Beware of Predatory Lenders

Recently, I was asked to consult for some people who felt they had been defrauded by a lender and wanted to know what options were available to them. Their story is typical of how these scam artists work and can serve as an example – and warning - to others.

Usually the victims are chosen because they are perceived as not being very “bank savvy,” often immigrants with limited English skills or the elderly. But the scam also works well on people who are afraid of “looking stupid” so never ask questions. In general the “mark” is someone who can’t or won’t ask for advice.

Here’s the way the scam works. An offer is made to help the client get approval for a home loan. Typically, the lender will be of the same ethnic or racial origin as the client, especially if the client’s English language skills are limited. The lender will then explain that it is extremely difficult to find a loan for the client (this may or may not be true). However, by virtue of his skills, connections, hard work, and desire to help, he has managed to find a loan. The point here is to make the client grateful and to create a feeling of trust. The rates and terms are extremely high, but the lender explains that the added fees are necessary because of the client’s real or fabricated credit problems.

When the client goes in to sign the paperwork, he will find that the “deal” has changed. Rates and fees will be even higher than those initially quoted. If the client owns other property, the lender may suddenly require that these properties also be used as collateral. I saw a case where the lender tried to force the client to sign over his sister’s home!

Should the client balk at signing, he may be bullied and threatened. He will be told that “no one else will make you a better deal” and may be threatened with legal action if he does not sign. One client received harassing phone calls during the night and threatening visits at her place of business.

Once the client signs the deal, the real problems begin. Because the interest rates are so high the client is often not able to make the monthly payments. As an act of “generosity” the lender allows the client to tack the monthly payments on to the total loan amount rather than pay monthly. But at the end of the (very short) loan term, usually one to three years, the client finds that the amount owed has outstripped his borrowing power. A legitimate lender will not make him a loan. And the bank that holds the note will not extend the loan term.

And now we come to the point of the scam. The lender is not interested in the monthly payments. In fact, he prefers the client not make the monthly payments; he wants to foreclose on the house. In a place like the Bay Area, where housing prices are high, that’s where the real profit lies. The client is forced into foreclosure and the bank gets all the property secured by the loan.

Once the deal is signed, it is extremely difficult to prove that the client was coerced, harassed and bullied into signing. Protect yourself. Demand to see all documents in writing and take them to a third party for review before you sign. If the lender refuses to give them to you – RUN! You could be signing away your home and borrowing a load of trouble.