The Seven P’s of Predatory Lending

By Cherri Walrod – Founder and Director of Resources4adoption © 2013

Adoption is usually such an emotional experience sometimes families can have a momentary lapse in good judgment and therefore become easy prey for unethical lenders. When you long for something so badly, it can be so easy to justify things that we would normally say "no" to.

Since starting Resources4adoption three years ago, I have talked to, coached, or communicated with hundreds of adoptive families, mainly in the area of adoption financing. As a result of these encounters, I have become more and more concerned about predatory lending practices for adoption loans.

I am not a CPA or a banking expert, but I had a lot of questions about this problem. So, I began to do some research on this subject. I also found someone with a CPA background to help me understand this better.

To help us better understand what is involved with predatory lending, I reached out to Jeremy Calva from America’s Christian Credit Union. Mr. Calva is a CPA and also the VP/Chief Strategy Officer at ACCU. He oversees corporate and consumer lending along with credit services. Deeply troubled by predatory lending practices, America’s Christian Credit Union began an adoption loan program in 2009. Since then, they have helped well over 600 children join their forever family through this program. ACCU continues to set the "gold standard" in adoption lending.

While researching this topic, a pattern seemed to emerge which I will share as The Seven P’s of Predatory Lending.

1. Promises - Promises the lender may or may not be able to keep.

Be extra careful of the “fine print” where the lender can change the terms of the loan at any time. This is what many credit cards do. They can change the rules of the game to suit them and you are just out of luck. Promises that sound too good to be true probably are. Promises to fix your current problems with future refinancing should be avoided.

Promises go both ways so you should also avoid making promises that YOU cannot keep either. Take time to thoughtfully consider your needs and situation so you can keep the commitments you sign up for.

2. Pre-payment penalties – Anything with a pre-payment penalty should be big red flag.

Lenders should be working in your best interest and not just theirs. Penalty periods can last for years and have steep fees. This is ridiculous and should be a sign for you to look for a much better option. Good lenders should be thrilled when you are able to pay them back early.

3. Purpose – What is the real motive and purpose of this loan?

Are they targeting you because you are emotionally vulnerable? Unfortunately, there are crooks in this world that like nothing more than to prey on unsuspecting adoptive families... some of these people can smell desperation a mile away.

Do not fall for ads which seem to indicate that your credit does not matter. Most reputable lenders will require some sort of credit check. This may not be the case when working with non-profit foundations lending money for adoption. However, this is almost always the case when dealing with an actual lending institution. If they are a solid company, why wouldn’t they want to see your credit score?

If you feel you are being rushed or pressured into any decisions, remember that you CAN walk out the door or hang up the phone. Reputable lenders should be willing to work with you on your timeline and not just theirs. If you encounter terms like "once-in-a lifetime" or "limited time only," it is time to turn around and head the other direction.

4. Perfunctory personal service – "Perfunctory" means they are just going through the motions, apathetic or like you are dealing with a giant heartless machine.

You need genuine personal service and not just be a number in their system! Try to deal with lenders who are local or at least can offer you more personalized service. Doing business face-to-face would be optimal, but of course is not always possible.

There are adoption loan options which are reputable and can be trusted, even long distance. America’s Christian Credit Union, ABBA Fund, Pathways for Little Feet and A Child Waits Foundation are all examples of solid adoption loan options. ACCU is the only option in this list which is available from an actual lending institution. The other three are non-profit organizations with zero to low interest rates. Please be advised that most of the organizations do have application criteria which you will need to meet before you can apply.

I encourage families to also check with their local hometown banks, credit unions or savings and loans institutions. You might be surprised how willing they are to help you…especially if you have some form of collateral. There are many times when they can help you if you only ask.

Here is an example of GOOD personal service: One savings and loan association (S & L) shared with me a way they can help. If you have a relative or friend who is willing to put a certificate of deposit (CD) up for collateral with the savings and loan, then the S & L can lend you up to 95 percent of the CD amount at a very low interest rate. In this case the S & L was able to lend at 3 percent interest over a five year term. The best part is the CD continues to gain interest and stays in the owner’s name. The savings and loan issues you the loan and you pay them. This is a total win-win... unless of course you decide to skip town and quit making payments.

5. Points – This one is a little harder to describe and understand if you don’t have a financial background.

Basically, "points" (also called discount point) are the lender’s fees you have to pay to them for the loan. However, it is a little more complicated than that. Points are actually a form of pre-paid interest and a lot of caution is in order. Points are one way the lender can "mask" the amount of money you will be paying. Each point is equal to certain percentage of the loan amount. A lender can effectively raise the yield on a loan above the stated interest rate by charging the borrower points.

6. Puffed-up interest rates – This may be obvious, but here it is anyway.

Lenders can make more money if they charge you a big chunk of interest. I would urge caution anytime you are dealing with interest rates in the double digits... especially if you are getting past the 11 or 13 percent interest rate range. Signing on the dotted line for interest rates much higher than this almost guarantees that you will not be able pay it back within any kind of reasonable amount time.

You should also avoid adjustable interest rates or any loan with the term "balloon" attached to it. A balloon could mean that a huge payment is due at some point or it could mean the interest rate is basically getting ready to explode. Either way, this is not a good scenario and further increases the chance that you will not be able to pay it back.

While it can be very tempting to go in with the hope that a future raise, bonus or tax credit will rescue you from a balloon, this is a very bad idea. You do not know for sure what the future holds and you should not count on these to save the day. You should only go into a loan with reasonable interest rates and reasonable terms which you can deal with right now... today.

7. Perpetual – Perpetual stands for repeated refinances or "flipping."

This is another "bait and switch" tactic that many predatory lenders use. The promise you the cash you need today, and you can pay back later with some other sort of refinance. However, you can end up owing a whole lot more than you bargained for, loosing valuable equity, becoming "upside-down" on your mortgage, or even worse... losing your home. Having the ability to get your hands on the cash you need now can be very tempting... especially if you are in an emotionally vulnerable place and desperate for adoption funds.

 

Please be cautious and weigh all options very carefully. When your child comes home, you want to be in a position to enjoy your family and give them the time and attention they deserve. You do not want to be so bogged down with debt that you become depressed and it feels hopeless.

By the way, I know how this feels and this is why I am sharing this information with you now. If I can do anything to help someone else avoid some of the pits that I fell into along the way, then it will all be worth it!


Sources:

  1. Responsible Lending – 8 Signs of Predatory Lending http://www.responsiblelending.org/mortgage-lending/tools-resources/8-signs-of-predatory-lending.html
  2. Jeremy Calva - CPA, is VP/Chief Strategy Officer at ACCU. He oversees corporate and consumer lending along with credit services.

Cherri Walrod is mom to six children and the Founder and Director of Resources4Adoption.com. Resources4Adoption.com is the #1 educational resource for adoptive families seeking financial assistance. From help in writing compelling grant and loan applications to providing tips for fundraisers, Resources4Adoption offers personalized support for each family.

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