Predatory Lending
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Understanding Predatory Lending

Credit crunch, foreclosure crisis, recession - many of the economic problems currently plaguing the United States have been blamed in part on predatory lending. Consider the following information to protect yourself and your finances from unscrupulous lenders.

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What is Predatory Lending?

No official legal definition exists for predatory lending, but many activists and scholars have developed working definitions, which generally include the following elements:

  • Lender deception: knowingly presenting loan terms untruthfully or incompletely to borrowers;
  • Unfair and/or abusive loan terms: charging more than is reasonable or charging for products/services that are unnecessary;
  • Exploitation: taking advantage of a borrower's incomplete understanding of a contract, violating terms of agreement knowing that a borrower does not know his rights, breaking laws the borrower may not be aware of, etc.; or
  • Violation of consumer protection laws.

Lenders who practice one or more of the above are generally agreed to be engaging in predatory lending. Predatory loans are offered in all borrowing areas, so awareness is important for anyone who plans to borrow money in the near or distant future.

Types of Predatory Loans

A report released by the newly-formed nonprofit organization Americans Against Mortgage Abuse (AAMA) detailed three main forms predatory loans can take. You may be surprised to find how widespread predatory lending is.

  1. Predatory Finance Lending: These loans allow borrowers to finance small, day-to-day expenses. In reality, they can end up costing much more than anticipated.
  2. Examples: payday loan stores, pawn shops, rent-to-own stores, "title" lenders, refund anticipation lenders

  3. Predatory Bank Lending: Despite popular opinion, predatory lending is not restricted to "non-traditional" lenders. Even major banks have been found to engage in certain predatory practices.
  4. Examples: certain credit card lending, certain subprime mortgage lending

  5. Predatory Mortgage Lending: Many point to predatory mortgage lending as a major reason for the current foreclosure crisis. Predatory mortgage lending can happen in all phases of the lending process, including loan securitization, origination, servicing and foreclosure.

Awareness of the prevalence of predatory lending can help you avoid being cheated. Here's a look at some tactics commonly used by predatory lenders.

Predatory Lending Techniques

There's no failsafe method for determining whether or not a lender is scamming you, but there are certain red flags you can watch for.

  • Lack of transparency: when the terms of a loan are presented in an unclear or confusing way. Long, dense credit card agreements and loan contracts written in legalese are classic examples - most borrowers aren't familiar enough with legal language to decipher the meaning behind the jargon. Worse, some lenders intentionally lie about the contents of a contract to convince a borrower to sign.
  • Some lenders add cost to loans by including services that are unnecessary or available for less money elsewhere. Many don't inform borrowers that they can negotiate loan terms.

  • Interest in disguise: when labels like "fees" and "charges" are used to distract the borrower from how much interest he's actually paying. Examples include "fees" charged by payday loan stores, "overdraft charges" some banks levy, and certain regular account charges on credit cards.
  • Fraud or misrepresentation: when facts are explicitly falsified or altered. During the subprime lending boom, many mortgage brokers recorded a borrower's "stated income" on loan forms. "Stated" is just a buzzword meaning "artificially inflated:" basically, brokers would lie about income so borrowers qualified for bigger loans.
  • This can be difficult to detect, especially when a lender or broker is filling out already complicated forms and/or assuring the borrower that no harm will be done.

  • Targeting specific groups: when lenders let visual and social clues influence their loann offer. During the subprime mortgage boom, for example, various studies found that racial minorities, women, the elderly and the less educated were disproportionately affected by predatory lending.
  • It's important to note that anyone can be victimized by predatory lending, so you should be aware of the dangers no matter your age, race, gender or education level.

  • Excessive interest: Charging exorbitant interest rates to borrow money can be concealed by "disguising" interest (see above) or by advertising only short-term costs so that the borrower doesn't realize what he'll eventually pay.
  • Some payday loans charge the equivalent of more than 300% in annual interest - a fact that's often overlooked by consumers who view the loan as a short-term solution.

The AAMA report emphasizes that many predatory lending scams are designed carefully and are virtually "invisible" to the general public. Some corporations bank on the fact that most consumers won't bother contesting an excess charge of a couple dollars here and there. But, when millions of consumers are "accidentally" overcharged, companies can make serious profits.

Know Your Rights!

The government has passed several laws to protect consumers from predatory lending. Knowing what you're entitled to as a borrower may help you avoid paying more than you should.

RESPA (Real Estate Settlement Procedures Act of 1974): Prevents kickbacks between members of the real estate industry. As a borrower, if you think there's a mistake in your account, you can write a "qualified written request" to your loan servicer to correct the error.

TILA (Truth in Lending Act of 1968): Designed to give consumers a chance to make educated decisions about using credit by requiring disclosure about a credit source's terms and cost.

HOEPA (Home Ownership and Equity Protection Act of 1994): An amendment to the TILA meant to stop certain predatory practices of subprime lenders by limiting the total cost of fees permitted.

Fair Housing Act (1968): Forbids discriminating against any race, religion, sex, handicap, family status or national origin when renting, selling or financing a home.

Fair Debt Collection Act (1978): Outlines what debt collectors can and cannot do.

Community Reinvestment Act (1976): Requires lenders to provide credit to consumers regardless of economic status.

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