Banking on Your Future

1. Banking on Your Future Protecting Your Home from Lending Scams Funded by

2. Learning Objectives • Identify predatory financial practices in the home equity lending industry • Recognize advertisements or marketing practices that predatory lenders use • Demonstrate new skills to enable them to stay away from predatory lenders and home improvement con artists. • Identify predatory practices in the home improvement industry. • List community resources that will provide additional information in case of questions (Know where to go for help)

3. Predatory Lending: What is it? Predatory lending is the practice of tricking consumers into taking home equity loans at a higher than normal interest rates, with hidden fees and penalties using their home equity as the basis for the loan.

4. Meet Mr. Romano

5. Types of LendingWhat’s the Difference? • Prime • Sub-prime • Predatory lending

6. “A” loans ‘Prime’ loans Made to a borrower at the going rate Made to borrowers with very good credit ratings (FICO score). Types of Loans – Prime Loans

7. Anything under an “A” rating is ‘sub-prime’. “A-” loans -- slightly higher interest rate. Borrowers with few credit blotches “B”, “C”, and “D” loans Borrowers with significant credit blemishes. “D” loans have highest interest rate Made to people with the weakest credit histories Can include bankruptcy. Types of Loans – Sub-prime Loans

8. FICO Scores: What to Expect *as of 10/21/05 myfico.com

9. Is All Sub-prime Lending Bad? No, responsible sub-prime lenders serve a valuable role. • Allow many more people to buy home without perfect credit • Allow people with credit issues to remain homeowners.

10. Predatory Lenders…. • Pressure you to borrow more than you can afford • Charge higher interest; • Add fees for things like credit insurance that traditional lenders do not charge; • Add conditions such as early payment penalties and balloon payments

11. Predatory Lenders…. • Add undisclosed, hidden terms • Make loans with negative amortization - a loan structured so that the monthly payments do not cover the amount of interest due each month so that the principal balance increases each month. • At the end of the loan, the borrower owes more than the amount originally borrowed.

12. Protect Yourself

13. Loan secured by your home equity Can be a useful tool Abused by predatory lenders Home Equity Loans

14. Low-moderate income Elderly Persons of color People in financial crises People with Equity People without access to information People who are intimidated Predatory Lenders:Who Are Their Targets?

15. TRAP You need money, but don’t have enough income each month. You have equity and have decided to get a loan. The lender encourages you to inflate or pad your income on the application. The monthly payments are too high and you lose your home. SOLUTION: DON’T GET CAUGHT Never ‘pad’ your income. Borrow only the amount you can easily repay. Read contracts carefully Tell lenders that you will not accept a loan for an amount higher than you feel you can comfortably repay. Do your homework! How much income do you have that you could use to repay a loan?! Loan Padding

16. TRAP The lender charges a higher rate than necessary and adds credit insurance or other fees to your loan, fees that you may not need. This makes your payments too high. You are unable to meet the payments. SOLUTION: DON’T GET CAUGHT Traditional lending institution loan Even if your credit is damaged you could still get a loan from a traditional lender. If a contract has fees you do not understand, question the lender. Ask for the dollar amount rather than the percentage. Do not sign any blank pages! High Interest Rates/Unnecessary Fees

17. TRAP Lender encourages refinancing the loan repeatedly in a short amount of time. No benefits for consumer Lender gets rich on the fees that are charged each time The monthly payments get larger and you won’t be able to meet your payments. SOLUTION: DON’T GET CAUGHT Be wary of anyone that encourages you to refinance the loan in short period of time. If you are refinancing the loan shop around for the best deal. Refuse to sign anything that has lots of fees. Home Loan “Flipping”

18. TRAP Lender offers you a specific set of loan terms when you apply, then at signing, produces higher charges. The lender pressures you to accept the higher changes. After a few months, you are unable to meet your payments. SOLUTION: DON’T GET CAUGHT Refuse to sign the loan. Leave the building Contact the better business bureau to report the lender. Shop around for a better deal including traditional lenders. Bait and Switch

19. TRAP A lender offers a very good sounding deal—minimal payments for the first six months to two years on a loan. After that time, the balance of the loan is due. You will be stuck paying back the entire loan in one lump sum. SOLUTION: DON’T GET CAUGHT Be very careful with this type of loan. Understand how long you will make payments, whether the payments will cover any of the principal, and finally, how much and when the final lump sum payment will be due. Do not sign if you do not like the terms. Balloon Payments

