Predatory lending is far more prevalent in refinancing than in the purchase market. One reason is that buyers tend to look for mortgages from established and recognized lenders, many of whom are bound by rules put forth by Fannie Mae, FHA, or the Veterans Administration. If they don't follow the rules, they cannot sell their loans on the secondary market.

Another is that real estate brokers, determined to protect their sale, will wave borrowers away from loans that don't pass their own "smell test". Nonetheless, buyers can be taken in and should be alert to the possibility of predatory lending.

1) Agressive Sales and Advertising Techniques

There's nothing wrong with advertising, it's essential to build a business. But predatory lenders go over the top. Some target specific neighborhoods or demographics, which is called "red-lining" or "steering" and is definitely illegal.

Be very careful when you see ads targeting specific neighborhoods, ethnic groups, or demographics. A good rule of thumb is that if the loan wasn't originated by you, you may be being targeted so keep your radar on.

2) Lending to People Who Can't Afford the Loan

This is a tactic of which both home buyers and refinancers need to be aware. A legitimate lender does not want to foreclose on its borrowers and has many safeguards in place to maximize the ultimate recovery of the capital that is lent. A predatory lender plans on being well out of the picture before things go wrong.

Predatory lending practices in this category include overstating income, falsifying debt levels, or pushing borrowers into a higher interest rate in order to increase the lenders commission. A good rule of thumb is that if a lender ever asks you to sign or say something that isn't the truth, run don't walk for the nearest exit!

3) High Rates

As is discussed at length in Mortgage Secrets Revealed, the interest rate on your loan is determined by many factors. Most are totally out of your control since the market determines underlying rates. However, your credit-worthiness, income, and the amount of your downpayment will all affect your final rate.

The bad guys will sometimes convince borrowers that they are a worse risk than they really are, thus justifying a higher interest rate and/or higher fees. A good rule of thumb is that if things seem strange or the rates seem high, ask. If the loan officer can't give you a good reason, get a second opinion with another loan officer.

4) High Fees, Points, and Padded Costs

Everyone has to make a profit and mortgage companies and brokers have every right to levy charges that will compensate them for the service they provide. However, fees should be reasonable and they should be fully disclosed and explained.

It's tough for a borrower to crack the code on this category of deceptive lending. A good rule of thumb is whether you feel comfortable and feel like the loan officer is earning their money. If it seems too high, get a second opinion and see if the fees are comparable. Do be careful, since lenders can say anything and jack it up later. Ultimately, nothing is as important as feeling like you can trust your loan officer.

5) Steering

Unethical lenders may steer borrowers away from fair and reasonable products and toward those with higher rates and fees. This may be because the lender gets a referral fee for doing so, or they might be referring to a company that is financially linked to their own, sharing in the higher profit margins.

Generally speaking, most loan officers have a lot of products available. They should spend time with you determining what kinds of loans you're comfortable with and what is most appropriate for your situation. They should present you with two or three options and let you decide. If you feel like you're being pushed into a loan that you're not comfortable with, stay away!

6) Bait and Switch

Just like the advertised special at the applicance store which is "sold out" when you arrive the next morning, mortgages that seem to be too good to be true tend to be just that; once you accept them, they disappear. There is always a good explanation, but somehow the switch always comes after the loan officer has hooked you with a non-refundable application fee or an appraisal.

You won't hear this from mortgage brokers in the industry, but in cases like this the best thing you can do is bring your original Good Faith Estimate and demand that they explain why the fees changed. If the explanation doesn't seem right or you're not comfortable, back out and ask for any fees you've already paid back. If they balk, just mention the Department of Real Estate and they should be much more helpful...

7) Home Improvement Scams

These are particularly ugly schemes, usually targeting the elderly or those with lower incomes. In a nutshell, someone comes to the door offering to do work to the house that needs to be done, and they'll refinance the house at the same time so it won't cost any money out of pocket. However, the work is usually done poorly and the refinance is typically a rip-off.

Remember what we said earlier about people coming to the door? Always be wary when someone comes to the door offering a refinance or other work done that you don't feel is necessary.

8) Undisclosed PrePayment Penalties

A prepayment penalty requires that the borrower pay a fee (usually a certain number of months interest) if he/she pays off the mortgage before the due date. There is usually a specified period of time from the origination date when prepayment penalties apply. Prepayment penalties are now illegal in some states, but in states where they are legal they should be fully disclosed.

I would say two things in this situation. First, make sure you read your loan documents carefully. If no prepayment penalty was mentioned and you see something about one, be careful! Two, if a prepayment penalty is part of your loan and the loan officer has told you about it, know that it's a subprime loan. Be sure the term is the same as what the loan officer told you and that it's a period of time you're comfortable with.