Millions of poor and elderly Americans are the victims of predatory lending schemes. The scammers bilk them out of billions of dollars in ridiculous fees and obscenely high interest rates. Knowing what to look out for, will guide you in helping your aging parents to avoid predatory lending schemes.
The Usual Suspects
Although many home improvement contractors are honest and conduct their businesses with integrity, some are unscrupulous and prey on elderly people who have limited incomes but have built up a substantial amount of equity in their homes. Other predatory lending schemes come directly from unethical mortgage brokers or lenders.
Here is how it works. There are five primary forms of predatory lending schemes perpetrated on the elderly:
- Loan Flipping. The lender refinances the senior’s existing mortgage with a new loan that has excessive fees, a high interest rate and will take many years to pay off. As if that were not bad enough, whenever the lender “flips” the loan again, they charge additional fees and points.
- Packing. The lender includes features you did not ask for with your mortgage. One of the most common items “packed” into a mortgage is credit insurance. Some dodgy lenders even lie to the seniors and tell them they must buy the credit insurance to qualify for the loan.
- Equity Stripping. In this scheme, the lender does not refinance the existing mortgage. Instead, he sets up a home improvement loan or some other loan that uses the equity in the senior’s home as collateral, regardless of whether the senior has the cash flow to make the payments. If she cannot afford the monthly payments, the lender can foreclose and sell the home.
- Hidden Balloon Payments. If a loan sounds too good to be true, it probably is. If your parent is offered a loan with surprisingly low monthly payments, read all of the supporting documentation to see if the lender will require a balloon payment in a few years for the entire balance of the loan. These loans generate massive fees for the lender, because your parent will have to refinance in a few years and pay more fees and points.
- Bait-and-Switch Schemes. In these scams, the lender tells you that you are getting certain terms, like a low interest rate, but then actually provides a different type of loan or one with less favorable terms. A particularly sneaky tactic is when the loan has the promised terms for the first few months, and then, without warning or explanation, the different terms take effect. Under the new terms, the senior might have unaffordable higher monthly payments. When the senior cannot make the monthly payments, she can lose her home to foreclosure.
How You Can Help Your Aging Parents Avoid These Rip-offs
Talk with your aging parents about predatory lending schemes. Make them aware of the dangers of loans for home improvements and other loans tied to the equity in their homes. Be present when they talk to contractors and lenders, and get everything in writing. Read all of the documents to make sure the contractor or lender did not bury a financial land mine in the fine print.
The laws are different in every state, and this posting talks about the general law. To protect your parents, consult with an elder law attorney in your area.
Washington State Department of Financial Institutions. “Predatory Lending.” (accessed November 29, 2017) https://dfi.wa.gov/financial-education/information/predatory-lending
CNN.com. “Predatory lending: There ought to be a law.” (accessed November 29, 2017) https://www.cnn.com/2005/POLITICS/08/19/predatory.lending/index.html