Predatory loan: Any lending practice that imposes unfair loan terms on a homeowner.
Predatory loan: A loan that imposes unfair or abusive loan terms on the homeowner through deceptive or coercive actions.
Predatory Loans: Protecting Yourself From Unfair Lending Practices
Predatory mortgage loans, which often carry high fees and interest rates, and reduce equity, are usually offered by banks or lenders to seduce low-income buyers.
According to America’s Debt Help Organization, “Over the past several years, predatory lending practices have been prevalent in the area of home mortgages. Since home loans are backed by a borrower’s real property, a predatory lender can profit not only from loan terms stacked in his or her favor, but also from the sale of a foreclosed home, if a borrower defaults. While the practices of predatory lenders may not always be illegal, they can leave victims with ruined credit, burdened with unmanageable debt, or homeless.”
Predatory loans are usually associated with the following lending practices:
Insufficient or False Disclosure – The bank distorts the true cost of the mortgage loan, as well as the risks related to the loan terms, or the bank modifies the loan terms after the original offer.
Risk-Based Pricing – By tying the interest rates to the loan to a buyer’s credit history, the bank may charge extremely high interest rates to buyers who are likely to default.
Excessive Fees and Charges – The bank may charge exorbitant fees for home appraisal, closing and document preparation.
Loan Packing – The bank may include needless products like credit insurance, which covers the loan if the homeowner dies, in the cost of the loan.
Loan Flipping – The bank may convince a buyer to refinance an existing loan into a much larger one with higher interest rates and extra fees.
Asset-Based Lending – The bank may encourage buyers to borrow more than they can afford by offering a refinance loan based on home equity, rather than earnings or ability to repay the loan.
Reverse Redlining – The bank may target low-income populations, while charging higher interest rates, regardless of credit history, earnings or ability to repay the loan.
Balloon Mortgages – The bank may encourage the homeowner to refinance a current mortgage with one that has inferior payments upfront but unnecessary balloon payments at the end of the loan term.
Negative Amortization – By paying the minimum, homeowners may be subjected to negative amortization, which results in the payments not covering the interest, thereby increasing the unpaid balance. This can cause homeowners to owe more than the amount borrowed or even more than the home is worth.
Irregular Prepayment Penalties – The bank may impose prepayment penalties on a homeowner who chooses to pay the loan sooner and refinance the balance. Nearly 80% of subprime mortgages have unusually high prepayment penalties.
Forced Arbitration – The bank may add terms to the contract that make it illegal for the homeowner to sue for fraud or misrepresentation, thereby forcing the homeowner into arbitration, which usually works to the bank’s advantage.
There are laws that protect consumers from predatory loans, including The Equal Credit Opportunity Act (ECOA).
“The Equal Credit Opportunity Act [ECOA], 15 U.S.C. 1691 et seq. prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, because an applicant receives income from a public assistance program, or because an applicant has in good faith exercised any right under the Consumer Credit Protection Act.
“The Department of Justice may file a lawsuit under ECOA where there is a pattern or practice of discrimination. In cases involving discrimination in home mortgage loans or home improvement loans, the Department may file suit under both the Fair Housing Act and ECOA. Individuals who believe that they have been the victims of any unfair credit transaction involving residential property may file a complaint with the Department of Housing and Urban Development [HUD] or may file their own lawsuit,” according to the United States Department of Justice.