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June 2002 Owners Update

Ohio Attorney General Offers Tips to Avoid Predatory Lending Practices

Credit is a way of life in America, and most lenders are honest. However, there are certain practices that can only be described as "abusive" because of the terms and conditions of the loan or the way it was solicited. Usually these abusive lending practices (also collectively known as "predatory" lending) are directed at the most vulnerable segments of the population, i.e., the elderly and low-income. These consumers have usually been excluded from the financial mainstream because of low income, lack of education (particularly in financial matters), or even place of residence. (Low-income neighborhoods tend to have fewer banks or major supermarkets to handle financial transactions.)

These abusive lending practices add up to big bucks for the lender and a never-ending treadmill of debt for the borrower. While credit abuses are nothing new (company stores and share-cropping are examples of past practices), abusive lending practices have boomed in the past decade. And it is not just the unsophisticated borrower who is at risk. Even the best-educated consumer can have trouble understanding the array of numbers (annual percentage rates, prepayment penalties, finance charges) that a loan application entails. However, the fact remains that the prime targets of abusive lending practices are the elderly and low-income. The following information is intended to help Ohio consumers understand the nature of abusive lending practices, how to avoid them, and where victims can get help.

Abusive lending practices may include the following features:

  • Excessive fees.
  • High interest rates.
  • High front-end insurance premiums.
  • Hidden costs.
  • Balloon payments – a large, final payment at the termination of the loan.
  • Prepayment penalties.
  • Coercive hard-sell, high-pressure sales tactics.
  • The following tips for getting the best loan are provided by Attorney General Montgomery’s Consumer Protection Section, Fanny Mae, and the National Association of Attorneys General:

Obtain a copy of your credit report and credit score before applying for a loan or mortgage. If your credit is "less than perfect," "clean up" your credit before buying a home. If necessary, consult Consumer Credit Counseling Services.

Get references. Check with the local Better Business Bureau® before doing business with a lender or mortgage broker.

Shop around for the best loan for your situation. If you have a relationship with a bank or savings and loan, consult them first regarding the best mortgage and loan rates. Then check with at least three lenders and compare their rates. Look at the annual percentage rate (APR), fees, points, and closing costs associated with the loan. Examine the terms of the loan and the monthly payment. Look for prepayment penalties. Also check the World Wide Web and your local newspaper’s business or real estate sections to compare rates of various lenders.

Do not be pressured by lenders. If the lender called you or came to your door uninvited, don’t agree to anything.

Don’t depend on extra money built into a home improvement loan for "quick cash." Borrow only the amount you need and can afford to repay.

Be wary of high-pressure sales pitches, such as claims that an offer is good only for a limited time.

Take your time. Read every document thoroughly and show it to a trusted friend or relative before you sign. Better yet, have an attorney review all paperwork. Do this in private, away from a high-pressure sales environment.

Do not be pressured into signing for a loan you can’t afford. If you do, act quickly. You have a legal right to cancel in writing within three business days of signing loan documents unless the loan is to initially purchase your home. Borrowers who refinance their mortgage also have a three-day, federally-guaranteed cancellation period. Remember to send the cancellation notice in writing via certified mail. Also, you don’t have to sign if you go to closing and there are fees or charges you did not expect. Walk out!

If you’re thinking about consolidating your debts into a home-equity loan, talk to a local nonprofit housing or consumer credit counseling agency first.
Ask if credit life or disability insurance is required as a condition of the loan. If it isn’t, and a charge is included for it, ask that it be removed.
Call several home repair contractors rather than buying a service from a door-to-door contractor who offers to arrange financing for you, usually with a high built-in fee. Also, beware of home improvements suggested by an unsolicited contractor who offers to arrange financing for you through a home-equity loan or second mortgage. If you do need home repairs, find the contractor yourself after checking the references of several.

Fill in all blank spaces. Do not sign a document until you have completed every space.

Avoid lenders that tell you to falsify information on loan applications.


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