What Is Predatory Lending?
Predatory lending doesn't end with the mortgage application. Predatory lending goes on at all stages of the home ownership process — with banks, brokers, finance companies, even home improvement companies that offer financing options for their work.
HUD issued a report in 2000 indicating that the common element in predatory lending as deception or fraud is the manipulation of the borrower through aggressive sales tactics or the borrower's general lack of understanding of loan terms. The most recent widespread examples of predatory lending have happened in the subprime mortgage market, where borrowers commonly use their homes for debt consolidation or other consumer credit purposes.
Why do certain people fall victim when others don't? Mostly because they're in debt trouble in the first place. HUD points out the abuses fall in the following camps:
Loan flipping: This describes a process in which mortgage originators refinanced borrowers' loans repeatedly in a short period of time. With each successive refinancing, these originators charged high fees, including sometimes prepayment penalties that stripped borrowers' equity in their homes.
Charging of excessive fees and “packing:” While subprime lending costs more for the lender to administer than loans for their best customers, HUD observed that some lenders charged higher-than-necessary fees packed into the loan amount without the borrower's full understanding.
Ignoring the borrower's ability to repay: Lenders zeroed in on borrower's equity without considering whether the borrower, usually a poor or elderly person, had the cash flow to pay the monthly interest and principal on these loans.
What's interesting about the continued worries in Washington and elsewhere about predatory lending is how many legal roadblocks there continue to be against preventing it. In April 2007, the U.S. Supreme Court ruled that national banks' mortgage-lending subsidiaries do not have to obey state banking regulations, no matter how tough the states are on consumer protections against unfair lending practices. That means that local banks not operating outside their own state lines had to operate under much tougher consumer protections than their national competitors who were doing the lion's share of business across the country.
What can consumers do about predatory lending?
It might make sense for you to check with your state's banking department to see if the particular banks or other lending agencies have to observe state consumer protection laws. (See Appendix C for contact information.) While you're at it, ask if they're aware of any particular protests being filed against that lender in your state.
At the same time, the federal government has not stepped in to review existing guidelines against predatory lending among interstate private lenders.
In states where state laws against potentially predatory lenders seem useless, it might make sense to contact your congressional representatives and senators and encourage others to do the same to have them take a closer look at the laws in the books.
