Yes, predatory lenders are still out there. Although underwriting practices have tightened and government regulations for mortgage lending have increased, it's difficult to force unethical lenders to put consumers' best interests first. It's still your responsibility, as a consumer, to look out for yourself. Let's look at some warning signs that the mortgage you're considering, whether it's for a purchase, refinance or home equity loan, might end up hurting you. (To learn more about these scams and others, check out Homeowners, Beware These Scams!)

SEE: Mortgage Fraud: Understanding And Avoiding It

Refresher Course: What Is a Predatory Loan?
Predatory loans aren't making headlines anymore like they were a few years ago, so in case you've forgotten what they are, here's a refresher. Each time a lender successfully closes a mortgage, it earns money. In a non-predatory situation, the lender earns a reasonable and customary fee and the borrower gets the best product for her needs.
Alternatively, the borrower might choose a loan that isn't the best option, but that she fully understands and chooses willingly. For example, a borrower might reject a fixed-rate mortgage and choose an ARM instead because of its low introductory payments even though she plans to keep the mortgage beyond the ARM's low-rate introductory period. That's not predatory.

A predatory loan is one that benefits the lender at the borrower's expense. The mortgage might have above-average fees, excessive or unnecessary fees, overly high interest rates given the borrower's qualifications, or prevent the borrower from accumulating home equity. Convincing a borrower to refinance or take out a home equity loan when there is little to no benefit, or even harm, in doing so, are also predatory.

The list of practices that qualify as predatory is endless you don't have to learn about every single one before you can confidently apply for a loan. The important things are to know that predatory lending still exists, to understand the general concept, to be aware of common red flags and to remain alert when shopping for a loan.

Warning Signs
Predatory lending practices cost consumers dearly. Be alert to these warning signs when shopping for a mortgage to lower your chances of getting taken by a predatory lender.

The interest rate is too good to be true
Those offers you get in the mail promising a mortgage at below-market rates? Ignore them. At best, they're a marketing ploy to get you to call up the lender, who will then reveal that the advertised rate isn't actually available, but will try to talk you into doing business with the company anyway. At worst, you'll get reeled into doing business with someone unscrupulous who may indeed be able to get you the advertised interest rate, but will overcharge you elsewhere or put you into the wrong loan for your situation.

They pressure you to act quickly
Ignore high-pressure sales pitches for mortgages. You're making a decision that will affect your monthly cash flow and your long-term net worth, not to mention where you'll sleep at night. Take all the time you need to choose a lender and a loan.

They pressure you to take out a risky or expensive loan
It's one thing for a borrower to willingly sign up for an ARM or other product that isn't as straightforward as a fixed-rate mortgage; it's another thing for a lender to push you into one. Few mortgages are inherently bad, but many mortgages are the wrong product for a borrower's circumstances. If you walked into a lender's office asking for a 30-year, fixed-rate mortgage and you've been talked into applying for an interest-only loan, you might be dealing with a predatory lender. (Learn more in 5 Risky Mortgage Types to Avoid.)

They ask you to lie on your application
This behavior by a loan officer should be a huge red flag that you're working with someone unethical who is probably only looking out for themselves. Lying on a mortgage application is a crime called mortgage fraud and you certainly don't want to be convicted of that.

While there are some situations where rigid lending rules keep qualified buyers out of the market (such as high net worth buyers with plenty of money in the bank but minimal monthly cash flow), if you don't qualify for a mortgage, it may be that you don't have the income or savings to comfortably repay it. In these cases, not qualifying for a loan could be a blessing in disguise. A few years from now, you might have the down payment, income and steady job you need to get a good mortgage that you can afford, rather than being evicted in foreclosure proceedings because you couldn't make your payments.

The fees are high compared to other lenders' fees
You wouldn't buy a new TV without shopping around to get the best brand and features at the best price, so why would you entrust your financial future to the first mortgage lender you talk to?

The rules about shopping around on a major purchase apply to mortgages, too. Get quotes from several lenders and compare their offers. Unless you're unlucky enough that every single one is predatory, you'll be able to spot the common threads and pick out the discrepancies in the different offers. For example, three lenders might offer you roughly the same interest rate with no points; another might offer that same rate but expect you to pay points. That's a red flag that you're being overcharged.

