Dollars and Sense: Predatory Lending Quiz

The prime targets for predatory lenders are some of the most vulnerable members of society -- minorities, the elderly, non-native English speakers and people with bad credit. People in these groups often lack access to the information they need to protect themselves from bad lending practices.

Sometimes, mortgage brokers (who are supposed to be on the side of the homebuyer) collude with mortgage lenders. The lender pays the broker to help convince the homebuyer to sign for a specific mortgage, in what's known as a kickback.

The bait-and-switch technique involves two lenders. The first offers the homebuyer an incredible deal, but it "falls through" at the last minute. The second lender calls the homebuyer later that day to offer a less attractive deal, banking on the fact that the homebuyer will be too excited about buying the house to care.

Flipping a loan refers to the practice of convincing a homeowner to refinance a loan even when there's no financial benefit to do so. The goal is to either get the homeowner to sign a new loan with a higher interest rate or to collect transaction fees.

Approximately 80 percent of all subprime mortgages have a prepayment penalty that charges a fee when a borrower pays back too much of a mortgage too soon.

Loan fraud is illegal, but that doesn't stop some predatory lenders. They might quote one rate but write a higher one in the contract or encourage a borrower to lie on a loan application, both of which are against the law.

An adjustable rate mortgage (ARM) has one interest rate for the first year or two of a mortgage and a different one for the remainder of the term of the loan.

Some people call ARM loans 2/28 or 3/27 mortgages because the interest rate is fixed for the first two or three years and the remainder of the loan (27 or 28 years) has a floating interest rate that can change over time.

According to the United States Congress Joint Economic Committee, an increase of four or five percentage points in ARM rates results in an increased mortgage payment of 29 to 50 percent!

The Center for Responsible Lending estimated that 44.5 million American homes would lose an average of $5,000 in value due to nearby foreclosures. That amounts to $233 billion.