Mortgage Lending Scams

By Sharon Secor,
LendersMark.org Staff Writer

How to Avoid Lending Scams: Learn the Warning Signs

Mortgage lending scams are an unfortunate reality in today’s market. As in nearly every area of business, there are a few unscrupulous operators that will attempt to take advantage of the unwary mortgage loan consumer. Often targeting the most vulnerable members of society, such as the elderly, those with shaky a credit history, and consumers in dire financial straits, mortgage and home equity lending scams bilk American consumers and lending institutions out of millions of dollars every year.

Predatory lending is a term commonly used to describe mortgage practices that are deceptive, unfair, or even blatantly fraudulent. While the most frequently targeted consumers are those seeking to refinance an existing mortgage or shopping for a home equity loan, home purchasers are victimized by deceptive lending practices more often in today’s market than ever before. In September 2004, the FBI released an announcement that stated mortgage fraud has become rampant in the United States, with reports of suspicious activity tripling since 2001.

The best protection against mortgage lending scams is education. Before you begin to shop around for a home loan, it is wise to invest a bit of your time learning about various home mortgage loans and how they work. While it is not necessary to become a financial expert to obtain a fair deal on a home loan, taking the time to learn the basics can help you avoid falling prey to fraudulent or predatory lenders. Ill-informed consumers are the key to the success of many of these mortgage lending scams.

Common Mortgage Lending Scams and Predatory Lending Schemes

Among the most telling signs to watch for when shopping for a home loan is a lender that pursues your business a bit too persistently, or rushes you towards closing. Often, predatory lenders will solicit very aggressively, contacting the consumer repeatedly with a variety of inflated claims and promises to solve the consumer’s financial troubles in the blink of an eye. Of course, these offers are often available for a limited time, making it necessary to close the deal quickly, preferably before the consumer has time to read the fine print.

Another common practice for the disreputable mortgage broker or lender is the old fashioned bait and switch technique. Often, in this type of scheme, the terms and conditions presented to the borrower at closing are very different than those described by the lender during the negotiation period. The consumer may find that the interest rates are higher than promised, there are fees involved that were not disclosed, or even that the loan presented at closing is a completely different type than the one they agreed to. If the borrower allows themselves to be pushed into signing the closing documents in spite of the changes, it can take a considerable amount of time and money to set things right, often requiring court action.

Home improvement scams are another popular tactic for the disreputable. Often, these are solicited by a “contractor” who just happens to be working in the neighborhood. These solicitations often occur soon after the homeowner has inquired about home improvement loans or services, or they can be completely random, door to door fishing expeditions by the scam artists. Generally, the contractor will offer to finance home repairs or improvements through his company, or will claim to have a friend or associate in the mortgage industry that can offer financing. Once the homeowner agrees, the work done by the contractor is often sub-standard and overpriced, and the loan riddled with fees, high interest rates, and heavy prepayment penalties.

One particularly nasty mortgage lending scam is aimed specifically at the financially distressed homeowner. Sold as a rescue loan to bail the consumer out of financial difficulties or impending foreclosure, the operators of this scam convince the homeowner to “temporarily” transfer the deed of the property to them while waiting for the loan to be approved, supposedly as a safeguard against foreclosure. These predators, once they take legal possession of the home, rarely produce the promised loan. Generally, they will record the homeowner’s payments as rent while they work to obtain loans against the property to steal the homeowner’s equity, or sell the property and evict the homeowner.

Consumers should be very wary of any broker or loan consultant who is willing to bend the rules or fudge the numbers to secure a home loan for their clients. These tactics can lead to the consumer being approved for a loan that they cannot afford, leading to financial turmoil in the future that can lead to foreclosure. An unethical broker or consultant has nothing to lose from such situations, having walked away with their fees and commissions long before the trouble begins. Some even take advantage of the same consumer again, offering to refinance the crushing loan that they originated for the consumer to ease them out of their financial chaos, often at higher rates and with yet more fees and commissions.

These examples are just a few of the more common mortgage lending scams that are used to take advantage of unwary. While most mortgage brokers and financial institutions follow the rules, offering legitimate financing to consumers, there are predators who will ruthlessly steal your life savings and even the roof over your head, leaving your family in the street with no remorse. Patience and information are crucial in protecting yourself from such unscrupulous practices. Taking the time to research potential lenders and their offerings before you commit can spare you the heartache and hassle of falling victim to mortgage lending scams.

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