Predatory lending is at an all-time high because the real estate market is still going strong after five years of skyrocketing prices and low interest rates. The term doesn't have a clear meaning, but it usually refers to lenders who go out of their way to give buyers loans at much higher rates than those buyers could find elsewhere. Predatory lending is a business that makes money, and unscrupulous lenders or their agents often hide it as legal lending.
It usually goes like this: An agent who works for a lender, or who works for the lender on their own, tells a person who wants to get a loan that he or she doesn't meet the requirements for the loan they want. The agent goes on to say that not only will this lender not give them a mortgage, but it's likely that no other major lender will either. The agent then tells the borrower that everything will be fine because he knows a lender who can give the customer a loan.
At that point, he sends the customer to this other lender, with whom he works. This lender will give the buyer a loan, but the loan has a high interest rate, very expensive closing costs, and a prepayment penalty that will make it hard for the buyer to refinance in the future. The buyer signs the contract and agrees to the high-priced loan because he or she doesn't know any better and feels like he or she can't do better anywhere else.
There are more shady deals to come. Most of the time, these lenders are interested in more than just the money from the loan. By giving people with bad credit or low income loans with high interest rates, the lenders may be betting that the buyer won't be able to make their monthly mortgage payment. Once the buyer stops paying, the lender can foreclose on the property and sell it for a profit. The lender gets an easy-to-sell piece of property, and the agent gets a commission on the loan and another bonus when the house is sold. The buyer is left with bad credit and no place to live, which is a shame.
This is called "loan steering," and it happens most often in areas where buyers are poor or have bad credit that makes it hard for them to get a loan from a big bank. People who do this kind of predatory lending can easily take advantage of customers who don't know any better or who think they can't get a better deal from another lender.
Be wary of a lender who turns down your loan request, tells you that no one else will lend to you, and then offers to send you to someone who will. Instead of falling into a predatory lending trap, it's much easier to just check with other lenders yourself.
