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7 ways to spot a shady mortgage lender
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Too-good-to-be-true rates, rock-bottom fees?
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Tread carefully as you refinance, especially if
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you have less-than-perfect credit.
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By Jay MacDonald, Bankrate.com
Home Buying Guide
Home Financing
Johnny Bell had a new deck and other home
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improvements in mind when he refinanced his
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home in Oxford, Miss., last summer.
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Make that almost refinanced.
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Bell spotted attractive terms on a television
ad, contacted the lender and locked in a
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Manage Debt cash-out refi at 5.125% with $350 upfront as a
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Then trouble began. First, the company delayed the closing, saying it was behind on the
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paperwork. Then it asked for proof of reserve funds and Bell complied. After 90 days, the company
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informed Bell that his "locked" rate had gone up to 6.2%.
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"I got angry," Bell recalls. "I told them I was definitely not paying more interest. They started making
excuses for why it had taken so long, putting the blame on Fannie Mae for requiring the reserves.
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But the interest rate didn't have anything to do with the reserves."
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After two more months of futile telephone calls, Bell walked away from the deal, received his $350
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back and built his deck out of pocket.
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"It was bait and switch," he said. "It took me five months to not refinance."
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Signs of a bad loan
Bell's experience isn't isolated. For the last couple of years, low interest rates, aggressive
marketing tactics, scant industry oversight and investors who want to put their money into real
estate instead of the stock market have contributed to the ideal operating environment for
predatory lenders.
In many cases, it's all too easy for a trusting homeowner anxious to leverage a home's value or
lock up a low rate to fall prey to less-than-upfront lenders. W.C. Fields maintained that you can't
cheat an honest man. But when it seems that everyone is getting a loan and you've been promised
rock-bottom interest rates and negligible fees, it's hard to resist.
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Some deals, however, are indeed too good to be true.
7 questions to ask
before you refinance
According to the Federal Trade Commission, you may be signing on for trouble if a lender:
4 reasons not to
refinance
Encourages you to falsify your application information to get the loan.
Fixed vs. adjustable:
Urges you to borrow more than you need.
Which mortgage wins?
Pushes you to accept payment terms that you can't realistically meet.
Fails to give you the required disclosures (e.g., APR, rescission rights, etc.).
Shows up at closing with a totally different loan product than you agreed to.
Asks you to sign blank forms. ("It'll speed things up. We'll fill in the blanks later, trust me.")
Denies you copies of documents you signed.
And if you miss a warning sign early in the process, a bad loan often resembles the Tar Baby from
an Uncle Remus story: The further in you get, the harder it can be to get out. Bad lenders are
counting on the likelihood that the farther you travel down the loan-process road, the more you will
have invested in earnest money, deposits, inspection fees, design plans and contingencies that
accelerate your momentum to close.
Chicago real estate attorney Tom Polinski recalls a recent closing where the buyers found out that
their lock had expired four days earlier and their interest rate would be 1.5% higher.
"We were at the closing table, and they didn't want to walk away. Had they done that, they would
have been in breach of contract and the seller would have had to decide if he wanted to sue them
for specific performance because he, in turn, was buying another house. You always get that
domino effect. It would have been a mess," he says.
http://moneycentral.msn.com/content/Banking/Homefinancing/P86789.asp 3/19/2005
MSN Money - 7 ways to spot a shady mortgage lender Page 2 of 3
With little recourse, the buyers settled for a $750 reduction in fees and closed, vowing to refi at the
earliest opportunity.
"I see a lot of it," Polinski admits. "I can't tell you the last time I went to a closing where the buyer
has known a reasonable time in advance, even 24 hours or more, what their bottom-line closing
costs were going to be. The lenders are notoriously slow in getting those figures to the closing, so
we have to try to estimate what the buyer is going to need. And estimate on the high side, because
if it's short, they won't let you close."
Preying on the powerless
Predatory lending practices are most visible in the subprime market, which serves lower-income
individuals with credit problems.
Respectable subprime lenders serve an important social function by offering credit on fair terms to
individuals who otherwise might never be able to build home equity. Predatory lenders, however,
are a scourge on these same neighborhoods, taking advantage of elderly, less-educated and non-
English-speaking individuals by offering egregious loan terms that would drain equity and
eventually lead to foreclosure on their homes.
Norma Garcia, senior attorney for the nonprofit Consumers Union, has been fighting for more than
a decade to stop predatory lenders from preying on the powerless. In her March testimony before
the House Committee on Financial Services, Garcia expressed concern at the tremendous growth
of the subprime market in general and subprime refis in particular.
Nationally, subprime originations increased from less than 5% ($35 billion) in 1994 to nearly 13%
($160 billion) in 1999. The predatory hot spots, Texas and California, were even worse: Texas
subprime refis grew from 6% of all refis in 1997 to 33% in 2000, California subprime lending grew
from 4% in 1993 to 20% in 2000.
"Not all subprime loans are predatory," Garcia points out, "but virtually every predatory loan we
have seen is a subprime loan."
That's because shady lenders, like predators everywhere, tend to target the easiest prey, people
with poor credit who have few other options. But Garcia notes that individuals with spotless credit
also fall victim to bad loans.
"Loans that are good subprime loans might in another sense be predatory for someone who has
good credit. We see this a lot among the elderly and in communities of color -- people with
perfectly good credit who don't have a sense of what's happening out there in the lending world,"
she says.
Garcia says that to simply spout "buyer beware" isn't enough.
"There are definitely people who are ripping others off. To the extent that there are individuals who
are being placed in loans with interest rates and fixed fees that are much higher compared to that
person's credit-risk profile, that should be a crime," she says.
"Some states require lenders to put borrowers into the best loans for which that buyer may qualify.
We would love to have that be extended to all loans, but it isn't and there is a lot of resistance and
pushback from the lending lobby to protect against new laws aimed at regulating the industry."
California is currently in the midst of a test case to see if a weaker state anti-predator statute
should supersede a tougher ordinance passed by the city of Oakland that fills in the gaps left by
the state law. Garcia has similar concerns about any minimum industry standards that could one
day be forthcoming at the federal level.
"We can see that minimum standards might be a good thing, but we don't want to prevent states
that have serious problems from closing the gap," she says.
Firing the 'bad actors'
The mortgage industry has dug in its heels against government regulation at any level that would
restrict access to credit.
A.W. Pickel, president of the National Association of Mortgage Brokers, says a few "bad actors"
shouldn't spoil it for an industry that is committed to providing as many financing options to as
many customers as possible. In addition to calling for more pre- and post-license training, NAMB
has put forth its own solution to the predator problem.
"We promote the ability to do a national registry that would basically keep bad guys out of the
business," he says. "For instance, we now actually register every loan officer. Unfortunately, we
don't register loan officers inside a bank. So you could have a bad actor who would be working for
a licensed broker or mortgage broker but then they go to a bank and they don't have to be
licensed."
http://moneycentral.msn.com/content/Banking/Homefinancing/P86789.asp 3/19/2005
MSN Money - 7 ways to spot a shady mortgage lender Page 3 of 3
Although Pickel admits he would never use an online lender, he defends their right to peddle their
products. The problem, he says, is not the shady deals, but the public's inability to accept what
mortgage brokers take for granted: If it seems too good to be true, it probably is.
"What amazes me is that people don't use their common sense. Somehow people think that this
person who is giving them 5% is telling the truth when everybody else in town doesn't have it. You
ought to call guys in your local community and check their references. Even in your own
community, you want them to put it in writing. You want them to stand by their word."
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http://moneycentral.msn.com/content/Banking/Homefinancing/P86789.asp 3/19/2005