Predatory Lending

Abusive lending practices that include a mortgage loan to someone who does not have the ability to repay. It also pertains to repeated refinancing of a loan charging high interest and fees each time.

Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers. " Though there are laws against many of the specific practices commonly identified as predatory, various federal agencies use the term as a catch-all term for many specific illegal activities in the loan industry.

Predatory lending should not to be confused with predatory mortgage servicing which is used to describe the unfair, deceptive, or fraudulent practices of lenders and servicing agents during the loan or mortgage servicing process, post loan origination.

One less contentious definition of the term is "the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against. " Other types of lending sometimes also referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high. Although predatory lenders are most likely to target the less educated, lowest incomes, racial minorities, the elderly, victims of predatory lending are represented across all demographics.

Predatory lending typically occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower's ability to pay is greater than it actually is. The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral.

There are many lending practices which have been called abusive and labeled with the term "predatory lending. " There is a great deal of dispute between lenders and consumer groups as to what exactly constitutes "unfair" or "predatory" practices, but the following are sometimes cited. The organization ACORN claimed that predatory loans are usually made in poor and minority neighborhoods where better loans are not readily available.

Organizations such as AARP, Inner City Press, and ACORN have worked to stop what they describe as predatory lending. ACORN has targeted specific companies such as HSBC Finance and H&R Block, successfully forcing them to change their practices. On the other side of the issue are various subprime lending advocates, such as the National Home Equity Mortgage Association (NHEMA), which say many practices commonly called "predatory," particularly the practice of risk-based pricing, are not actually predatory, and that many laws aimed at reducing "predatory lending" significantly restrict the availability of mortgage finance to lower-income borrowers.

Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race. African Americans and other minorities are being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts. Even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender, though not necessarily a sub-prime loan. In addition, studies by leading consumer groups have concluded that women have become a key component to the subprime mortgage crunch.

Professor Anita F. Hill wrote that a large percentage of first-time home buyers were women, and that loan officers took advantage of the lack of financial knowledge of many female loan applicants. Consumers believe that they are protected by consumer protection laws, when their lender is really operating wholly outside the laws. Refer to 16 U. S. C. 1601 and 12 C. F. R. 226. Media investigations have disclosed that mortgage lenders used bait-and-switch salesmanship and fraud to take advantage of borrowers during the home-loan boom.

In February 2005, for example, reporters Michael Hudson (reporter) and Scott Reckard broke a story in the Los Angeles Times about “boiler room” sales tactics at Ameriquest Mortgage, the nation’s largest subprime lender. Hudson and Reckard cited interviews and court statements by 32 former Ameriquest employees who said the company had abused its customers and broken the law, “deceiving borrowers about the terms of their loans, forging documents, falsifying appraisals and fabricating borrowers' income to qualify them for loans they couldn't afford. ” Ameriquest later agreed to pay a $325 million predatory lending settlement with state authorities across the nation. There are many underlying issues in the predatory lending debate:OCC Advisory Letter AL 2003-2 describes predatory lending as including the following:In an article in the January 17, 2008 New York Times, George Mason University economics professor Tyler Cowen described "predatory borrowing" as potentially a larger problem than predatory lending:It should be noted that mortgage applications are usually completed by mortgage brokers, rather than by borrowers themselves, making it difficult to pin down the source of any misrepresentations.

The only situation in which the application would not done by the broker, but rather the borrower, would be in a "stated income loan. "A stated income loan application is done by the borrower, and no proof of income is needed. When the broker files the loan, they have to go by whatever income is stated. This opened the doors for borrowers to be approved for loans that they otherwise would not qualify for, or afford. Several commentators have challenged the notion of "predatory borrowing," accusing those making this argument as being apologists for the lack of lending standards and other excesses during the credit bubble. Although the target for most scammers,, lending institutions were often complicit in what amounted to multiparty mortgage fraud. The Oregonian obtained a JP Morgan Chase memo, titled "Zippy Cheats & Tricks. " Zippy was Chase's in-house automated loan underwriting system, and the memo was a primer on how to get risky mortgage loans approved. Many laws at both the Federal and state government level are aimed at preventing predatory lending. Although not specifically anti-predatory in nature, the Federal Truth in Lending Act requires certain disclosures of APR and loan terms. Also, in 1994 section 32 of the Truth in Lending Act, entitled the Home Ownership and Equity Protection Act of 1994, was created. This law is devoted to identifying certain high-cost, potentially predatory mortgage loans and reining in their terms.