("India Abroad," Mar. 22, 2002)

Debt consolidation and refinancing are fertile grounds for consumer fraud. Consumers who blithely believe lenders' glitzy offers of "saving" money on loan payments often find ugly surprises in store, finding themselves in a financial trap a few months later, making much higher loan payments for much longer. We discuss below some typical deceptive practices that have left borrowers fretting.

The Systematic Deception: First, Find the Vulnerable

Lenders typically target vulnerable borrowers: those with a mortgage debt and outstanding credit card balances. It's easy to find them: Lenders simply secure lists of borrowers who carry significant credit card debt. Such lists are readily sold by retailers and others: If you have outstanding balances on your credit card from Best Buy, K-Mart, or Costco, for example, you are a good target (Recall that you already provided your mortgage information while applying for a credit card).

Thereafter, lenders conduct an aggressive mailing and telemarketing campaign with such borrowers promoting the benefits of debt consolidation. One of the most effective methods has been the mailing of "live" checks. In the promotional materials with such checks, lenders invite the borrowers to access the specified loans by "merely" cashing the "preapproved" live check. Typically, these loans carry a "no interest" provision for a short time - a teaser, because very few borrowers are able to pay off the loan within that time. And the interest rate after that "teaser time" will more than make up for the slack! In effect, thus, the encashment of this "live" check obligates the borrower to repay the money at high interest rates

So, if you've received a loan offer extolling your "excellent" credit history, don't get carried away. It probably means that you've landed in some lender's "Suckers List"!

Roping In With Enticements

Once a borrower encashes the live check, his/her name immediately lands on the lenders' "hot list" and is circulated amongst its sales staff. In short order, the lender completes its homework: It has already gained access to the borrowers' credit history and long and short term debts. With this information, it entices borrowers with a "lower" monthly payment by consolidating all outstanding loans - mortgage, credit card, and sometimes even car loans - with its apparently irresistible offer.

Lenders are known to have used several deceptive practices at this stage. These include, for example, telling borrowers that making bi-weekly payments electronically - instead of the conventional monthly payment by check - would produce lower effective interest rates; often, they don't. Worse, some lenders don't reveal the upfront finance charges such as fees and points, and the effective Annual Percentage Rate for the interest charged.

In addition, the projected monthly payments under the consolidated loans may include payments toward separate "revolving" loans which carry significantly higher interest rate. And these revolving loans amortize much slower, which means that borrowers would be paying off the loan for a much longer period of time or alternatively, would have to make balloon payments a while later. And to top it all, many loans contain prepayment penalties which reduce borrowers' ability to refinance that lender's loan.

For example, after a home purchase, a California couple received a "live" check for $5,000 from a lender. The couple cashed the check to help with a family emergency believing that they could pay off the debt with a low-interest loan from the lender. The couple fell victim to the above practices and eventually landed up with two loans, owing the lender more than their home was worth! They were now trapped in loans that carried interest rates of 12.4 percent and 23.9 percent. The lender had never informed them of prepayment penalties and other unanticipated financial burdens so that they could not even think of approaching another lender.

Some lenders also promote credit life insurance - but that coverage is typically valid only for the first few years, and borrowers often pay additional up-front points based on the cost of the insurance. Lenders often fail to return or credit such payments even if the insurance is terminated later.

Another tactic is to make the loan amounts so high a proportion of the value of the borrower's home that a refinance of the consolidated loan would be out of the question. Thus, for example, say A has a $100,000 mortgage balance on a $150,000 house. He also has $20,000 in credit card loans. The lender would offer to consolidate this $120,000 loan, and further offer an additional "revolving" loan of $20,000 - so that A's outstanding principal balance is now $140,000. That straps A to the lender, compelling A to pay extortionate interest because no other lender will refinance this loan which, with interest and costs, would exceed the value of the home itself.

Non-Deceptive, But Sharp Practices

While the above illustrate some fraudulent practices, even non-deceptive but unfair practices could be legally suspect: Don't assume simply because the lender is a well-established bank demanding something, that demand is legitimate. For example, a homeowner desirous of selling his home asked the lender for a payoff letter, also known as an estoppel certificate, to ascertain the exact amount necessary to satisfy the existing mortgage on the premises. The lender faxed the letter, but also charged $13.50 for a "recording fee" and $10.00 for a "Fax fee." Both these are prohibited by law in New York.

In a class action disputing this charge, the lender argued that it had disclosed these charges to the homeowner and hence, there could be no fraud. But that is no answer, said the court, because the homeowner was at the lender's mercy, and had no realistic alternative. Any sane person would have paid these fees rather than jeopardizing the refinancing.

Consumer fraud typically involves an individual consumer who falls victim to a commercial entity which enjoys a "disparity of bargaining power", and a controversy over the sum of $23.50 is exactly the kind of small-money dispute to which the law was meant to apply.

So, if your refinancing deal turned out to be different than what you thought it was, call us to see if you can do something about it. You could help yourself, and a lot of others! Initial consultation is free.

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