad period, it allows consumers to consume their entire housing wealth over time, which could leave them in truly dire circumstances with no choice but to declare bankruptcy.

How can you recognize and avoid predatory lenders?

Watch out for these early warning signs:

You are being pressured into signing agreements before you have had the opportunity to read them or you have unanswered questions.

The payment schedule includes a large "Balloon Payment" or there are hidden loan terms such as a pre-payment penalty.

There seems to be an unreasonable amount of fees, there are blank spaces in the documents or the lender is unable or willing to explain the fees or the documents.

There are unwanted services like credit life insurance added to the loan or you have an uneasy feeling about the proces.

How can you protect yourself?

Shop around for a mortgage and educate yourself yourself. Ask each lender about their terms and be sure you can afford to pay them. Make sure you understand all of the terms of the loan and read all items carefully, don't let anyone pressure you into signing any documents and never let the promise of extra cash get in the way of your good judgment. Never agree to a loan if you don't have enough income to make the monthly payment. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member, an attorney or a housing counseling agency. Know the true cost of the loan and explore the alternatives. If you feel you are falling prey or have become a victim of predatory lending, contact the office of the Attorney General, the Federal Trade Commission or Consumer Credit Counseling.

Who is the Predatory Lending Task Force?

The Predatory Lending Task Force, made up of local and state agencies, nonprofit organizations, financial institutions and legislative representatives, is working to develop strategies for educating agencies and homeowners statewide. Anchorage Neighborhood Housing Services, in conjunction with the task force, has developed a PowerPoint presentation and an informative booklet, which have been enthusiastically received by local community groups. The task force strongly recommends that if you feel you are a victim of predatory lending that you report it!

Don't be a victim! Protect yourself and your employees. Schedule a fre educational presentation developed by the Alaska Predatory Lending Task Force TODAY! Call Anchorage Neighborhood Housing Services at (907) 677-8490.

Al Tobin is the CEO of Better Business Bureau of Alaska Inc. To contact the Better Business Bureau of Alaska, call (888) 244-0704 or visit the Web site at www.alaska.bbb.org.



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