Predatory Lending Red Flags

Excessive Fees

Look out for excessive and/or unnecessary fees.  Loan fees should be no more than 3% of
the loan amount, (e.g., $3,000 on a loan of $100,000). Fees over 5% of the loan amount are excessive. Ask your broker or lender to show you an itemization of the loan amount with all fees explained.

Excessive Mortgage Broker Compensation (Yield Spread Premiums)

If you are dealing with a mortgage broker, find out how the broker will be paid. Sometimes brokers receive extra compensation from lenders called the “yield spread premium.” This is extra pay the mortgage broker collects from the lender for signing the borrower to a loan with a higher interest rate than the borrower deserves.

Excessive Prepayment Penalties

Find out whether your mortgage includes a prepayment penalty. If it does, find out how
much it is and how long it will be in place. You want to give yourself the option to refinance for better loan terms or pay your loan early without having to pay an excessive fee.

Equity Stripping

Look out if a lender bases the decision to give you a mortgage on the equity you have in
your home instead of your income. A predatory lender may lend you more than you can
pay every month and wait for you to default on your loan. The predatory lender can then
foreclose on your house and strip you of your equity!

Loan Flipping

Look out if you have been making your payments and a broker or lender encourages you to refinance for any reason. Each time the loan is refinanced, the lender charges fees that
increase the amount you owe.

Misstated Income

Look out if the broker or lender changes any of the income information you provided. The
lender may suggest that you could qualify for a higher loan amount by including income on your loan application that doesn’t exist, or by inflating your income on the loan application. This practice is problematic because it qualifies you for a loan your income may not support.