Predatory lending
Predatory lending is the practice of using a borrower's ignorance against them for profit. It is often referred to as an affliction that only strikes racial minorities, women, and the elderly. While these groups are certainly prone for victimization, for which the ramifications cut far deeper and are often life-altering, predatory lending runs silently unregulated amongst all demographics.
Predatory lending can be identified by deceptive marketing and sales practices, non-disclosure of all terms that relate to the qualification and payback of the loan, and falsifying documentation to gain otherwise unattainable loan approvals, although the actual term is an umbrella to numerous specific scenarios.
Some lenders target elderly homeowners who have considerable
equity in their homes, and who might be more easily deceived or coerced into taking out a mortgage loan that they cannot afford to pay back.
A broker may originate a loan to a borrower knowing they do not have enough cash flow to make the monthly payments and then immediately sell the loan to a secondary market investor. When the borrower defaults, they and the funding lender are damagedâ€"not the broker.
Sadly, in many cases where a person with large credit card debt (i.e. unsecured), no assets beyond the equity in their home, and no cash flow to cover the minimum monthly payments, a better option for them may be to work out a payment plan with the credit card companies covered by the cash flow they do have, or even to declare
bankruptcy so that they do not lose their home in a foreclosure sale.
Another far more complex, very innovative (but allegedly criminal) predatory tactic involves predators creating and exploiting conflicts of interest among the various purchasers and servicers of a pool of mortgages, through frivolous foreclosures of performing loans, and legal barratry contrary to fiduciary duty that are extremely profitable for the predators.
[ http://www.predatorix.com particularly "Super Future Equities vs. ORIX", SFEvsORIX.pdf sections: :A. General Background description of Commercial Mortgage Backed Securities ("CMBS"), also known as the Collateralized Mortgage Obligation ("CMO") with figures, ::(2) How the Scams Work :::a. First Scam (Buy Our "B-Pieces" or We Will Sue You) :::b. Second Scam (Keep our "B-Pieces" Alive) :D. Orix's Scams at Work ].
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.
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Risk-based pricing. This is the practice of charging more (in the form of higher interest rates and fees) for extending credit to borrowers identified by the lender as posing a greater credit risk. The lending industry argues that risk-based pricing is a legitimate practice; since a greater percentage of loans made to less creditworthy borrowers can be expected to go into default, higher prices are necessary to obtain the same yield on the portfolio as a whole. Some consumer groups argue that risk-based pricing is an excuse for price gouging vulnerable consumers. They argue that higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk.
*Single premium
credit insurance. This is a purchasing of insurance which will pay off the loan in case the homebuyer dies, this is more expensive than other forms of insurance because it does not involve any medical checkups, but customers almost always are not shown their choices—because usually the lender is not licensed to sell other forms of insurance. In addition, this insurance is usually financed into the loan which causes the loan to be more expensive, but at the same time encourages people to buy the insurance because they do not have to pay up front.
*Any situation where the loan price is negotiable, but the buyer is not aware of this. Many lenders will negotiate the price structure of the loan with borrowers. In some situations, borrowers can even negotiate an outright reduction in the interest rate or other charges on the loan. Consumer advocates argue that borrowers—especially but not only unsophisticated borrowers—are not aware of their ability to negotiate, and might even be under the misapprehension that the lender is placing the borrower's interests above its own. Thus, many borrowers do not take advantage of their ability to negotiate.
*The most common complaint however, is with any loan which has associated fees which do not add to the
APR number. These are compared to a hypothetical situation where the same money can be borrowed without fee from a line of credit. For example, a payday loan of 20 dollars may cost 2 dollars. If the borrower only had a credit card, a cash advance on the credit card might cost 4 dollars, and the payday loan would be the cheapest option (unless what I needed to purchase could be purchased by the credit card incurring no cash advance fee). However, if the borrower had a line of credit with no fees for cash advances, then if he borrowed that 20 dollars and repaid it within the same time frame as the payday loan, the interest would only cost 0.02 cents. This causes people to suggest that the 2 dollars charged on the 20 dollars is a 1000% interest rate. However it might be impossible for the borrower to obtain a no fee line of credit. This scenario occurs in many places:
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Payday loans
**Credit Card late fees
**Checking Account Overdraft Fees
**Car Dealer Finance, where the price of the car if financed is higher than if paid for in cash
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Tax Refund Anticipation Loans
**Certain mortgage and equity loan fees
Anti-predatory lending organizations such as
ACORN argue that predatory loans are usually made in poor and minority neighborhoods where better loans are not readily available, and that the loss of equity and foreclosure can devastate already fragile communities.
