How to Spot Predatory Lending Practices

Predatory lending is still out there

Despite tighter regulations, predatory lending persists — especially targeting first-time buyers, older homeowners, and people with credit challenges. Knowing the red flags is your best defense.

Top 10 red flags

• "You can afford this" without looking at your full financial picture: if they skip verifying income or assets, they are packaging a loan you cannot afford.
• Pressure to sign immediately: "This rate expires today!" Legitimate lenders give you time to read and compare.
• No Loan Estimate provided: by law, they must give you an LE within 3 days. If they avoid it, run.
• Prepayment penalty: most conventional loans do not have them. Some subprime and non-QM loans do. Anything over 2 years is predatory.
• Balloon payments: a large lump sum due after a few years. Almost always a bad deal.
• Negative amortization: your balance goes up every month because the payment does not cover the interest. Common in some subprime ARMs. Avoid.
• "No doc" loans with no income check: these disappeared after 2008 for good reason. If they offer a loan without verifying anything, it is a trap.
• Fees above 5%: total origination charges over 5% of the loan amount are excessive. Anything over 3% needs a clear justification.
• Mandatory arbitration clause: prevents you from suing if they commit fraud. Cross it out or walk away.
• Equity stripping: they refinance you repeatedly, each time charging fees, eating your equity. If a broker calls every year to refi "because rates dropped," be skeptical.

How brokers help prevent it

A good broker acts as a gatekeeper against predatory products. Here is why: brokers see offers from dozens of lenders. They know when a loan is overpriced compared to the market. They can say, "This lender is charging you 3 points above the wholesale rate. Here is a better option."

Banks and direct lenders have no incentive to tell you their offer is bad. Brokers who compete for your business do.

What to do if you suspect predatory lending

1. Stop all communication with that lender.

2. Report it to the CFPB (consumerfinance.gov/complaint) or your state attorney general.

3. Get a second opinion from a licensed broker — at no cost.

4. Check your Loan Estimate against the market average on Bankrate or Zillow. If fees are 2x the average, something is wrong.