What is predatory lending?  Does it only involve people with bad credit history?  You will be surprised.

Historically, predatory lending meant abusive practices against consumers who desperately needed a loan.  Because of those in desperate need had no bargaining power, lenders heaped on abusive interest rates and terms.

Today, there is an over-abundance of creditors who are willing to lend.  Your mailbox is full of “pre-approved” loan offers.  Television commercials are full of “no down payment” car loans.  So, consumers who need loans have many choices.  Yet, predatory lending practices persist.  In fact, predatory lending practices have spread across the spectrum of all economic strata.

Predatory lending continues today because of disparity in information available to consumers as compared to lenders.  Computers and the Internet instantly supply lenders with information that gives them an unfair advantage.  Incredibly long and incomprehensible contract language present barriers to consumers from understanding the true nature of the loan terms.

The following will address predatory lending practices prevalent in Arizona, and how to stop the abusive practices.

1. Mortgage Interest Mark Up

2. Auto Loan Mark-Up

3. Credit Report Myths and Solutions

4. Protect Your Credit Information

5. Yo-Yo'ed in Car Buying

6. Mandatory Arbitration

Mortgage Interest Mark Up: Consumers are trained to shop around for the best prices.  Consumers spend hours comparing prices and features of cars, televisions, appliances, and even groceries.  Yet, when it comes to the biggest transaction of their life, consumers do not shop around.  Consequently, consumers often are stuck with interest rates that will results in tens of thousands of extra interest payments over the life of the mortgage.

Almost all mortgages are generated through mortgage brokers.  Mortgage brokers make money through commission.  The higher the interest rate, the more commission brokers make.  On a $250,000.00 mortgage, a mere .25% increase in interest rate could result in $2,500.00 in extra commission.  How do you know that 6.75% rate the broker quoted you does not include a .50% mark up which will give the broker $5,000.00 in extra commission?  And exactly what does 6.75% mean?

By the time consumers sense that the broker may have misled them, it is often too late.  Consumers are often given 30 minutes with an escrow officer to sign 50 pages of documents – while their family must move out of the old house and move into the new house within days.  This is not the best time to learn that the broker added .50% mark up, or a prepayment penalty clause.

What can you do to protect yourself?

The best way to make sure you are getting the best possible rate is shop around and get rate quotes in writing.  Let the brokers know that you are shopping around and you will go with the best rate quoted in writing.  Make sure you get the following items in writing:

1. Interest Rate

2. Discounts or origination points

3. Total pr0ocessing fees

4. Whether prepayment penalty is applicable

5. Total APR (annual percentage rate).

Make sure you understand what the above terms mean.  The best option differs for different circumstances.  However, in almost all cases, the lowest APR will cost you the least in the long run.

Do not let brokers discourage you from shopping around.  Brokers often tell consumers that inquiries by other brokers will lower the credit rating.  While this may be true, the slight lowering of credit rating by one or two additional inquiries is well worth it considering the benefits of shopping for the best rate.  Moreover, many credit agencies now consider multiple inquiries within a certain time frame as one inquiry in order to encourage comparison shopping.

Some brokers also discourage comparison shopping citing bad credit.  However, there are many lenders willing to loan money to people with bad credit.  Even if you are forced to get a high interest loan because of your credit history, make sure you are getting the high interest loan with the lowest possible cost to you.  You can be assured of this by comparison shopping.

Some brokers also ask you to give them the lowest quote so he/she can “match” it.  I think this is a dishonest practice and you should not trust such a broker.  Every broker should have a fair chance at earning your business by giving you the best rate possible.  A broker should not be able to quote you a high rate, and then cut it down to match the other broker’s better quote.  This goes against the American way baseball, apple pie and hot dogs.

Make sure you decide on the lowest cost loan broker based on a written quote (this is often labeled “Good Faith Estimate”).  Then compare the written quote to the final loan documents.

Do not wait for the escrow company to give you a stack of papers to sign within 30 minutes reserved for you.  Call two days ahead and ask for documents so you can read them at home before signing.  You are promising to pay hundreds of thousands of dollars, and giving the loan company a right to throw your family out on the street if you break even one of many promises contained in the documents.  You should read them first.  And make sure that the documents match the written quote.  If you are not sure about anything in the documents, make sure you review it with someone who can help you.