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
Household Finance and
H&R Block, successfully forcing them to change their practices. Inner City Press and
Fair Finance Watch continue watching the practices of HSBC and Citigroup as they export their controversial subprime lending models beyond the United States. These groups have also
spearheaded legislation that would make forms of lending deemed to be predatory illegal.
On the other side of the issue are various subprime advocates such as
NHEMA, who say that many practices commonly called "predatory," particularly the practice of risk-based pricing, are not actually predatory.
There are many underlying issues in the predatory lending debate:
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Risk-based pricing: The basic idea is that more-risky borrowers who are more likely to default should pay more interest to avoid the
tragedy of the commons, the unfair punishment of those who have never defaulted and never will. Risk-based pricing is a universal practice in bond markets and the insurance industry, and it is implied in the stock market and in many other industries. Risk-based pricing allows lenders to lend to a group they never have been able to previously; the higher interest rate compensates for money lost due to the higher-than-normal default rate. There is debate as to whether this concept is fair. Some believe it is unfair in principle. There are also some who, while agreeing that the rates are generally set fairly considering the risk that the lender assumes, feel that it is not good to allow borrowers with credit problems to take out such a loan.
*Competition: Some believe that risk-based pricing is fair but feel that many loans charge prices far above the risk, using the risk as an excuse to overcharge. These criticisms are not levies on all products but only on those specifically deemed predatory. Proponents counter that competition among lenders should prevent or reduce overcharging.
*Financial Education: Many observers feel that competition in the markets served by what critics describe as "predatory lenders" is not affected by price because the targeted consumers are completely uneducated about the time value of money and the concept of APR, a different measure of price than what many are used to.
*Caveat Emptor: There is an underlying debate about whether a lender should be allowed to charge whatever it wants for a service, even if it seems to make no attempts at deceiving the consumer about the price. At issue here is the belief that lending is a commodity and that the lending community has an almost fiduciary duty to advise the borrower that funds can be obtained more cheaply. Also at issue are certain financial products which appear to be profitable only due to
adverse selection or a lack of knowledge on the part of the customers relative to the lenders. For example, some people allege that
credit insurance would not be profitable to lending companies if only those customers who had the right "fit" for the product actually bought it (i.e., only those customers who were not able to get the generally cheaper term life insurance).
*Discrimination: Certain groups feel that many financial institutions continue to engage in racial discrimination. Most do not allege that the loan underwriters themselves discriminate, but rather that there is systemic discrimination. Situations in which a loan broker or other salesman may negotiate the interest rate are likely more ripe for discrimination (certain lenders like Honda Auto Finance have had to pay settlements for alleged discrimination by their auto dealers). Discrimination may occur if, when dealing with racial minorities, loan brokers tend to claim that a person's credit score is lower than it is, justifying a higher interest rate charged, on the hope that the customer assumes the lender to be correct. This may be based on an internalized bias that a minority group has a lower economic profile. It is also possible that a broker or loan salesman with some control over the interest rate might attempt to charge a higher rate to persons of race which he personally dislikes. This is a less likely scenario, although the potential for it does exist. For this reason some call for laws requiring interest rates to be set entirely by objective measures.
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.
Twenty-four states have passed anti-predatory lending laws.
Arkansas,
Georgia,
Illinois,
Massachusetts,
North Carolina,
New York,
New Jersey,
New Mexico and
South Carolina are among those states considered to have the strongest laws. Other states with predatory lending laws include:
California,
Colorado,
Connecticut,
Florida,
Kentucky,
Maine,
Maryland,
Nevada,
Ohio,
Oklahoma,
Pennsylvania,
Texas,
Utah,
Wisconsin, and
West Virginia. These laws usually describe one or more classes of "high-cost" or "covered" loans, which are defined by the fees charged to the borrower at origination or the APR. While lenders are not prohibited from making "high-cost" or "covered" loans, a number of additional restrictions are placed on these loans, and the penalties for noncompliance can be substantial.
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Usury*
Payday loan*
Overdraft protection loans
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Subprime lending*
Title loans*
Refund Anticipation Loan*
ACORN, neighborhood associations opposing predatory lending
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Weekly report on predatory lending by Inner City Press, an organization combatting predatory lending
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Center for Responsible Lending, an organization opposing predatory lending
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National Home Equity Mortgage Association, an organization promoting subprime lending
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Report Predatory Lending, a complete list of resources to report suspected fraud.
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Predatorix, educates the public about certain complex predatory lending practices.
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Banks Trick Poor Into Expensive Loans from
Dollars & Sense magazine
