Loan Fraud

What is Predatory Lending?

In communities across the U.S., consumers are losing their homes and their investments because of predatory lenders, appraisers, mortgage brokers and home improvement contractors who:

• Sell properties for more than they are worth using false appraisals.
• Encourage borrowers to lie about their income, expenses, or the cash they have available for a down payment in order to get a loan.
• Knowingly lend more money than a borrower can afford to repay.
• Charge high interest rates to borrowers based on their race or national origin and not on their credit history.
• Charge fees for unnecessary or nonexistent products and services.
• Pressure borrowers to accept higher-risk loans such as balloon loans, interest only payments and steep pre-payment penalties.
• Target vulnerable borrowers to cash-out refinance offers when they know borrowers are in need of cash due to medical, unemployment or debt problems.
• “Strip” homeowners’ equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower.
• Use high pressure sales tactics to sell home improvements and then finance them at high interest rates.

What Tactics Do Predators Use?

The following list provides details about some of the most commonly used predatory lending strategies:

• A lender or investor tells you that they are your only chance of getting a loan or owning a home. You should be able to take your time to shop around and compare prices and houses. If a lender tries to prevent you from doing so, then it’s likely to be fraud.
• The house you are buying costs a lot more than other homes in the neighborhood, but isn’t any bigger or better.
• You are asked to sign a sales contract or loan documents that are blank or that contain information which is not true.
• You are told that the Federal Housing Administration insurance protects you against property defects or loan fraud. FHA insurance does not serve these kinds of purposes!
• The cost or loan terms at closing are not what you agreed to.
• You are told that refinancing can solve your credit or money problems.
• You are told that you can only get a good deal on a home improvement if you finance it with a particular lender.

11 Tips for Being a Smart Consumer

The following tips can help you avoid predatory lending practices and other unethical tactics in the real estate industry:

1. Before you buy a home, attend a homeownership education course offered by the U.S. Department of Housing and Urban Development (HUD)-approved, non-profit counseling agencies.
2. Interview several real estate professionals (agents) before you start working with a realtor. Always ask for and check references before you select a realtor to help you buy or sell a home.
3. Get information about the prices of other homes in the neighborhood. Check the average price per square foot for properties in that area. Don’t be fooled into paying too much.
4. Hire a properly qualified and licensed home inspector to carefully inspect a property before you are obligated to buy. Determine whether you or the seller is going to be responsible for paying for the repairs. If you have to pay for the repairs, determine whether or not you can afford to make them once you buy the property.
5. Shop for a mortgage lender and compare costs between different lenders. Be suspicious if anyone, including your realtor, tries to steer you to just one lender.
6. Do NOT let anyone persuade you to make a false statement on your loan application, such as overstating your income, lying about the source of your down payment, failing to disclose the nature and amount of your debts, or extending the length of time you have been employed. When you apply for a mortgage loan, every piece of information that you submit must be accurate and complete. Lying on a mortgage application is fraud and may result in criminal penalties.
7. Do NOT let anyone convince you to borrow more money than what you know you can afford to repay. If you get behind on your mortgage payments, you risk losing your house and all of the money you put into your property. You will also ruing your credit and could face severe financial distress.
8. Never sign a blank document or a document that has any blank information. If information is inserted by someone else after you have signed, you may still be bound to the terms of the contract. Insert “N/A” (i.e., not applicable) or cross through any blanks.
9. Read through everything on both your offer and your mortgage agreement carefully and ask ALL of the questions you have. Do not sign anything that you don’t understand! Before signing, have your contract and loan agreement reviewed by an attorney skilled in real estate law, consult with a trusted real estate professional or ask for help from a housing counselor with a HUD-approved agency. If you cannot afford an attorney, take your documents to the HUD-approved housing counseling agency near you to see if they can review the documents or if they can refer you to an attorney who will help you for free or at low cost.
10. Be suspicious when the cost of a home improvement goes up if you don’t accept the contractor’s financing.
11. Be honest about your intention to occupy the house. Stating that you plan to live there when, in fact, you are not (because you intend to rent the house to someone else or fix it up and resell it) violates federal law and is a crime.