Predatory lending means different things to different people. To some, it may involve charging too much to complete a mortgage application, while to others it may involve doctoring documents to qualify an applicant for a loan.
It also involves more cut and dry practices such as deceiving borrowers by failing to include all associated costs upfront, forging documentation, or simply leaving out important loan documents such as the Hud-1 or the Good Faith Estimate. Either way, what’s clear is that predatory lending involves unethical practices.
Most banks and lenders put a cap on what a broker or loan originator can earn on a certain loan. For prime mortgage companies, this number usually falls around 3-5% of the loan amount. This is still a hefty commission on a loan. Imagine a $750,000 loan with a 3% commission. That’s $22,500.
And to many 3% is average, if not a low commission. The gray area lies in what people feel is right to charge a borrower. For subprime lenders, this percentage can be much higher, exceeding 5% in many cases.
Often times mortgage brokers or loan officers feel they can charge as much as they want because the borrower “doesn’t qualify” or “doesn’t deserve” to get the loan. Because the broker is pulling strings, finding loopholes, and putting themselves at risk with shady practices, they may hit the borrower hard.
Many borrowers might find themselves in a tough spot, and take whatever rate the broker or bank will offer them just to get in the home. Some borrowers might have a looming contingency or close of escrow, and will have little choice but to take a higher interest rate just to get the deal done and avoid a penalty or losing the home completely.
The real problem is that “predatory lending” is subjective, especially since banks and lenders all have different max fees they can charge. And this makes it hard to define, and even harder to control. The key to avoid being a victim or predatory lending is knowing your rights, and carefully reading anything to sign or agree to. A mortgage application is a big deal, and shouldn’t be approached casually!