20. TRAP The lender has created a loan where you aren’t meeting even the interest payments each month; therefore, the principal (original amount owed) is increasing. At the end of the loan, you owe more than you originally borrowed, even though you have been making monthly payments. SOLUTION: DON’T GET CAUGHT Do your homework. Understand how long the loan is for, how much (in dollars including the interest and fees), and how much of each payment will go to paying the principal. If you don’t like the terms, don’t sign the loan. Shop around for a better deal. Negative Amortization

21. TRAP Giving false information about the loan terms; Hiding information such as the cost of the loan Not letting you see the loan amounts, hiding the amounts with their arm during signing, etc. SOLUTION Do not give false information. Make sure you see and read all papers, signing where necessary. Do not sign any blank pages “X” out or cross out blank spaces on loan documents Deceptive Practices and Fraud

22. TRAP Borrowers believe they are borrowing a certain amount with a specific monthly payment. Borrowers find much higher amount at loan closing. Lender tells you - payments will be reduced or that the loan will be refinanced. Lender forges signatures. SOLUTION Understand the law. You have the right to know exactly how much you are borrowing and how much interest you will be paying. Don’t be fooled by the “but don’t you trust me? I only have your best interests at heart,” scheme. Deceptive Practices and Fraud

23. Protection from Predatory Lenders

24. Tools: Protection from Predators • The Truth in Lending Act (TILA) • Homeownership Equity Protection Act (HOEPA) • Real Estate Settlement and Procedures Act (RESPA) • State Unfair and Deceptive Acts and Practices Laws (UDAP)

25. Truth in Lending Act (TILA) • Right to rescind (cancel) a loan, as long as the loan is secured by your primary residence. • Includes home equity and home improvement loans • Lender must provide notice of the right to cancel • Three business days to cancel • Lenders must clearly explain loan terms. • You have up to three years to cancel the loan, if lender did not follow these rules

26. Home Ownership and EquityProtection Act (HOEPA) • Protection from high interest rate loans • Additional disclosures for loans 3% above Treasury rate • Lender must disclose APR and monthly payment amount 3 days before closing • Prevents certain terms in loans

27. RESPA • Real Estate Settlement and Procedures Act • Kickbacks and unearned fees are illegal

28. State Laws • States have laws to protect borrowers • Laws may prevent: • Unaffordable loans • Flipping • Equity stripping • Misrepresenting loan terms

29. Is This the American Dream?

30. Tips to Avoid Predatory Loans • Get a loan for the minimum amount needed. • Protect your equity. • Shop around. • Study and learn how to compare loan terms. • If it sounds too good to be true, it probably is.

31. Tips to Avoid Predatory Loans • Learn about APR (annual percentage rate) • Ask about any additional fees you see in the loan BEFORE you sign. • If the lender will not disclose the fees or dollar amounts, leave. • You can delay closing. • Remember – the law is on your side.

32. “I was in the neighborhood.” “You need new windows…” “Your home can be the sample.” “This offer is only good for today.” Home Improvement Scams

33. Unsolicited salesman “Your house needs repairing” “have left over materials” Offer to do the job for a small amount of money. Later, threatens homeowner for more money Say, thank you, NO Close the door Look for responsible home contractors Get referrals from family, friends, local NWO “I was in the neighborhood” The Scam Avoiding It

34. Unsolicited salesman “Your house needs new --------” No money? No problem. Brings their own lender. Poor work, unfinished work Homeowner in debt Don’t hire these contractors Get referrals from family, friends, local NWO Don’t pay full amount until work is done Seek home improvement funds from your local bank “You need new windows” The Scam Avoiding it

35. Salesman looking for “model” home to be sample of their work Homeowners that agree end up with bigger bills than planned Homeowner in debt Don’t hire these contractors Ask for references and check them! Get a contract and have it reviewed by an expert Remember, if it sounds too good to be true…it’s probably a scam. “Sample home” Scam Avoiding it The Scam

36. Contractor offers an incredible deal that is only good today. Full amount due in advance. So what happens? You pay him for the incredible deal and never see the work or materials. Don’t be pressured by these people. They are only out to get your money. Protect your home! Say, “thank you, no” and close the door! “Offer is only good for…” The Scam Avoiding it

37. Call or visit local banks Shop around You can always walk out Check with the Better Business Bureau Get advice from your local NeighborWorks organization. Avoiding Home ImprovementLending Scams

38. Summary • Identify predatory financial practices in the home equity lending industry • Recognize advertisements or marketing practices that predatory lenders use • Demonstrate new skills to enable them to steer away from predatory lenders and home improvement con artists. • Identify predatory practices in the home improvement industry. • List community resources that will provide additional information in case of questions (Know where to go for help)