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Let the borrower beware, says economics professor

October 28, 2003


With mortgage refinancing at an all-time high, predatory lenders are stripping borrowers of their home equity and threatening them with foreclosure. These lenders target people who are short of cash, as well as minorities, the lesser educated– and especially the elderly. And their practices are legal in many states, including Tennessee.
October 28, 2003


With mortgage refinancing at an all-time high, predatory lenders are stripping borrowers of their home equity and threatening them with foreclosure. These lenders target people who are short of cash, as well as minorities, the lesser educated— and especially the elderly. And their practices are legal in many states, including Tennessee.

Dr. Jerry Plummer, assistant professor of economics at Austin Peay, says with mortgage refinancing at an all-time high nationwide, it's important to be wary of potential predatory lending, “particularly in the 'sub-prime' markets.”

Plummer says, “Some sub-prime lenders have been accused of making loans to people, generally when they have good equity in their home, knowing that they cannot make the payments and will be foreclosed upon; meaning that the foreclosure will often lead to a low sale price, which in turn, means the property can be purchased and sold for a profit.

“The loans usually have high interest rates (often more than 20 percent APR) and additional fees, all of which are legal in their respective states.”

Some predatory lenders practice "loan flipping,” Plummer adds, repeatedly refinancing borrowers' loans over a short time frame. With each successive refinancing, the lender places additional fees that reduce the borrower's home equity. “This is a common practice with many firms, and the 'low interest rates' are the nucleus for the refinancing incentives,” Plummer says.

Several states, including Tennessee, are attracting a high number of sub-prime lenders, due to their generous lending and interest accrual practices.

“It is unfortunate that there is little legislative activity nationwide to eliminate these practices, but many privately funded organizations stand ready to assist those thinking of refinancing,” says Plummer.

“However, no group can assist with an already concluded loan. This is truly the approach of 'caveat emptor,' or, 'let the buyer beware.'”
Rebecca Mackey