Predatory Lending continue – Deceptive Marketing
Much of the competition between lenders in the subprime industry is not based on the rates or terms offered by the different lenders, but on which lender can reach and “hook” the borrower first. Predatory lenders employ a sophisticated combination of “high tech” and “high touch” methods, using of multiple lists and detailed research to identify particularly susceptible borrowers (minority, low-income, and elderly homeowner) and then mailing, phoning, and even visiting the potential borrowers in their homes to encourage them to take out a loan.
One of the methods used routinely and successfully by predatory lenders is the practice of sending “live checks” in the mail to target homeowners. The checks are usually for several thousand dollars and the cashing or depositing of the check means the borrower is entering into a loan agreement with the lender. The appeal of the checks is they are a fast and easy way for a homeowner to obtain cash. This initial loan is just an entry point into the financial life of the homeowner. The loan has an artificially high interest rate and monthly payment, in order for the predatory lender to be able to offer the homeowner an opportunity to refinance it, along with other debts, into another loan. The predatory lender’s ultimate goal is to get the homeowner to refinance their first mortgage with them.
A couple received a check in the mail for $4,000. It came at a time when they needed money and so they decided to deposit it. The check was a loan with a 21% interest rate and a 5 year repayment term. Almost immediately after depositing the check, the lender called the homeowner and offered to refinance that loan at a lower rate and give them additional money. The new, larger loan was at 19% interest rate with a ten year repayment term which lowered the monthly payments. Shortly after this, the lender again contacted the homeowner and encouraged them to refinance again and to consolidate other debts. This loan was at 17% interest rate and had a repayment term of twenty years. The lender went back to the homeowner and encouraged them to refinance this loan along with their first mortgage which was with another lender. Their first loan had a 12% interest rate and a thirty year repayment term.
Source from: Credit.org