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Predatory mortgage lenders knowingly lend more money than a borrower can afford to repay. The tactics used provide the lender with quick, upfront income and leave homeowners in a financial mess with their most significant asset at risk.

A surge in the subprime mortgage market over the past five years or so has allowed homebuyers with weak credit to qualify for "creative" loans. These have encouraged homeownership but have also led to increasing mortgage default and foreclosure rates.

Today, millions of Americans are losing their home because of predatory lending. If you are in the process of buying a home it is imperative that you understand predatory lending tactics and recognize the signs.

1. Steering: A credit score of 620 is the line between prime and subprime. Other factors like downpayment and income affect a homebuyer's borrowing capability. Predatory lending targets borderline consumers and steers them into subprime mortgages, even when they could qualify for a better loan. Recent college graduates, cash-strapped buyers and minorities are often the victims of steering. According to Fannie Mae, half of today's borrowers with subprime mortgages qualified for better mortgage rates and terms.


2. Excessive points and fees: Most borrowers focus on the mortgage rate and while they are distracted predatory lenders roll excessive points and fees into the financing. In the mainstream mortgage market, fees are typically less than 1% of the loan. Predatory loans often disguise fees and boost them to more than 5% of the loan.


3. Abusive prepayment penalties: If you are borrowing under a subprime loan with the hope of refinancing, think again. Most subprime mortgages, about 80%, carry a prepayment penalty compared to only 2% of prime market mortgages. A prepayment penalty means a fee will be incurred for paying off the loan early. Some prepayment penalties cover three years and cost up to six months of interest. In other words you won't be able to get out of a bad deal without paying out thousands of dollars.


4. Loan flipping: When a lender refinances a loan they receive a fee. If the refinance doesn't improve the borrower's rate or terms this is called "flipping". The tactic provides income to the lender without providing the homeowner any benefit. Flipping can cause unnecessary debt, increase monthly payments and deplete equity.


5. Mandatory arbitration: This little clause in a predatory loan limits the legal remedies available to the borrower. In other words you can't take your lender to court even if your loan has abusive or illegal terms.

• Mortgage 101: The Credit Factor by Elle MacKenna
• How Credit Scores Affect Mortgage Rates by Elizabeth Razzi
• Homeowners Turn for Help In Handling Mortgage Woes by Robert J. Hughes
• Finding a Mortgage in Tougher Times by Jane J. Kim
• Congress Primed to Act on Risky Home Loans by G. Hitt, S. Lueck, J.R. Hagerty
• Strapped Homeowners Start to Feel the Pain of Rising Rates by Ruth Simon
  
• Center for Responsible Lending