Auto Loan Mark-Up:  Did you know that car dealers do not like people who pay cash?  Did you also know that car dealers make more money from financing than from sales? 

People who get auto loans from automobile dealers sometimes pay thousands of dollars extra because of higher interest rates charged by dealers, and minorities usually pay the most.

Many dealers increase the loan interest rate to certain customers.  Loans made by dealers usually come from an outside lender such as a bank or auto finance company.  The lender authorizes the dealer to make the loan at a certain interest rate based on the current going rate and credit record of the purchaser.  That is not, however, necessarily the rate charged to the buyer by the dealer.

To gain additional profit from the sale, the dealer can and sometimes will charge some customers an interest rate for the loan higher than the rate approved by the outside lender.  The dealers consider this their commission.  The difference between the lender approved rate and the rated charged by the dealer is called the “mark-up.”  In cases I have handled, I have seen mark-ups as high as 4%, with the usual mark-ups at around 2%.  While that does not seem much, even 2% can translate to over $2,000 in additional interest over the life of the loan.  The extra money goes into the pocket of the dealer or is split between the dealer and the outside lender.  It is pure profit.

Why are the loan rates increased by dealers for some customers and not others? The answer usually depends on how the salesperson “sizes up” the customer. A dealer may charge one customer little or no increase but charge the next customer a significantly marked up rate.

To make matters worse, many dealers increase the interest rate in a discriminatory manner. National studies show that minorities are much more likely to be charged a higher rate mark-up.

What can you do to protect yourself?

You should have a loan pre-approved with a credit union before you shop for a car.  Generally, credit unions offer lower rates on car loans.  Obtain pre-approval and then shop for a car.  If you find a car you wish to purchase, negotiate the price.  Once you arrive at a agreed upon price, then have the dealership contact the bank to finalize paperwork.  Do not negotiate based on the down payment and monthly payments.  If your credit is good, you should have no problem obtaining pre-approval.

If your credit is bad, dealers offer financing.  However, you should ask the dealer about mark-ups before signing the contract.  If the dealer informs you that there will be a mark-up, you are free to tell the dealer that the increased interest rate is unacceptable – or simply that you would prefer to arrange the loan through another lender.  You can also attempt to bargain with the dealer for a lower rate.  The interest rate is just as negotiable as the price of the car.  A key question for the buyer should be, “is this the lowest interest rate you can give me?”  Or, “are you keeping a portion of the interest that you are charging me?”

You should insist on the dealer giving this information in writing.  If a dealer refuses, walk away.  There are many others dealers who will be happy to sell you a car.

If you have already purchased a vehicle, and believe that the interest rate is too high, you should consider refinancing.  Again, credit unions are your best choice.  If your dealer financed loan has a higher interest rate, you should refinance through your credit union.  There is no penalty for prepayment of a car loan.

Credit Report Myths and Solutions:  Your credit rating reflects your reputation.  Most people know that you will have to pay high interest rates on loans if you have bad credit.  But, did you also know that insurance companies think that you are more likely to cause an accident if you have bad credit?  Or that some employers check your credit before deciding to hire or promote you.  Landlords may even deny you housing if you have bad credit.  An erroneous bad mark on your credit can cost you tens of thousands of dollars.

According to USA Weekend, (May 15, 2005), one missed bill can have drastic consequences on your credit rating.  According to one national credit bureau, more than half of U.S. consumers have a delinquent payment history on their credit card.  And one late or missed payment in the past year will result in average credit scores about 160 points lower than those with clean records: 598 for one late payment vs. 759 for no late payments.

Despite the important implications of credit reports in many arenas of life, credit reports are replete with errors.  A Consumer’s Union report (publisher of Consumer Reports) showed that almost half the credit reports contained errors.  A recent study showed that 29% of the credit report contained errors serious enough to cause denial of credit.

