Predatory lending flourishes despite legal clampdown: Internet Scambusters #459
Predatory lending, the practice of deceptively forcing or tricking people into paying high interest rates or fees when they borrow money, hits hardest at those who can least afford it.
And despite federal and state legislation, loan company scammers still actively target desperate or unknowing victims.
In this week's issue we explain how predatory lending works and what you can do to avoid being snared by the high-cost loan tricksters.
On to today's main topic...
How to Avoid Predatory Lending Scams
Although laws are being tightened all the time -- in some states more than others -- the practice of predatory lending is still flourishing.
There seems to be no official definition of the term and that, in many cases, the process may actually operate inside the law -- it may be unjust and unfair but it's not always illegal.
Frequently, predatory lending occurs in the housing market, charging high-interest rates and fees; we've discussed this problem previously in a Scambusters issue as part of a broader review of mortgage scams: New Mortgage Scams Sweep Away Homes and Dreams.
But you might encounter it with other kinds of loans, especially those supposedly designed to help get you out of debt or provide a short-term advance.
What is predatory lending, exactly?
In a report issued a few years back, the US General Accounting Office (GAO) explains it involves "charging excessive fees and interest rates without regard to borrowers' ability to repay, refinancing borrowers' loans repeatedly over a short period of time without any economic gain for the borrower, and committing outright fraud or deception -- for example, falsifying documents or intentionally misinforming borrowers about the terms of a loan."
That's quite a catalog of woes but, says the GAO, there's no detailed statistical information on the scale of the problem. However, there's little doubt that most of the victims are among those who can least afford to be ripped off or those who don't understand the processes, such as some seniors or immigrants.
What we also know is that over the past few years, a number of firms have been forced to repay hundreds of millions of dollars for predatory lending practices.
Typical "tricks of the trade" include:
- Deceiving borrowers by offering low interest rates that turn out to be promotional terms that expire after a few months, to be replaced by unreasonably high rates.This promotional aspect is either not made clear or is hidden in the fine print.
- Disregarding predatory lending laws (notably the Truth in Lending Act) that require them to disclose the true annual rate equivalent of a short-term interest rate. A 3% monthly rate, for example works out at more than 42% a year.
- Offering consolidation loans, then inflating rates and fees because the borrower is considered a high risk. Sometimes, repayments are made to appear low because the victim repays interest only -- never clearing the debt.High rates for high risk are not illegal but some consumer groups suggest they often do not fairly reflect the increased risk.
- Requiring borrowers to take out high-premium credit insurance in case they can't make payments because of accident or death.These policies often don't require medical checks, which is why they cost so much, but the premiums (on which the lender earns commission) may become part of the loan so victims can't see how high they are -- plus, they then have to pay interest on them!
- Persuading borrowers to make untrue and fraudulent claims in loan applications to increase the likelihood of success.
According to another GAO investigation, the number of complaints alleging predatory lending and dubious debt-counseling has doubled since 2007.
Some of the firms identified in the study claimed to have religious affiliations or to be part of government debt relief programs, in order to enhance their credibility.
Steps To Avoid Predatory Lending
If you plan to borrow money, being aware that predatory lending practices still exist is an important first step to ensuring you don't get snared by the scammers.
Here are some other measures you can take:
- Educate yourself about the way interest rates are figured. You'll find a number of online calculators that convert monthly interest rates to annual percentage equivalents.
- Learn what legal protection your state has enacted. Most states do have their own predatory lending laws, mainly relating to real estate lending and so-called payday loans.Start with your state government website (usually the name of the state followed by ".gov").
- Check out your would-be lender online, with a simple search. If they've been operating illegally or inappropriately, others will likely have already written about them.
- Be wary about temptingly low interest rates. Often you'll find you don't qualify or that the rates will quickly ratchet up once you've signed.The old adage about "if it looks too good to be true it probably is" applies here.
- Preferably, work with known lenders that have an established reputation -- or seek recommendations from a reliable advisor or family members.
- Never agree to make an untrue statement on a loan application.
- Never sign a blank or incomplete document that a representative says they will fill in later.
A useful stepping-off point to learn more about this subject and predatory lending in general is Americans for Financial Reform, an independent coalition of national and state organizations.
No matter how much we improve our laws, some people will always be desperate enough to fall for lending con tricks or high interest rates.
But by heeding our advice, talking to reputable and existing lenders, and discussing your needs with family and trusted advisors, there's no need for you ever to fall victim to predatory lending.
Time to close -- we're off to take a walk. See you next week.