The fees and/or terms suddenly change at closing
Lenders are legally required to give borrowers a good faith estimate of all the fees associated with their loans early in the application process. At closing, you should compare the good faith estimate with the final charges. If there are significant discrepancies that are not in your favor, you may want to cancel the deal. If the discrepancies are in your favor, that's OK, some lenders prefer to under-promise and over-deliver.

Don't Be Afraid to Start Over
The mortgage process is onerous, and abandoning your financing could mean losing the home you want to purchase, or a great interest rate. As a result, you might be reluctant to back out of a mortgage that you suspect is bad, even though you haven't closed yet and still have the opportunity to walk away.

It's important to consider the long-term implications of taking out a bad loan. Starting over with a new loan, and possibly searching for a different property, are short-term inconveniences. Saddling yourself with a financially destructive loan product has serious, long-term consequences.

The Bottom Line
A predatory loan, at best, means you'll pay more than you had to for your mortgage. At worst, it could send you to foreclosure and even bankruptcy, leaving you without a home, destroying the wealth you were trying to accumulate through home ownership and severely damaging your credit. It's worth the effort to educate yourself about the mortgage process and to shop around with different lenders so you can compare different offers and make sure you're getting the best loan for your needs. (For more related reading, see What The New Mortgage Lending Rules Really Mean.)

Related Articles
  1. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  2. Investing Basics

    5 Tips For Investing In IPOs

    It’s not easy to profit from IPO​s, but the money is there.
  3. Investing

    How To Invest For The Greater Good

    We discuss why is important to prioritize economic, social and governance factors when making investment decisions, regardless of gender or generation.
  4. Investing Basics

    Toshiba's Accounting Scandal: How It Happened

    Learn how Toshiba's corporate culture and lax internal controls led to an accounting scandal that ended with the resignation of the company's CEO.
  5. Professionals

    Is Your Financial Advisor Looking Out for You?

    Financial advisors sometimes aren't looking out for clients' best interests. Regulators are scrutinizing their practices; investors should too.
  6. Taxes

    5 Warning Signs a Charity Is a Scam

    Giving to charities and helping those in need is admirable. Here's how to ensure your good intentions and donations aren't siphoned off by scammers.
  7. Trading Strategies

    IPO Flippers And The Companies Who Hate Them

    Learn how flipping activity affects an initial public offering.
  8. Investing

    Why These Industries Are Prone To Corruption

    Corruption is like life in that it exists pretty much everywhere the conditions are favorable.
  9. Professionals

    Surviving an SEC Audit: Tips for Advisors

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  10. Professionals

    Are You Sure You Aren't Ponzi Scheme-Susceptible?

    Anyone can be a victim of a Ponzi scheme — even the most financially literate. Here's how to avoid the next Madoff.
  1. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Black Money

    Money earned through any illegal activity controlled by country ...
  3. Bidding Ring

    A group of individuals or businesses that conspire to affect ...
  4. Negative Option Deals

    A dubious business practice that involves supplying a typically ...
  5. Credit Card Dump

    The unauthorized copying of all the information contained in ...
  6. PIN Cashing

    A type of fraud in which a stolen credit card or debit card is ...
  1. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  2. How should a whistleblower report unlawful or unethical behavior?

    Whistleblowing takes many forms. A whistleblower could expose government corruption, expose unethical business behavior or ... Read Full Answer >>
  3. How do insurance companies use a whistleblower?

    Fraudulent claims are among the most prevalent and serious business risks that insurance companies face. Many consumers have ... Read Full Answer >>
  4. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  5. What were the primary financial crimes involved in the ZZZZ Best case?

    ZZZZ Best was a company started by Barry Jay Minkow that claimed to be a carpet cleaning business. In fact, it was a Ponzi ... Read Full Answer >>
  6. What is the difference between wash trading and insider trading?

    Wash trading is an illegal trading activity that artificially pumps up trading volume in a stock without the stock ever changing ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!