Section 3:
Look out for deceptive practices

Some lenders target the elderly, people with low incomes and people with bad credit. Then they use deceptive practices including:

• Equity stripping
• Loan flipping
• Hiding the terms of the loan
• Packing a loan with extra charges
• Deceptive loan servicing
• Hidden home improvement loan

Always consult a knowledgeable, trust-worthy family member, friend or financial advisor before making important financial decisions. Here’s how these scams work.

Equity stripping

A lender encourages you to get a home equity loan even though you know your monthly income isn’t enough to take on more debt. You may even be encouraged to pad your income on the loan application so you can qualify. Lenders like this are hoping you won’t be able to keep up, because they have their eyes on your equity. When you default, they foreclose, taking your home and stripping you of the equity that’s taken you years to build.

Loan flipping

This is when a lender encourages you to repeatedly refinance your loan and borrow more money, using your equity to get extra cash. It begins with a small loan to take a special vacation, for example. When the lender comes along again in a few months and encourages you to finance an even greater amount, you accept, thinking about how nice it was to have extra cash. Each time you refinance with the lender, you incur more fees, high points and your interest rate has most likely gone up. With each “flip” of the loan, you’ve increased your debt. If you get in over your head, you could lose your home.

Balloon payments

Sometimes a lender will offer you an attractive, low-payment loan with a balloon payment after a couple of years. But you may be paying only interest during this time. At the end of the pre-determined payment period, you’ll find that you have not reduced the principal at all. You will then be forced to either pay off the loan or refinance it. This adds up to more fees and probably a higher interest rate.

Credit insurance packing

One of the ways deceptive lenders pack your loan is by including charges at closing that have not been discussed as part of the deal. They hope you won’t notice they’ve added credit insurance or other “benefits” that you didn’t ask for, don’t want and probably don’t need. If you do ask, they may tell you it comes with the loan, leading you to believe there’s no extra cost. If you protest, the lender may use scare tactics—telling you the deal will have to be rewritten or that your application will have to be reconsidered. So you sign, agreeing to buy additional products you don’t want or need.

Deceptive loan servicing

The lender fails to provide accurate or complete account statements and payoff figures. It’s hard to determine what you’ve paid and what you still owe. Or they might send you letters saying your payments will be higher than expected—for taxes and insurance you’ve already arranged to pay yourself. Late fees might be assessed when payments are made on time. There may be legal fees you don’t understand. Amid the confusion, you may pay more than you owe.

Hidden home improvement loan

A contractor tells you that he can arrange financing through a lender to put on a new roof or remodel your two bathrooms. He begins work. Later, he gives you the papers to sign from the lender. Unbeknownst to you, you have agreed to a home equity loan with high points, fees and interest. He may threaten to quit working on the project unless you sign.