Predatory lending is a pejorative term used to describe practices of some lenders. Words and phrases are pejorative if they imply disapproval or contempt A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent There are no legal definitions in the United States of predatory lending, though there are laws against many of the specific practices commonly identified as predatory, and various federal agencies use the term as a catch-all term for many specific illegal activities in the loan industry. A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent
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. "[1] 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. A payday loan (also called a paycheck advance or payday advance) is a small short-term Loan that is intended to cover a borrower's expenses until A credit card is part of a system of Payments named after the small Plastic card issued to users of the system Consumer debt is Consumer credit which is outstanding In macroeconomic terms it is debt which is used to fund consumption rather than
Although predatory lenders are most likely to target the less educated, racial minorities and the elderly, victims of predatory lending are represented across all demographics. [2][3]
Predatory lending often 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. In lending agreements collateral is a borrower's asset that is Forfeited to the lender if the borrower is insolvent—that is unable to pay back the principal and interest on In Finance, default occurs when a debtor has not met its legal obligations according to the debt contract e Repossession is generally used to refer to a Financial institution taking back an object that was either used as collateral or rented or leased in a transaction Foreclosure is the legal proceeding in which a mortgagee, or other Lienholder, usually a lender obtains a court ordered termination of a mortgagor
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Abusive or unfair lending practices
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.
- Risk-based pricing. Risk-based pricing is a methodology adopted by many lenders in the mortgage and Financial services industries 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 higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk. [4]
- Single premium credit insurance. Credit Insurance is a term used to describe both Trade Credit Insurance and Credit Life Insurance This is the purchase of insurance which will pay off the loan in case the homebuyer dies. It 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.
- Failure to disclose loan price is negotiable. [4] 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 mistaken impression that the lender is placing the borrower's interests above its own. Thus, many borrowers do not take advantage of their ability to negotiate. [4]
- Failure to clearly and accurately disclose terms and conditions, particularly in cases where an unsophisticated borrower is involved. Mortgage loans are complex transactions involving multiple parties and dozens of pages of legal documents. In the most egregious of predatory cases, lenders or brokers have been known to not only mislead borrowers, but actually alter documents after they have been signed.
- Short-term loans with disproportionally high fees, such as payday loans, credit card late fees, checking account overdraft fees, and Tax Refund Anticipation Loans, where the fee paid for advancing the money for a short period of time works out to an annual interest rate significantly in excess of the market rate for high-risk loans. A payday loan (also called a paycheck advance or payday advance) is a small short-term Loan that is intended to cover a borrower's expenses until A refund anticipation loan ( RAL) is a high Interest rate short-term Loan secured by a taxpayer’s expected Tax refund, and designed to offer The originators of such loans dispute that the fees are interest.
- Servicing agent and securitization abuses. Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets The servicing agent is the entity that receives the mortgage payment, keeps the payment records, provides borrowers with account statements, imposes late charges when the payment is late, and pursues delinquent borrowers. A securitization is a financial transaction in which assets, especially debt instruments, are pooled and securities representing interests in the pool are issued. Most loans are subject to being bundled and sold, and the rights to act as servicing agent sold, without the consent of the borrower. A federal statute requires notice to the borrower of a change in servicing agent, but does not protect the borrower from being held delinquent on the note for payments made to the servicing agent who fails to forward the payments to the owner of the note, especially if that servicing agent goes bankrupt, and borrowers who have made all payments on time can find themselves being foreclosed on and becoming unsecured creditors of the servicing agent. [5] Foreclosures can sometimes be conducted without proper notice to the borrower. In some states (see Texas Rule of Civil Procedure 746), there is no defense against eviction, forcing the borrower to move and incur the expense of hiring a lawyer and finding another place to live while litigating the claim of the "new owner" to own the house, especially after it is resold one or more times. When the debtor demands that the current claimed note owner produce the original note with his signature on it, the note owner typically is unable or unwilling to do so, and tries to establish his claim with an affidavit that it is the owner, without proving it is the "holder in due course", the traditional standard for a debt claim, and the courts often allow them to do that. In the meantime, the note continues to be traded, its physical whereabouts difficult to discover.
Disputes over predatory lending
The organization ACORN claims that predatory loans are usually made in poor and minority neighborhoods where better loans are not readily available. ACORN, the Association of Community Organizations for Reform Now, is a community-based organization that advocates for low- and moderate-income families by working [6] Organizations such as AARP, Inner City Press, and ACORN have worked to stop what they describe as predatory lending. For the AppleTalk protocol developed by Apple Computer, see AppleTalk address resolution protocol (AARP Inner City Press is a non-profit public interest organization best known for its investigations of the banking industry's treatment of low-income communities of color at first within ACORN has targeted specific companies such as HSBC Finance and H&R Block, successfully forcing them to change their practices. "HFC Bank" redirects here for the bank in Ghana see Home Finance Company HSBC Finance Corporation is a financial services company H&R Block ( is a Tax preparation company in the United States claiming more than 22 million customers worldwide with offices in Canada Australia and the United Kingdom [7]
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. [8]
Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race. Subprime lending ( near-prime, non-prime, or second chance lending is a financial term that was popularized by the media during the "credit crunch" Mortgage discrimination or mortgage lending discrimination is the practice of banks governments or other lending institutions denying Loans to one or more groups [9] African Americans and other minorities are being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts. Subprime lending ( near-prime, non-prime, or second chance lending is a financial term that was popularized by the media during the "credit crunch" [10] 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. [9]
Underlying issues
There are many underlying issues in the predatory lending debate:
- Judicial practices: Some argue that much of the problem arises from a tendency of the courts to favor lenders, and to shift the burden of proof of compliance with the terms of the debt instrument to the debtor. According to this argument, it should not be the duty of the borrower to make sure his payments are getting to the current note-owner, but to make evidence that all payments were made to the last known agent for collection sufficient to block or reverse repossession or foreclosure, and eviction, and to cancel the debt if the current note owner cannot prove he is the "holder in due course" by producing the actual original debt instrument in court.
