Recognise signs of predatory mortgage lending
Such lenders make use of coercion, deception and other exploitative actions that may force a borrower to accept terms and or feature that they don’t need or want or can’t afford.
In most cases, these unscrupulous lenders take advantage of a borrower’s confusion or lack of understanding about the terms being offered or financing in general.
According to the Australian Financial Complaints Authority’s (AFCA) statistics, there have been 60,681 complaints received for the 10 months from November 2018 to 31 August 2019. These include 2,566 responsible lending complaints and 1,557 complaints about misleading product/service information.
Signs of predatory mortgage lending
Borrowers need to be alert and recognise the following signs to avoid becoming a statistic in AFCA’s reports:
Targeting and steering
Some lenders target specific groups of people to victimise.
Predatory mortgage lenders typically target those who are financially constrained, elderly, less educated and minorities. However, they may also take advantage of borrowers who give too much trust and don’t read the fine print.
They offer products that are unnecessarily expensive but do so under the pretense that it may be the best the borrower can get considering their circumstances.
Incomplete disclosure of fees
Lenders are required to fully disclose and explain all the fees that are tied into the loan so that the borrower knows how much they are really paying for the loan itself.
Some lenders may disclose the amount to be paid in fees but don’t identify the payment frequency or show different fees during the closing transaction. Likewise, the loan contract may identify additional fees that were not discussed prior to the closing transaction.
Inflated fees and charges
Similar to the previous sign, predatory lenders usually charge a higher amount to provide services as part of the loan process.
For instance, they may charge higher for appraisals and application fees compared with reputable lenders.
Steep prepayment penalty
Lenders are allowed to place prepayment penalties for some products, such as fixed-term home loans, but most lenders limit the penalty to three or four months’ worth of interest repayments.
In the case of predatory lenders, prepayment charges are usually very high and border on being financially abusive. Some impose very high prepayment penalties that the cost of the entire loan skyrockets.
Using high-pressure tactics
Similar to property spruikers, predatory lenders pressure their victim into deciding on their loan offer quickly or lose the opportunity.
They may even convince the borrower that no other lender will approve the loan application due to their credit history or high-risk status.
Encourages borrowers to ‘lie’ in their application
One very big red flag that proves that a lender is no good is if they encourage the borrower to lie in their loan application in order to qualify for the loan.
For instance, the lender may suggest that the borrower decrease the amount of household expenses in the application to make it seem like they have more money to use for mortgage repayments.
However, this may result in financial constraints for the borrower since they don’t really have enough money for repayments – more so when the required repayments increase.
Worse, since mortgage fraud is a crime, the lender may pass on the blame to the borrower if they are caught for irresponsible lending.
Mandatory arbitration
It’s not uncommon for companies to protect themselves when things go south.
Some predatory lenders prefer to make sure that their victims won’t be able to take them to court. One way they do this is to add a condition in the fine print that limits the borrower’s legal action for complaints to internal arbitration.
AFCA can assist victims of predatory lending, but the best way to avoid becoming one is to spot the signs early on.
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