Running head: PREDATORY LENDING PRACTICES
Predatory Lending Practices
Predatory Lending Practices
Predatory lending was once a major problem in the United States. This was one of the reasons for the credit crisis in 2008. Unfortunately there were a few companies that were involved in these illegal practices which will be discussed in further detail later. There are different tactics used in predatory lending and several laws were developed to help prevent future predatory lending issues. 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 coercive, deceptive, exploitative, or unscrupulous actions for a loan that a borrower can’t afford, doesn’t need, or doesn’t want. Predatory lending benefits the lender, not the borrower by ignoring or hindering the borrower’s ability to repay the debt. These lending tactics attempt to take advantage of a borrower’s lack of understanding about loans, terms, or finances in general (Krulick, 2014). Who can be targeted in these illegal practices? Predatory lenders typically target minorities, poor, elderly, and less educated people. People who need immediate cash are also targeted. For example people that need to pay medical bills, need to make a home repair, or someone that needs help making a car payment. People with credit issues or people who recently lost their jobs can be targets as well. The credit issues often disqualify borrowers from conventional loans or lines of credit but yet they have substantial equity in their homes. Predatory lending can take place in many forms including payday loans, car loans, tax refund anticipation loans, or any type of consumer debt. Over the past several years, predatory lending practices were 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 not all predatory lending practices are illegal, they can leave borrowers with unmanageable debt, ruined credit, or even homeless (Krulick, 2014) There are several types of predatory lending practices which include: inadequate or false disclosure, risk-based pricing, inflated fees and charges, loan packing, loan flipping, asset-based lending, reverse redlining, balloon mortgages, negative amortization, abnormal prepayment penalties, and mandatory arbitration (Krulick, 2014). The several different types vary in definition. Inadequate or false disclosure means the lender hides or misrepresents the true costs, risks and/or appropriateness of a loan’s terms or the lender changes the initial terms after the offer. Risk based pricing is depended on by lenders which is tying interest rates to credit history; however, predatory lenders abuse this practice by charging very high interest rates to high risk borrowers who are most likely to default. Inflated fees and charges are when the lender’s fees and costs are much higher than those charged by reputable lenders and are usually hidden within the fine print. Loan packing is unnecessary products added into the cost of the loan. An example of this is credit insurance which pays off the loan if a borrower dies. Loan flipping is where the lender encourages a borrower to refinance an existing loan into a larger one with a higher interest rate and additional fees. In 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. Reverse redlining is where the lender targets limited-resource neighborhoods that conventional banks may shy away from. Everyone in the neighborhood is...
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Krulick, A. (2014). Predatory Lending. Retrieved from http://www.debt.org/credit/predatory lending/
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