- Risk-based pricing: The basic idea is that borrowers who are thought of as more likely to default on their loans should pay higher interest rates and finance charges to compensate lenders for the increased risk. Risk-based pricing is a methodology adopted by many lenders in the mortgage and Financial services industries In essence, high returns motivate lenders to lend to a group they might not otherwise lend to -- "subprime" or risky borrowers. Advocates of this system believe that it would be unfair -- or a poor business strategy -- to raise interest rates globally to accommodate risky borrowers, thus penalizing low-risk borrowers who are unlikely to default. Opponents argue that the practice tends to disproportionately create capital gains for the affluent while oppressing working-class borrowers with modest financial resources. [11] Some people consider risk-based pricing to be unfair in principle. [4] Lenders contend that interest rates are generally set fairly considering the risk that the lender assumes, and that competition between lenders will ensure availability of appropriately-priced loans to high-risk customers. Still others feel that while the rates themselves may be justifiable with respect to the risks, it is irresponsible for lenders to encourage or allow borrowers with credit problems to take out high-priced loans. [4] For all of its pros and cons, risk-based pricing remains a universal practice in bond markets and the insurance industry, and it is implied in the stock market and in many other open-market venues; it is only controversial in the case of consumer loans.
- 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. Competition is a rivalry between individuals groups nations or animals for territory or resources These criticisms are not levied 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 Annual percentage rate, a different measure of price than what many are used to. Annual percentage rate (APR is the simplified counterpart to the Effective interest rate that the borrower will pay on a loan
- 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. Caveat emptor is Latin for "Let the buyer beware" Generally caveat emptor is the Property law doctrine that controls the sale of Real 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. Adverse selection, anti-selection, or negative selection is a term used in Economics, Insurance, Statistics, and Risk management 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. Credit Insurance is a term used to describe both Trade Credit Insurance and Credit Life Insurance e. , only those customers who were not able to get the generally cheaper term life insurance). [4]
- Discrimination: Some organizations feel that many financial institutions continue to engage in racial discrimination. Unlike most discrimination policies discrimination between, which is the discernment of qualities and recognition of the differences focused here discrimination against is 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. 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. A credit score is a numerical expression based on a statistical analysis of a person's credit files to represent the Creditworthiness of that person 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. For this reason some call for laws requiring interest rates to be set entirely by objective measures. [12]
Predatory borrowing
George Mason University economics professor Tyler Cowen described "predatory borrowing" as potentially a larger problem than predatory lending:[13]
| “ | As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. George Mason University (also referred to as GMU or Mason) is a large Public university in the United States. Tyler Cowen (pronounced /ˈkaʊˌɛn/) (b January 21, 1962) occupies the Holbert C The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default. Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. | ” |
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.
