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      What Is Predatory Lending?
      How Predatory Lending Functions
      Tips to be Watchful for
      Types of Predatory Loans
      New Types of Predatory Lending
      Anti-Predatory Lending Laws
      How to Prevent Lending
      Predatory Lending FAQs
      The Bottom Line

      Personal Finance Credit

      Predatory Lending
      By Adam Hayes
      Updated July 03, 2022
      Review by Khadija Khartit
      Khadija Khartit

      What is Predatory Lending?

      Predatory lending is the practice of applying unfair, misleading, or abusive loan terms on those who are borrowers. In many cases they loans have high fees and interest rates that strip the borrower equity, or place an able borrower into a less rated credit (and more costly) loan, all to the lender’s benefit.

      The predatory lenders typically employ aggressive sales tactics and capitalize on their clients’ incomprehension regarding financial transactions. Through deceitful or fraudulent acts and lack or transparency they entice in arousing, enticing, or assisting an individual borrower to take out the loan they won’t be able to pay back.
      Important Takeaways

      Predatory lending is any lending practice that imposes unfair or abusive loan terms on borrowers.
      Aspects of predatory lending include high interest rates, fees that are high, and terms that strip the borrower of equity.
      COVID-19’s economic consequences allowed cash-strapped consumers to become vulnerable to predatory loans.1
      Predatory lending disproportionately affects females, Black communities, as well as Latinx communities.
      Predatory lending is often used when mortgages are used to purchase homes.

      How Predatory Lending Works

      Predatory lending refers to any unethical methods employed by lenders to induce, mislead, and help borrowers to take out loans they cannot repay in a reasonable amount or pay back at a price which is far above market rate. Predatory lenders take advantage of borrowers’ circumstances or lack of knowledge.

      The term loan shark, as an instance, is the archetypal example of a predatory lender. Someone who loans money at an extremely high-interest rate and may even threaten violence to collect on their debts. However, a great deal of the lending that is predatory is performed by more established institutions like banks and mortgage brokers, finance companies attorneys, and real estate agents.

      Predatory lending can put several borrowers in danger and is particularly targeted at those with few credit options or at risk in other ways, such as those with a poor income who create regular and urgent needs to get cash in order to cover their expenses, those with low credit scores, those with less education access or those who are subject to discriminatory lending practices due to of race, ethnicity or disabilities.

      These lenders typically focus on areas where few credit options exist making it difficult for borrowers to compare. They entice customers with aggressive sales tactics by telephone, mail, TV, radio, and even door-to door, and usually employ various unfair and deceptive tactics to profit.

      Predatory lending is beneficial to the lender but does not affect the borrower’s ability to pay back a debt.
      The most effective predatory lending tactics to look For

      Predatory lending is designed in the first place, to profit the lender. It does not consider or interfere with the ability of the borrower to pay back the loan. The lending strategies are usually deceitful and attempt to take advantage of a borrower’s lack of knowledge of the financial terminology and the regulations governing loans. These tactics can include those identified in the Federal Deposit Insurance Corporation (FDIC) and a few others:

      Inexpensive and abusive fees: These are often disguised or minimized since they aren’t included in a loan’s interest rate. According to the FDIC fees that exceed more than 5% of the loan amount are not unusual. Excessive prepayment penalties are another example.2
      Payments for balloons: It is a substantial payment at the end of a loan’s duration, often utilized by predatory lenders for making your monthly installment appear to be low. However, you might not be able afford the balloon payment and will have to refinance, incur new expenses, or go into default.
      A lender pressures a borrower refinance, again and again in order to earn points and fees for the lender each time. This means that a borrower can end up trapped in a growing debt burden.2
      Equity stripping and asset-based lending A lender will grant the loan in relation to your assets such as a house or car, and not than on your ability to repay the loan. It is possible to lose your home or car when you fall behind on payments.2 Cash-strapped, equity-rich individuals with fixed incomes might be targeted by loans (say to pay for house repairs) that they’ll be unable to repay and can affect the equity of their home.
      Unnecessary add-on products or services like single-premium life insurance for mortgage.
      Leverage: The lender steers borrowers into expensive subprime loans regardless of whether their credit rating and other aspects make them eligible for prime loans.
      Redlining: Reverse redlining, the racist housing policy that effectively stifled Black families from receiving mortgages, was banned by the Fair Housing Act of 1968.34But redlined communities are still filled with Black and Latinx communities.5 In some instances, a reverse redlining, they are often targeted by predatory and subprime lenders.

