Lender Scams and Warning Signs: Beware & Protect Yourself!

[Joshua Dorkin]

Another recent thread on this forum caught my attention, and I thought it important to post this discussion . . .

I'd like to get feedback from our members, including the investors, professionals, and lenders about lender scams that might be out there.

If you've aware of ANY kind of scam or scandalous practice that traditional, private, or hard money lenders are currently engaging in, please share them here. I'd like this thread to hopefully become the go-to place to find out how not to get screwed when it comes to getting a loan.

So . . . lets see what you've got to say:

[Bill Gulley]

There are many red flags. Basically as Charles mentioned, if you get a feeling a lender (broker, HML) is telling you what you want to hear before your pay the application fees, taht's the first red flag.

You need a B.S. Meter in this business. The better something sounds that is contrary to the norm, your BS Meter should sound off and light up. While everyone, to a degree has a BS Meter (most people get one in junior highschool and it is developed with common sence over time) some have units that need to be calibrated.

The best way to calibrate your BS Meter is to study the subject in a conventional manner. The best way to do that is study real estate financing rules and regualtions, really boring stuff, but that's the way it is. Just because someone says they have a degree in finance or they passed a mortgage brokerage exam or even a bar exam, does not give them credibility in real estate financing. The subject is not taught in depth in any formal educational program.

Pay particular attention to what is known as "prudent lending practices". These are the conventionally accepted norms ofoperations that any prudent lender would follow in making a real estate loan. If someone says they can get financing under terms or conditions that do not follow these guidelines (which is possible) expect to pay more in fees and interest rates to compensate for the additional risks associated with these variances from the norm.

What would you do if you were a lender? Would you make a loan like the one being described to you?

Those who usually get ripped off are those who are desperate. They have poor credit or insufficient capital, maybe both. But the biggest reason people get ripped off is because they don't know any better! They are willing to trust those who tell them what they want to hear. They turn their BS Meter off.

There is an old saying: Financing is the key to real estate that opens doors for you. And, if you really don't understand real estate financing then you really can't understand real estate!

The biggest problem I see for many investors is that begin by listening to guru programs orfollowing the advice of other investors as they insist on skipping the basics and diving straight into something they see as having a profit potential. They fail to accomplish any due diligence with themselves. As fast as rules, regulations and laws are changing today, following the advice of another investor might just take you down a road to make the same mistakes that investor makes and your mentor may not know the difference. What I'm saying is that it is up to you to calibrate your BS Meter.

Your BS Meter should go off as any lender presents something that varies from the norm, they further away they get, the louder it should be blasting in your head!

Some (not all) of the indicators could be:

Up front loan fees that are outside the norm for the type and loan amount you are seeking; and

Not providing a loan committment in a timely manner. This means a good committment that is not contingent on verifications or committee reviews!

Only having one qualified appraiser to appraise a property. If the applicant is paying for an appraisal, there should not be an "in-house" appraiser. And,

Loan fees should be estimated at the time of application, even in commercial deals!!!!! If that lender has been making SBA loans, they know about what an environmental report will cost. They will know what bond fees will be and what underwriting fees will be by the investor.

Residential properties (owner or non-owner occupied) may vary widely from one region to another. Brokers are nowrequired to disclose premiums received as well as all other loan costs in a Good Faith Estimate of Loan Costs.
I have seen people call foul when the per diem interest was estimated at some two digit figure and then end up being in the high three digits. This is not a scam, it depends on the actual closing takes place. Lenders should be using 15 or 30 days.

Borrowers need to get a signed estimate of costs at the time of application.

Borrowers should give brokers or lenders instructions, that all verifications and credit should be approved prior to spending moneyon any appriasal, but often schedules won't allow this as it could be weeks before an appraisal is completed. If the borrower is aware that there are credit problems, credit should be viewed first before spending other loan fees.

Loan scams are usually found by big name lenders who provide loans on line. Quicken Loans runs a shaddy practice.

They require you to submit a credit card number to pay for the fees before speaking with a loan originator. The originator is pretty much a sales person to "get the ball rolling". People have called back within minutes of the on line application to stop the process and the originator did not stop anything. You have a ding on your credit card for $500.00 which is non-refundable. Even after being assured your loan request is terminated or cancelled, a few days later you might see someone stop in front of the property and take a picture from their car. You just had your property appraised!

As to the BBB, that is absolutely worthless. The BBB only tells you if anyone has filed a complaint, not that the company is in good standing. The clerk at the BBB may not even tell you the truth either, especially if ABC Bank is amember and provides hefty contributions to the office party! Pure politics!

Call the Attorney General's Office and the local prosecutors office and see if they have any actions against them. Call the local police department and ask for the fraud division and ask them if thatname has crossed their desk! They are not to discuss any ongoing investigations, but many times a detective will say something like "I wouldn't go there if it were me". Check court records by name. Now, in fairness, a large bank or lender may have several cases so you have to consider the amount of business they conduct and understand that if they file a floreclosure action, the borrower may have filed a counter suit. But not finding your lender there might be a good thing.

But the best way to no when you are dealing with pure BS, is knowing what is definitely not BS, that would be programs that sound like they conform to prudent lending practices, rules, regulations and laws!

Sorry it's so long!