Predatory Lending laws help consumers

While making breakfast the other day, I heard short news note on National Public Radio saying that a new study showed that the “predatory lending” laws passed by 28 states had, in fact, helped consumers get a better deal than they did in states without such laws.

I wanted to know more about this What did these laws cover, for example? Which states had them? So I “googled” the subject under “news” and found…nothing about the study. I did however, run into many entries chronicling a hot debate about what lenders and governments should do about things like negative amortization loans, interest only (or “option”) loans, prepayment penalties on mortgages, and whether or not laws should prohibit these things.

There was no mention in the current articles about credit card interest rates, which are often, in my opinion, predatory.

Sticking with the mortgage issue, whether or not it is legal, you should generally avoid any mortgage that does not include some sort of principal payment, and that shorter term mortgages (15 years instead of 30 for example) can save you tens of thousands of dollars.

But the worst thing of all, in my opinion, is long-term prepayment penalties on “sub-prime” (high interest rate) mortgages. Anyone getting a sub-prime mortgage wants to refinance as soon as they have raised their credit score in order to get their interest rate down. But, if they signed the original mortgage without paying much attention to the “fine print” they may have set themselves up for disaster.

I talked to one person who sold her house after a year and a half and bought one where she could get a lower interest rate. When she got the closing documents for her sale, she found a $15,000 prepayment penalty tacked on to her $150,000 mortgage.

Her original contract called for a three year prepayment penalty on sale and a five year penalty on refinance. This contract violated the state laws where she lived, but the bank that made it was a “national bank” regulated by the Office of the Controller of the currency and not (they claimed) subject to state regulation.

Make sure you ask anyone giving you a mortgage whether or not the lender complies with state lending laws. And in any case, never sign such a contract if you can help it.

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