After a natural disaster, it's common for dodgy contractors to flock to the affected area to "help" desperate homeowners. But it's not just shoddy or non-existent work they leave behind. Some of them try to persuade their victims to sign up for inappropriate home improvement loans. Their devastating effects can last years after the flood, ruined roof or torn-off siding has been forgotten.
It's a tragic truism that when it comes to financial matters, low-life predators target the vulnerable, so we shouldn't be surprised that con artists put bullseyes on recent victims of natural disasters.
Home Equity Loan Con
Catastrophes like Hurricane Sandy in 2012 tend to affect whole neighborhoods, cities, or regions. That means you might have to wait weeks or months for a reputable local contractor to fix your urgent problems. Imagine your relief when a builder who seems charming, trustworthy and knowledgeable knocks on your door and offers to begin work immediately. His or her estimate for the work is high. You don't have the insurance coverage or savings to handle it. "Not to worry," the friendly contractor replies, "I have a friend who can organize the necessary financing." And, because you're desperate, you let the work commence immediately. Days or weeks later, the lender delivers the loan paperwork.
According to the Consumer Financial Protection Bureau (CFPB), "The papers may be blank or the lender may rush you to sign before you have time to read what you've been given. The contractor threatens to leave the work on your house unfinished if you don't sign. You sign the papers." And later you discover that you've just taken out a home equity loan. The terms are terrible, and if you don't pay, you'll lose your home.
You're stuck, perhaps for many years, with some ruinously expensive borrowing.
Cowboy contractors pushing exorbitant home equity loans or lines of credit are bad enough, but many don't stop there. These masters of disaster might also deliver shoddy, incomplete or even downright dangerous repairs and "improvements." The best way to avoid either trap is to deal with reputable companies or individuals. Here's what many state and federal websites advise homeowners to do when a natural disaster hits:
- Ask your candidate contractor for photo ID, and don't deal with anyone who's unwilling to prove his or her identity.
- Be suspicious of those with unmarked vans or trucks, especially if they have out-of-state plates.
- Make sure you have a street address for the person/company, not just a P.O. Box and/or phone number.
- Avoid anyone who insists on cash.
- Get and retain a written contract, which should be signed by both parties, and which includes a schedule of work, costs and payment terms.
- No good can come from hiring someone who wants the full amount upfront. It's normal to make payment once work has been completed to your satisfactio. For larger jobs or those requiring expensive materials, it is reasonable to pay "draws" as pre-agreed milestones in the contract are reached. These payments should only be released if you're fully satisfied with the work to date. Always retain a substantial proportion until the end so you have some leverage.
- Few reputable contractors solicit business at homeowners' doors. Insist on at least two references from past customers, and call both to make sure the person selling to you is trustworthy and does good work.
- Don't let the contractor push you toward a particular lender. Always shop around for the best financing, whether you seek a home equity loan or a personal loan.
- Don't provide a contractor with personal information that could be useful to a criminal. That includes bank details, your insurance policy number and your Social Security number.
- Never be pressured into signing anything before you have had time to read and understand it properly. If any aspects worry you, seek professional advice.
- If you're suspicious that you might be getting scammed, call either FEMA's Disaster Fraud Hotline at 866-720-5721 or your local Attorney General's office.
- Some states (like Kentucky) run special contractor registration programs in the wake of a natural disaster. These might require contractors to register with local authorities and undergo background checks before they can conduct business in affected areas. Find out if you're covered by one of these, and if so, make sure the contractor has registered.
- If you sign a contract for a home improvement loan secured by your primary residence, you have until midnight of the third business day after signing loan documents to cancel the transaction. This is called your "right of rescission" and it applies in all states because it's a right granted under the federal Truth in Lending Act.
What if You've Already Been Burned?
This is perhaps the most important tip of all: the rescission period is extended to three years if the creditor fails to supply the required rescission notice or provide accurate legally-required disclosures pertaining to the loan. The lender must return all finance charges and fees you have paid, and it's also liable for damages, court costs and attorney's fees. Right of rescission applies to a home equity line of credit, a home improvement loan, home refinance or any other non-purchase credit transaction secured by your primary residence.