      Common types of predatory loans
      Subprime Mortgages

      Classic predatory lending centers around home mortgages. Because home loans are secured by the homeowner’s real estate, a predatory lender can make money not just from loan conditions that are stacked in their favor , but as well from the sale of the foreclosed property if a borrower defaults. Subprime loans aren’t always precarious. The higher rates of interest, banks would argue represent the higher cost of lending more risky to those with poor credit. Even if they are not using deceitful practices Subprime loan is more risky for borrowers because of the tremendous financial burden it imposes. Due to the rapid expansion of subprime loans was the possibility of predatory lending.6

      When the housing market crashed, as well as a crisis in foreclosure precipitated and triggered the Great Recession, homeowners with subprime mortgages were at risk. Subprime loans were able to account for a disproportionate percentage of foreclosures on residential properties. Black as well as Latinx homeowners were the most affected.
      Predatory Lenders

      The predatory mortgage lenders targeted them with aplomb in predominantly minorities’ neighborhoods regardless of income or creditworthiness. Even after controlling for credit score and other risk factors , such like loan-to-value (LTV) ratios as well as subordinate liens and ratios of debt to income (DTI) ratios, research shows the following: Black Americans and Latinos were more likely to get subprime loans with higher rates.

      Women were also targeted in the boom in housing that ended spectacularly during 2008 regardless of their financial status or credit score. Black women who had the top incomes are five times more likely males with similar incomes to get subprime loans.7

      Predatory Lenders usually focus on vulnerable groups, such as those struggling to meet monthly expenses and those who have recently lost their jobs; and those who are denied access to a wider range of credit options for criminal reasons, for instance, discrimination based on a lack of education or older years of age.


      In 2012, Wells Fargo reached a $175 billion settlement with the Justice Department to compensate Black and Latinx people who had the ability to get loans and were charged higher fees or rates or improperly diverted into subprime loans.8 Other banks also settled settlements. But the damage to families of color will last. Homeowners not only lost their homes but the chance to recoup their investment was lost when prices for housing also went again, adding once more to the disparity in wealth.

      In October 2021, the Federal Reserve (Fed) revealed that Black or Hispanic or Latino households earn 50% less than white households and have only 15 20 to 20% as much net wealth.9
      Payday Loans

      In the payday loan industry lends billions of dollars each year in small-dollar high-cost loans as an interim measure until the next payday. These loans typically are for two weeks, with annual percentage rates (APR) ranging from 390% to 780%.10 Payday lenders operate online and through storefronts largely in financially underserved–and disproportionately Black and Latinx–neighborhoods.1112

      Although it is the law of the land that Federal Truth in Lending Act (TILA) requires payday lenders to reveal their financing costs however, many do not consider the costs.13 The majority of loans are for 30 days or less and help the borrowers meet their short-term obligations. The loan amounts for these loans are usually from $100 to $1,000, with $500 being the norm. The loans usually can be extended for additional fees, and a lot of borrowers–as high as 80% of them–return as customers.14

      There are new charges added each time the payday loan is refinanced, the debt can quickly become out of control. A 2019 study found that the use of payday loans doubles the rate of personal bankruptcy.15 A number of court cases have been brought against payday lenders as lending laws have been enacted in the wake of the financial crisis of 2008 to establish a more open and fair lending market for consumers. Research suggests the market for payday loans has only expanded in the past year and has saw a surge in the period of the COVID-19 pandemic.16

      If a loan provider tries to rush to approve your loan, fails to answer any of your questions, or suggest you take out more than you’re able to pay, you should be wary.
      Auto-Title Loans

      These are single-payment loans based on a percent of the value of your car. They come with high interest rates and the requirement of handing over the vehicle’s title and a spare set of keys to be used as collateral. For the one in five borrowers who have their vehicle seized due to inability to pay back the loan the loan, it’s not only an economic loss and can also affect access to jobs and child care for the family.17
      New Types of Predatory Lending

