How to Spot Shady Lending Practices
During the real estate boom, so many people got into the mortgage business that just about anyone with a pulse and a basic ability to take a loan application found themselves a career. In many cases, problems in lending come from inexperience and unintentional mistakes. Not everyone who makes a mistake with customers is a crook.
But in times of boom and bust, inexperienced employees can be easier led by organizations that make their money by pushing the envelope in terms of sales tactics, documentation, and basic honesty about their products.
This is why potential borrowers need to adopt a courteous but wary attitude toward dealing with any lender and come armed with specific questions about any loan product they're offered. It also helps to have a fairly keen sense of radar about suspicious behavior on the part of loan officers or anyone else in the mortgage food chain. Here are some general tip-offs that you might want to walk away from a particular lender:
Evasiveness: Just remember, there's no such thing as a stupid question when it involves your money. If you sense any hesitation to answer questions about exact terms or costs of a loan, walk away.
Prepayment penalties attached to the loan: If a lender says you can't add extra payments to lower the overall amount of your loan because it's such a great deal, again, walk away.
Unwillingness to disclose the overall monthly payment: If you can't find out the monthly payment, you probably can't afford it. You should be given the exact figures three days prior to your closing. If you don't hear by then, don't sign.
High fees: If you find you're paying thousands in points, broker's fees, and other strangely worded fees that are being brushed off, you probably shouldn't go ahead with the loan. Always ask why you're paying a fee and whether you really need to pay it.
Negative amortization: There are legitimate forms of negative amortization loans, but they should be used by people who know exactly what they're doing. If you aren't required to pay principal every month, ask why and see if your overall loan balance will increase. Most important, see if you can handle it if it does. (For more on negative amortization, turn to Chapter 15.)
Being forced into a bigger mortgage than you can afford: Homeequity loans and lines can be legitimately used to consolidate debt, but don't be forced into a bigger loan that you can't afford.
Tweaking of financials: If you see that your income on the loan application has been bumped up without your knowledge, maybe your loan officer is trying to help you — or, again, get you into a loan you really can't afford. Always ask why any number you've submitted has changed, even if it turns out to be to your advantage.
Repeated solicitations: If it seems you just financed or refinanced a home and you're already getting a call from your lender to refinance again, it better be because rates have fallen precipitously and you stand to get a much better deal. If not, the lender may be trying to churn you on rates and fees.
Refusal to provide copies of application documents, either signed or unsigned: If you want an attorney or trusted advisor to look over a loan proposal before you sign, be polite and tell your lender that you want someone to look over this material before the end of the business day (and be prepared to fax the material to your advisor quickly). Make sure the loan officer knows that you plan to review the proposal quickly because you respect their time. But if the lender balks, maybe it's not such a good idea to continue the discussion.
The majority of home lenders are legitimate, but they're in business to make money on what can be for most consumers an extremely complex and paperwork-filled transaction. It's always good to be well informed and bring in advisors on your side to make sure you're getting the most for what you pay.