It is good idea to check your credit at least once a year and make sure that all of the credit items are accurate on your credit report with each of the three main credit bureaus (Equifax, Experian, TransUnion).  You are entitled to get a free credit report once a year from the Big 3.  You can obtain a free credit report at www.annualcreditreport.com.  Although it is a somewhat cumbersome process, you can instantly access your credit report.  Alternatively, you can purchase your credit report from “Consumer Credit Counseling” located at 950 W. Elliott Road, Suite 122, Tempe, AZ (NE Corner of Hardy & Elliott) or 17235 N 75^th Ave, Building C, Suite 125, Glendale, AZ (On 75^th Avenue, N of Bell Road).  Be sure to purchase a “tri-merge” report that costs $32.00.  A “tri-merge” report combines all three credit bureaus’ reports.  Carefully review your credit reports to see if anything is incorrect, inaccurate, or obsolete.  A debt becomes obsolete when it remains on your credit report more than seven years.  A bankruptcy, however, can remain on your credit report for ten years. 

Because of the enormous implications of credit reports, the industry is tightly regulated by the federal law.  This is both good news and bad news.  The good news is that there is a process that allows you to dispute erroneous information.  The bad news is that few people know about the process.  It is also slightly counterintuitive.  Most people who have inaccurate items on their credit report go directly to the creditor.  However, the most important protections under federal law do not kick in until you submit a dispute to the credit reporting bureau listing the erroneous item.

When you submit a dispute to the three credit reporting bureaus, you should write a letter clearly setting forth what information you believe is inaccurate. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item you dispute in your report, state the facts and explain why the information is incorrect, inaccurate, or obsolete, and request deletion or correction. You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, return receipt requested, so you can document what the credit bureaus receive. Keep copies of your dispute letter and enclosures.  Mail the letter via certified return receipt requested. 

The credit bureaus must then conduct a reasonable investigation and make corrections to your credit report.  The credit bureaus must also forward your dispute to the creditor (banks, credit car companies, mortgage companies, etc) to verify the reported information.  If the creditor receives a notice of dispute from a credit bureau, the creditor must also conduct an investigation.  After the investigation, the credit bureaus must give you a written notice – usually within 30 days – of the results of its investigation and a copy of your report if the dispute results in a change.  If credit bureaus still refuse to remove erroneous information, you can then file a lawsuit to remove erroneous information.

Contacting creditors directly may work.  However, under the federal law, the creditors are immune from liability unless you file a written dispute with the credit bureau first.  Because of this immunity, creditors are often not very motivated to correct the information.

As you can see, correcting errors in your credit report can be time consuming.  You should start working on cleaning up your credit report well in advance of your next big purchase using credit.  For more information, please see www.myfaircredit.com.

Protect Your Credit Information:  How would you feel if someone snuck into your house, opened your file cabinet containing all of your financial documents and looked over your personal information.  To make matters worse, what if that person made a copy of all the documents before sneaking out.  The same type of scenario – except done electronically – happens more than you think. 

Credit reporting agencies (such as Equifax, Experian, and Transunion) gather staggering amounts of information about you from a variety of sources.  Your birth date.  Your social security number.  Your current and past addresses.  AKA (also known as) names.  Your job history, including where you applied for a job.  Loan  amounts.  Credit card history.  Payment history.  Court judgments.  Tax liens.  Bankruptcies.  Collection information.  When and where you shopped for cars, cell phones, or insurance.  In sum, credit reports shows a very clear picture of your spending and shopping habits.  This information, often filling up 10 - 20 pages, is available to anyone willing to pay for it.

Because of the potential for great harm that can result from misuse of such information, the federal FCRA (Fair Credit Reporting Act) prohibits access and use of such information without a “permissible purpose.”  In fact, obtaining credit reports under false pretenses is a criminal act under both federal and Arizona law.  Despite such prohibition, there is widespread illegal access to credit reports.  Enforcement of the prohibition by the government is very lax.  Fortunately, you can enforce the prohibition through the civil justice system because the FCRA allows you to sue and recover your actual damages, punitive damages if appropriate, and attorneys' fees and costs.

