What is Predatory Lending?
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower does not need, does not want or cannot afford.
By definition, predatory lending benefits the lender, not the borrower, and ignores or hinders the borrower’s ability to repay the debt. These lending tactics often try to take advantage of a borrower’s lack of education and understanding about loans, terms or finances in general.
While the practices of predatory lenders may not always be illegal, they can leave victims with ruined credit, burdened with unmanageable debt, and even homeless.
Predatory lending can take the form of payday loans, cash advance loans, car loans, tax refund anticipation loans or any type of consumer debt.
Predatory lenders often target consumers who may have a need for immediate cash such as experiencing a job loss or have poor credit and are less informed about options available. Often times these consumers have medical bills, need to make an emergency home repair, or may have the dire need to make a car payment.
Being educated on what predatory lending is and how to identify it will enable you to avoid falling into these traps, or if you’re already a victim, how to fight back through legal action.
PREDATORY LENDING PRACTICES
While there is some dispute about what constitutes a predatory lending practice, a number of actions are often cited such as:
INADEQUATE OR FALSE DISCLOSURE
The lender hides or misrepresents the true costs, risks and/or appropriateness of a loan’s terms, or the lender changes the loan terms after the initial offer.
INFLATED FEES AND CHARGES
Fees and costs (e.g., appraisals, closing costs, document preparation fees) are much higher than those charged by reputable lenders, and are often hidden in fine print.
LOAN FLIPPING
The lender encourages a borrower to refinance an existing loan into a larger one with a higher interest rate and additional fees.
REVERSE REDLINING
The lender targets limited-resource neighborhoods that conventional banks may shy away from. Everyone in the neighborhood is charged higher rates to borrow money, regardless of credit history, income or ability to repay.
NEGATIVE AMORTIZATION
This occurs when a monthly loan payment is too small to cover even the interest, which gets added to the unpaid balance. It can result in a borrower owing substantially more than the original amount borrowed.
MANDATORY ARBITRATION
The lender adds language to a loan contract prohibiting a borrower from taking future legal action for fraud or misrepresentation. The only option, then, for an abused borrower is arbitration, which generally puts the borrower at a disadvantage.
RISK-BASED PRICING
While all lenders depend on some form of risk-based pricing — tying interest rates to credit history — predatory lenders abuse the practice by charging very high interest rates to high-risk borrowers who are most likely to default.
LOAN PACKING
Products like credit insurance — which pays off the loan if a homebuyer dies — are added into the cost of a loan when not necessary.
ASSET-BASED LENDING
Borrowers are encouraged to borrow more than they should when a lender offers a refinance loan based on their amount of home equity, rather than on their income or ability to repay.
BALLOON MORTGAGES
A borrower is convinced to refinance a mortgage with one that has lower payments up front but a large (balloon) payment at the end of the loan term. When the balloon payment cannot be met, the lender helps to refinance again with another high-interest, high-fee loan.
ABNORMAL PREPAYMENT PENALTIES
A borrower who sells their home or tries to refinance a home loan with one that offers better terms can be assessed an abusive prepayment penalty for paying off the original loan early. Up to 80 percent of sub-prime mortgages have abnormally high prepayment penalties.
PROTECTING YOURSELF AGAINST PREDATORY LENDERS
The best defense against predatory lenders is educating yourself about their deceptive practices. Here are a list of some of the things to watch out for:
LOAN OFFERS FROM UNLICENSED LENDERS
Beware of loan offers through the mail, via telephone or door-to-door solicitations. Reputable lenders typically do not operate in this fashion. Make sure any lender you work with is licensed.
PROMISES
Stay clear of lenders who make promises including a promise that your loan will be approved regardless of your credit history or rating. Get a copy of your credit report, and have some idea of what you should qualify for.
BEING RUSHED TO SIGN PAPERS
Do not let yourself be rushed into the loan process. Study the paperwork, and do not sign anything you do not agree with or understand.
HIGH INTEREST RATES AND FEES
Question high interest rates and fees. Refuse to accept payments you know you cannot afford. Decline any additional services “packed” into the loan, like credit or health insurance.
BLANK SPACES IN DOCUMENTS
Do not sign any documents that contain blank spaces. Read loan documents carefully, and have them checked by a qualified friend or a lawyer, if possible.
LEGAL PROTECTIONS
Federal laws protect consumers against predatory lenders. Chief among them is the Equal Credit Opportunity Act (ECOA). This law makes it illegal for a lender to impose a higher interest rate or higher fees based on a person’s race, color, religion, sex, age, marital status or national origin.
The Home Ownership and Equity Protection Act (HOEPA) protects consumers from excessive fees and interest rates. Loans that are considered “high cost” are subject to additional disclosure requirements and restrictions.
In addition, 25 states have anti-predatory lending laws, and 35 states including some of the ones with anti-predatory laws limit the maximum prepayment penalty that a homeowner is required to pay.
HAVE YOUR RIGHTS BEEN VIOLATED? GET HELP NOW
More DetailIf you are seeking the help of a legal professional to determine if your rights have been violated and you have suffered financially, call The Attorney Referral Network at 1-844-216-7863 to learn more about your legal rights and options.
REFERRAL AGENTS
Division of Consumer Services License and Complaint SearchAll Referral Agents are licensed by the Florida Department of Agriculture and Consumer Services. To learn more about your Referral Agent please visit the Division of Consumer Services License and Complaint webpage.