This document is intended to provide consumers with information regarding a specific topic. It is not meant to provide comprehensive information. For further questions, please contact the Consumer Affairs Division at (617) 635-3834.
HOMEOWNERS: BEWARE OF PREDATORY LENDERS
If you own a home, it's likely to be your single most valuable asset. But you could put that asset at risk if you agree to a loan based on your home's equity. Certain so-called predatory lenders target homeowners, particularly those who are elderly, or have low income or credit difficulties. Many of these homeowners are in need of cash, perhaps for medical bills or for home repairs. Using high-pressure sales tactics, the lenders encourage the homeowners to enter into a home equity loan. Often the homeowner is fooled into taking out a loan they cannot afford to repay. This results in the loss of the home.
Don't let the promise of fast cash or lower payments cloud your judgment!
Be on guard for potential predatory lending practices whenever you are considering entering into a so-called "High Cost Home Loan". A High Cost Home Loan is defined under 209 CMR 40.02 as any consumer credit transaction that is secured by the consumer's principal dwelling, and has an annual percentage rate more than 8 percentage points than the yield on treasury securities for a first mortgage, or nine points for a second mortgage. (This fluctuates, but as of January 2001, the rate on Treasuries is about 5.7%, so a second mortgage High Cost Home Loan would have a rate of about 14.7 or more.) Also, generally, any home loan that requires points or fees of greater than 5% will be considered a High Cost Home Loan under C.M.R. 40.02.
Such loans are subject to 209 CMR 32.32, which requires creditors to disclose important terms of the loan, forbids such loans unless the lender reasonably believes the borrower will be able to makes the payments, forbids requiring the financing of points of fees greater than 5%, forbids the charging of points and fees for a refinancing within two years of the current financing, and imposes various other restrictions on such creditors.
Be suspicious of:
Any salesperson who calls on the phone or comes to your door offering a loan.
Ads using language such as "bargain loans" or "No credit? No problem!"
High pressure sales tactics, such as "the offer is only good for a short time."
Never sign a blank document.
Don't sign anything you don't understand. Ask questions, and make sure you know the amount of the monthly payment, the annual percentage rate, the total cost of the loan, and the length of the agreement.
Be aware that you can shop around to find the best terms for a loan.
Important! Don't agree to a loan if you don't have enough income to make the monthly payment. If you do this, you are being set up, and in all likelihood will lose your home.
Important! The lowest monthly payment is NOT always the best deal. Make sure you look at the overall cost of the loan. Read the agreement carefully to check for hidden fees. This could include insurance, a fee for the broker, or a loan origination fee. Loan origination fees are normally 2% or less, but some predatory lenders charge fees of up to 10%, or more. This will amount to thousands of dollars out of your pocket over the life of the loan.
Watch out for balloon payments. A balloon payment is a large, lump sum that you owe at the end of the loan term. Some loans allow you to pay only the interest, making the monthly payment appear small. However the entire principal comes due at the end of the term. If you can't pay it, you risk losing your home.
You have three days after you sign to change your mind!
If you ever agree to a loan, keep careful records. There have been instances of lenders adding false charges, or providing inaccurate statements.
If you have any questions on this topic, call the Mayor's Office of Consumer Affairs and Licensing, at 635-3834.