With Subprime Loans, Proceed With Caution

Is this a legitimate lender, or are you the subject of a bait and switch? The predatory lender is prepared to make a loan to you with the expectation that you will quickly go into default, in which your house will be foreclosed upon, and the lender can start all over again with another innocent consumer.

One way to determine the bona fides of that lender is to shop around. Are other lenders reluctant to make you a conventional loan? If so, stick with your original lender -- but only if you carefully read the terms and conditions in your loan documents and are completely satisfied that you can make the monthly payments.

You should also contact such organizations as the Better Business Bureau, your local office of consumer protection and the Federal Trade Commission to determine the status of that lender.

The Department of Housing and Urban Development also has a strong interest in weeding out these predators. Recently, HUD issued a commentary on subprime lending, pointing out:

· Home refinance loans account for a higher share of subprime lenders' total originations than prime lenders' originations.

· A larger percentage of subprime lenders' originations are in predominantly black census tracts than prime lenders.

· Subprime lenders are more likely to have terms such as "consumer," "finance" and "acceptance" in their lender names.

A final note of caution: I hope that you have a financing contingency in your home-purchase contract that gives you the right to terminate your contract and get your money back if you are unable to obtain financing within a certain period of time.

Read that clause carefully. Because you have been rejected for a loan, and before your contingency expires, you should advise the seller (or the seller's agent) of that rejection, and either formally have the contract declared null and void or get an extension on the contingency period.

If you do not act, you will probably lose your earnest money deposit.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.