How are you damaged when someone impermissibly looks at your credit history?  First and foremost, it is an unwarranted invasion of privacy.  You don’t know who looked at your private information.  You don’t know what will happen to your private information.  With identity theft at an epidemic rate, you should be concerned about who is looking at your private information.  Moreover, frequent inquiries will lower your credit score leading to higher cost of credit – in the form of higher interest rates – or even a denial.  Most importantly, businesses want to pull your credit history to “size you up.”  With the businesses can use the incredible array of information to gain unfair advantage in negotiating a deal with you.

A key issue is what exactly is “permissible purpose”?  Listed below are more common “permissible purposes” under the FCRA:

Court order
written permission
credit transaction (loans)
collection
employment
insurance

Listed below are examples of proper and improper access of credit history.

1.  You visit a car dealer just to look around.  As you are ready to test drive a car, the salesman asks you to leave your driver’s license with his manager for “insurance purposes.”  You like the car and start negotiating the price.  The salesman then tells you that your monthly payment will be low because your credit report shows it is good enough to qualify for low interest loan.  Here, the dealer did not have a permissible purpose.  You did not apply for a car loan.  In fact, the dealer had no idea whether you were going to pay for the car with cash or a loan.

2.  You visit a car dealer to look around.  The salesman asks you to fill-out a “guest sheet.”  Unbeknownst to you, the guest sheet has a small print sentence allowing the dealer to pull your credit history.  This is a more difficult issue.  Unless you can prove that the dealer deceptively obtained your signature on the guest sheet, the dealer probably had a legal basis for accessing your credit history.  The fact you did not carefully read all of the guest sheet before you signed it does not negate the presumption that you agreed to the terms of the guest sheet.

3.  You pay for a lawn mower at local hardware store with a personal check.  Accepting payment in forms of a personal check is considered extension of credit for purposes of the FCRA.  A check is nothing more than a promise to pay certain amount when presented at the proper bank.  Therefore, it is considered a credit transaction and the merchant accepting the check has a right to check your credit.

4.  Your car is stolen.  A few days later, it is found in the woods, burned and damaged beyond repair.  Your insurance company suspects that you staged the incident to collect the insurance money.  Your insurance company asks the police to investigate.  The police pull your credit to see if you experienced financial problems requiring money.  The police do not have the right to access your credit history without a court order.  However, this is a routine practice among many police agencies.

How can you tell if someone has looked at your credit history?  Your credit report will tell you who accessed your credit and for what purpose within last 2 years under the “inquiries” section.  You should regularly obtain your credit report and examine it carefully.  You are entitled to get a free credit report once a year from the Big 3.  You can go to www.annualcreditreport.com and obtain a free credit report.  Although it is a somewhat cumbersome process, you can instantly access your credit report.  Alternatively, you can purchase your credit report from “Consumer Credit Counseling” located at 950 W. Elliott Road, Suite 122, Tempe, AZ (NE Corner of Hardy & Elliott) or 17235 N 75^th Ave, Building C, Suite 125, Glendale, AZ (On 75^th Avenue, N of Bell Road).  Be sure to purchase a “tri-merge” report that costs $32.00.  A “tri-merge” report combines all three credit bureaus’ reports.  Carefully review your credit reports to see if anything is incorrect, inaccurate, or suspicious.

Yo-Yo’ed in Car Buying:  If you buy a car and obtain financing through the dealer, there is a good chance that even though the salesperson shook your hand and congratulated you on your new purchase you could become the next bait-and-switch victim.  The "switch" usually starts with a call telling you: "The deal fell through" and then "we need more money for a down payment."  Car dealers may put what they call "conditional sales" language in all of their contracts when they arrange the financing for you.

Often consumers do not even get their down payment or trade-in back. The reason given is typically your trade-in or down payment was used to pay the charge for using "their" car.  Always get your own financing before you go car shopping. Go to your credit union or bank or anywhere else you trust. Just be sure to shop around. Find out before you go to the dealer how much the car you want to buy should cost by visiting the library or the Internet.

When you arrive at the dealership, do not start bargaining with how much you can pay each month. If you do, the dealer can convince you to pay more money than the car is worth.  If you let the dealer arrange financing, never sign any contract that has "conditional sales" language in it.  The dealer may tell you everything is fine, the loan is no problem and it's your car. But because these "puffing" statements are not in writing, they are meaningless. No three-day cooling off period applies when you buy a car in Arizona.