Matters of finance are difficult enough without the added stress of worrying about whether that deal you thought might be too good to be true is—in fact—too good to be true. With the onset of the recession and the revelations surrounding less than above-board behavior by some financial providers, trust became an issue between consumers and lenders.
The silver lining to the whole situation has been an increased focus on reducing predatory lending and increasing awareness among consumers. Thanks to the efforts of advocacy groups, government agencies and major lending institutions intent on restoring that trust, there are now more options than ever to help people recognize and avoid predatory lending and the repercussions that come with falling prey to unsavory schemes.
The first step in avoiding predatory lending is being able to recognize it. In general terms, predatory lending constitutes “unfair and costly practices that target a particular group or take advantage of a person,” says Ruth Susswein, deputy director of national priorities at Consumer Action, a consumer advocacy group with offices in Los Angeles, San Francisco and Washington, D.C. “It’s exorbitant rates or fees or both.”
Often, entire groups of individuals are targeted, including “older people, immigrants, low-income, minorities and people who have, for whatever reason, more limited access to financial resources,” says Susswein.
That lack of access to trusted financial advice, education or experience is at the core of susceptibility for at-risk individuals. “Sometimes you really don’t know until it’s too late that you’ve been the victim of predatory lending,” Susswein says. “You apply for a mortgage and the lender says this is the best rate you can get.” Maybe it is and maybe it isn’t, she adds, but “you trust the lender, especially if you have no experience in this area. It’s easy to take what’s said at face value, and maybe it’s true and maybe you’re being taken advantage of.”
Knowledge is Power
The best way to foil an unscrupulous lender is to get educated and ask questions. “Understand product terms and conditions,” says Bob Davis, executive vice president of mortgage markets, financial management & public policy, for the American Bankers Association (ABA). “Understand the terminology necessary to describe the product. Ask questions if you don’t feel you have an adequate understanding. Ask for explanatory materials that might be available.”
And do not ever feel intimidated or pressured. “Make sure you have adequate time to understand a product and the obligations you will assume,” Davis says. “Come back another day if you need more time or you aren’t ready to commit.”
Susswein agrees. “Don’t jump at the first offer you get because you’re being pushed or you have to make a deal today,” she says. “Talk to other people. Tell someone ‘I’m getting a seven percent rate for this.’ Someone else might say ‘I just got a two percent rate.’”
Ask questions and do not be shy about continuing to ask them until there is perfect clarity. And do not be shy about letting lenders know that you have done your homework. “The first way to combat predatory lending is to do your research,” Susswein says. “Don’t just go to one place. Apply at several places to see what the rate is. Ask questions including ‘is there anything I can do to improve this rate?’”
Materials provided by Betsy Lordan in the Federal Trade Commission’s (FTC) Office of Public Affairs, encourages consumers to realize that sometimes offers that look too good to be true can be truly dangerous. In the FTC’s “Six Sure Signs of an Advance-Fee Loan Scam,” available on their website at consumer.ftc.gov, the number one red flag is “a lender who isn’t interested in your credit history.” Look out, too, for “fees that aren’t disclosed clearly or prominently.”
Other red flags likely seemed obvious to predatory lending victims in hindsight. For example, “a loan that is offered by phone,” “a lender who asks you to wire money or pay an individual” or “a lender who uses a copy-cat or wanna-be name,” i.e., a company that makes its logo look like that of a legitimate bank or lender like Capital One or Chase.
The FTC also encourages consumers to do their homework. Taking those early steps will help people avoid running afoul of lenders who may not be registered in your state. As their site states, “Checking registration does not mean that you will be happy with a lender, but it helps weed out the crooks.”
Davis agrees that that legwork and self-education can be key in staying safe. “Shop so you have a good sense of current market pricing, alternative product offerings and alternative terms and conditions that may apply,” he says. “Look to institutions that have a good reputation and a positive track record in your community.”
Certain types of products might also set off warning bells for individual consumers. Pay day loans—and those types of loans offered online—van leave consumers particularly vulnerable, especially consumers coping with past financial missteps, poor credit ratings or limited credit histories.
According to the FTC web site, “The FTC recently sued several online payday lenders for violating federal laws. The lenders allegedly lied about how much their loans would cost, required borrowers to allow the lenders to take money from their bank accounts automatically, and threatened to sue the borrowers or have them arrested for non-payment.”
By providing the payday lenders with access to their bank account information so that the lender could deposit the loan directly into the account, consumers left themselves vulnerable to the organization withdrawing more money than the amount due as well as adding exorbitant, unnecessary and undisclosed fees.
Often, the victims of predatory lending may feel too ashamed or scared to turn to anyone for help, but staying quiet not only impacts the victim but others who may unwittingly follow suit later.
The first recourse, Susswein says, “is to contact the company and let them know, this doesn’t seem right and what will you do about it?” Although this often does not work, it is a solid place to start as you move up the ladder and get more people involved in correcting the issue. “You should then contact the regulator,” Susswein suggests. “Most lending companies have some sort of regulator.” If not, or if the consumer is unable to find that appropriate regulating body, then another option is to report infractions and misconduct to the state attorney general’s office.
Susswein also suggests contacting the Consumer Financial Protection Bureau (CFPB), a fairly new organization that serves as a nationwide complaint office. “They are the only one out there that tries to get some sort of resolution for the person” who reports the problem. “It doesn’t always work, but they try,” Susswein says. This national organization then shares the complaint with all of their different divisions, dispersing the information broadly. “If they see there are a lot of different complaints or if they find a pattern, they will investigate or sue” or work to create legislation to prevent future problems. “It’s a really great place to go if you don’t know who the lender’s regulator is,” Susswein says.
The CFPB was part of efforts to bring new mortgage laws online following the Great Recession, including requirements that banks make sure that borrowers have the ability to pay their bills. The organization can be reached at consumerfinance.gov or at 855-411-2372.
For many people, talking about money or finances can be an uncomfortable pursuit. Keeping things out in the open and keeping up to date and in control are absolute necessities, however, in quelling predatory lending and its impact on so many individuals not only in New York but nationwide. Staying strong and putting yourself in a strong position are both key to staying safe. For example, “the better credit rating you have, the more leverage you have,” says Susswein.
It’s not always a pleasant thing to do, this standing up and being heard, but it’s necessary. “Now I need to fight over a rate—it’s not something you usually think you have the right to fight for,” says Susswein.
But if something does go wrong, consumers also cannot spend their time blaming themselves. “As much as it is the consumer’s duty to study, the lender is always going to have more information,” says Susswein. “It’s easy to fall into the trap of thinking the lender knows financial matters and you don’t and then you trust them.” What is boils down to, she adds, is asking “does this deal benefit both parties or just the lender?” If it’s not a two way street, then it’s not a road worth taking, no matter how tempting it seems.
Elizabeth Lent is a freelance writer and a frequent contributor to The Cooperator.