      New schemes are popping up in the known as gig economy. For example, Uber, the ride-sharing service, reached a settlement of $20 million in 2017 with the Federal Trade Commission (FTC) in 2017, partly in relation to auto loans with uncertain credit terms that the platform offered to its drivers.18

      In addition, a number of fintech companies are launching products called “buy now and make payments later.” These types of products aren’t always clear on charges and interest rates, and can cause people to fall into a debt spiral they will never be able to get out of.
      Are there any efforts being made to combat Predatory Lending?

      To safeguard consumers, a number of states have laws against predatory lending. Certain states have banned payday loans completely, whereas others have set limits on the amount that lenders are allowed to charge.192021

      The U.S. Department of Housing and Urban Development (HUD) as well as the Consumer Financial Protection Bureau (CFPB) have also implemented measures to curb lenders who are predatory. But, as the shifting policy from the latter shows, rules and protections are subject to change.

      In June 2016 in June 2016, the CFPB issued an official rule that imposed more stringent regulations for the underwriting of auto-title and payday loans.22 In the following year, under new direction in July 2020, the CFPB repealed the rule and delayed further actions, significantly weakening the federal consumer protections from these lenders. lenders.2314
      How to Avoid Predatory Lending

      Learn to educate yourself. Financial literacy can help consumers recognize red flags and steer clear of untrustworthy lenders. The FDIC offers tips to protect yourself when you take on the mortgage, as well as guidelines for cancelling PMI, or private mortgage insurance (PMI) (paid for by you, it’s meant to safeguard the lender).13 The HUD also offers advice on mortgages and CFPB provides guidance regarding payday loans.2425
      Find out about your loan before you sign on the to sign the dotted line. If you’ve had to deal with discrimination in lending before, you’ll just want to finish the process in the shortest time possible. Don’t let the lenders win this time around. Comparing offers gives you an edge.
      Consider alternatives. Before you take on a large payday loan, consider turning to your family and friends as well as your local religious group, as well as public assistance, which aren’t likely to result in the same economic damage.

      What’s the best example of Predatory Lending?

      Whenever a lender seeks to gain advantage over a borrower and tie them into unfair or unmanageable loan terms, it can be deemed to be predatory lending. The indicators of a predatory lender are aggressive advertising, high charges for borrowing, high prepayment penalties, huge balloon payments, as well as being encouraged to consistently flip loans.
      Does Predatory Lending Constitute a Crime?

      In theory the case, it is. If you’re lured to take out an loan that carries higher fees than your risk profile warrants or you’re not likely not to pay back it, you may have been the victim of a crime. There are laws to protect consumers from predatory lending, though plenty of lenders continue to get away with it, partly because consumers aren’t aware of their rights.
      Can I sue on behalf of Predatory Lending?

      If you can prove that the lender you used to lend to violated federal or local laws such as federal laws, including the Truth in Lending Act (TILA) If you believe that your lender violated federal or local laws, you might think about filing a lawsuit. It’s never easy going against the financial institution that is wealthy. However, if you have proof that this lender broke regulations, you stand an excellent chance of being compensated. First, contact your state department of consumer protection.
      The Bottom Line

      Predatory lending refers to any lending method that is characterized by unfair and unfair loan terms on the borrower with high interest rates, high fees and terms that strip the lender of their equity. The predatory lenders typically employ tricks of sales and deceit to get borrowers to accept loans they can’t afford. And in many cases they target vulnerable populations.

      Predatory lenders aren’t all loan sharks. The majority of the lending that is predatory is executed by more established institutions, such as banks and mortgage brokers, finance companies attorneys, lawyers, or real estate agents. The subprime bubble in the years prior to 2008 was an instance of precarious lending.26

      Education and research are crucial to avoid the lure of loans. Make sure you understand the loan documents you are signing and determine how much you’ll be liable. However, If you’re fooled into signing a loan with higher fees than your risk-based profile would warrant or you’re not likely not to repay, you have potentially been the victim of an offense.
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