United States legislation combating predatory lending
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. The Truth in Lending Act (TILA of 1968 is a United States federal law designed to protect consumers in credit transactions by requiring clear Disclosure Annual percentage rate (APR is the simplified counterpart to the Effective interest rate that the borrower will pay on a loan A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent Also, in 1994 section 32 of the Truth in Lending Act, entitled the Home Ownership and Equity Protection Act of 1994, was created. Year 1994 ( MCMXCIV) was a Common year starting on Saturday (link will display full 1994 Gregorian calendar) This law is devoted to identifying certain high-cost, potentially predatory mortgage loans and reining in their terms. A mortgage loan is a Loan secured by Real property through the use of a Mortgage (a legal instrument
Twenty-five states have passed anti-predatory lending laws. Arkansas, Georgia, Illinois, Maine, Massachusetts, North Carolina, New York, New Jersey, New Mexico and South Carolina are among those states considered to have the strongest laws. Arkansas ( is a state located in the southern region of the United States. The State of Georgia ( is a state in the United States and was one of the original Thirteen Colonies that revolted against British rule The State of Illinois ( roughly ill-i-NOY is a state of the United States of America, the 21st to be admitted to the Union. The State of Maine ( is a state in the New England region of the northeastern United States of America, bordering the Atlantic Ocean The Commonwealth of Massachusetts ( is a state located in the New England region of the northeastern United States. North Carolina ( is a state located on the Atlantic Seaboard in the southeastern United States New York ( is a state in the Mid-Atlantic and Northeastern regions of the United States and is the nation's third most populous New Jersey ( is a state in the Mid-Atlantic and Northeastern regions of the United States. New Mexico ( is a state located in the southwestern region of the United States of America. South Carolina ( is a state in the southern region ( Deep South) of the United States of America. Other states with predatory lending laws include: California, Colorado, Connecticut, Florida, Kentucky, Maine, Maryland, Nevada, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Wisconsin, and West Virginia. California ( is a US state on the West Coast of the United States, along the Pacific Ocean. The State of Colorado ( or chiefly by nonresidents) is a state located in the Rocky Mountain region of the United States of America. Connecticut ( is a state located in the New England region of the northeastern United States of America. Florida ( is a state located in the southeastern region of the United States, bordering Alabama to the northwest and Georgia to the The Commonwealth of Kentucky ( is a state located in the East Central United States of America. The State of Maine ( is a state in the New England region of the northeastern United States of America, bordering the Atlantic Ocean Nevada ( is a state located in the western region of the United States of America. Ohio ( is a Midwestern state of the United States. As part of the Great Lakes region, Ohio has long been a cultural and geographical crossroads Oklahoma ( is a state located in the South Central region of the United States of America. Oregon ( is a state in the Pacific Northwest region of the United States. The Commonwealth of Pennsylvania ( often colloquially referred to as PA (its abbreviation by natives and Northeasterners is a state located in the Northeastern Texas ( is a state geographically located in the South Central United States and is also known as the Lone Star State. The State of Utah (ˈjuːtɔː or) is a western state of the United States. Wisconsin ( or wɪˈskɑnsɨn (French Ouisconsin) is one of the fifty United States of America, located in the north central part of the United States West Virginia ( is a state in the Appalachian Upland South, and Mid-Atlantic regions of the United States, bordered by 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.
Research has found ambiguous results of such legislation, including finding that high-cost mortgage applications can possibly rise after adoption of laws against predatory lending. [14]
See also
- Poverty industry
- Loan sharking
- Overdraft protection loans
- Payday loan
- Refund Anticipation Loan
- Settlement (finance)
- Title loan
- Usury
- Mortgage Discrimination
- Securitization
External links
- Predatory Lending Association, satire site with helpful tips for predatory lenders
- Don't be a victim of loan fraud from HUD. The poverty industry refers to a wide-range of money-making activities that attract a large portion of their business from the poor. A loan shark is a person or body that offers illegal Unsecured loans at high Interest rates to individuals often backed by Blackmail or threats An overdraft occurs when withdrawals from a Bank account exceed the available balance which gives the account a negative balance - a person can be said to have A payday loan (also called a paycheck advance or payday advance) is a small short-term Loan that is intended to cover a borrower's expenses until A refund anticipation loan ( RAL) is a high Interest rate short-term Loan secured by a taxpayer’s expected Tax refund, and designed to offer Settlement (of securities is the process whereby securities or interests in securities are delivered usually against payment to fulfill Contractual obligations A car title loan, or simply title loan, is a Loan where the Borrower provides their car as Collateral. Usury (ˈjuːʒəri comes from the Medieval Latin usuria, "interest" or "excessive interest" from the Latin usura "interest" Mortgage discrimination or mortgage lending discrimination is the practice of banks governments or other lending institutions denying Loans to one or more groups Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets The United States Department of Housing, often abbreviated HUD, is a Cabinet department of the United States federal government.
- Protect yourself in the loan process from the California Department of Real Estate.
- Federal Citizen Information Center, site has links to state and federal regulatory agencies and other consumer information provided by the United States General Services Administration.
- Challenges in combating predatory lending from The United States General Accounting Office.
- Predatory lending article from Dollars & Sense magazine
- Alternatives to payday loans from Virginians Against Payday Loans (VAPL)
- Americans for Fairness in Lending (AFFIL), nonprofit consumer organization with news, articles and advice
- Capitalism without values, Clint Reilly on the predatory lending scandal. Dollars & Sense is a Magazine dedicated to providing Left-wing perspectives on Economics.
References
- ^ Investor Dictionary
- ^ Fannie Mae Overview of Predatory Lending
- ^ Federal Trade Commission
- ^ a b c d e f ACORN Reports
- ^ Will My Mortgage Loan Be Sold?
- ^ ACORN campaign against predatory lending
- ^ The Nation: Tax Refund Scheme Targets the Working Poor
- ^ National Home Equity Mortgage Association Report
- ^ a b Study Finds Disparities in Mortgages by Race The New York Times By Manny Fernandez Published: October 15, 2007
- ^ NAACP Fights Loan Discrimination
- ^ In Defense of Payday Lending
- ^ ACORN - Predatory Lending
- ^ Tyler Cowen. Tyler Cowen (pronounced /ˈkaʊˌɛn/) (b January 21, 1962) occupies the Holbert C "So We Thought. But Then Again . . .", 13 January 2008.
- ^ St. Louis Federal Reserve Review, The Varying Effects of Predatory Mortgage Lending Laws on High-Cost Mortgage Applications
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