What Is Predatory Lending?
How Predatory Lending Functions
Tips to be Watchful for
Different types of predatory loans
New Forms of Predatory Lending
Anti-Predatory Lending Laws
How to Prevent Lending
Predatory Lending FAQs
The Bottom Line

Personal Finance Credit

Predatory Lending
By Adam Hayes
Updated July 03, 2022.
Reviewed by Khadija Khartit
Khadija Khartit

What is Predatory Lending?

Predatory lending typically means the imposition of unfair, deceptive or shady loan conditions on those who are borrowers. In many instances the loans come with significant fees and rates of interest and deprive the borrower of equity, or place a creditworthy borrower in an uncredit-rated (and more expensive) loan, all to the lender's benefit.

The predatory lenders typically employ aggressive sales tactics and capitalize on their clients' incomprehension regarding financial transactions. Through deceitful or fraudulent practices and an absence of transparency, they entice, induce, and assist a borrower in taking out a loan they won't be able to repay.
Important Takeaways

Predatory lending is any lending practice that is unfair and injurious loan terms on those who are borrowers.
Certain aspects of predatory lending include high interest rates, high fees, and terms that deprive the borrower of equity.
The economic effects of COVID-19 allowed cash-strapped consumers to be vulnerable to predatory loans.1
Predatory lending has a significant impact on the women Black, and Latinx communities.
Predatory lending often occurs when mortgages are used to purchase homes.

How Predatory Lending Functions

Predatory lending includes any unscrupulous methods employed by lenders in order to induce, mislead, and aid borrowers in taking out loans they are unable to pay back reasonably or must pay back at a price that is significantly higher than the market rate. The lenders who prey on the circumstances of borrowers or their lack of knowledge.

For instance, a loan shark, as an example, is the archetypal example of a predatory lender. Someone that loans money at an extremely high rate of interest and could even threaten violence to pay back their debts. However, a lot of these loans are carried out by more established institutions like banks or mortgage brokers, finance companies, attorneys, or real estate brokers.

Predatory lending can put several borrowers in danger, but it especially targets those with limited credit options or are vulnerable in other ways--people whose inadequate income leads to regular and urgent needs to get cash in order to cover their expenses or to meet their financial obligations. Also, those with poor credit scores, those who have less access to education or who are that are subject to lending practices that discriminate against them because of race, ethnicity or disabilities.

Predatory lenders usually target communities where few other credit options are available making it difficult for customers to compare. They entice customers with aggressive sales techniques through telephone, mail, TV or radio and even door-to door, and usually employ various unfair and deceptive tactics to profit.

The lender benefits from predatory lending and ignores or hinders the borrower's ability to pay back the loan.
Tips to Avoid Predatory Lending to Look out for

Predatory lending is intended, foremost, to benefit the lender. It ignores or hinders the borrower's ability to repay a debt. Lending tactics are often deceptive and attempt to take advantage of a borrower's lack of knowledge of the financial terminology and the regulations governing loans. They can be a result of the strategies that are uncovered in the Federal Deposit Insurance Corporation (FDIC) and a few others:

Inexpensive and abusive fees They are usually hidden or omitted because they aren't included in the loan's interest rate. As per the FDIC fees of over 5% of that loan amount are not unusual. Prepayment penalties that are excessive are another example.2
Balloon payment: This is a significant payment that is due at the end of the loan's term. It is often utilized by predatory lenders for making your monthly installment appear low. However, you might not be able to pay for the balloon amount and need to refinance, incur additional costs, or default.
Loan flipping: The lender pressures a borrower refinance, again and again, generating fees and points for the lender each time. In the end, the borrower could be entangled by an escalating debt burden.2
Equity stripping and loan-based loans A lender will grant a loan in relation to your assets, say a home or car, rather than your capacity to repay the loan. It is possible to lose your car or home if you default on payments.2 Cash-strapped, equity-rich older adults on fixed incomes may be targeted by loans (say for house repairs) that they will be unable to repay and could affect their equity in their home.
Add-ons that aren't needed for example, single-premium insurance for mortgage.
Steering: Lenders steer the borrowers towards expensive subprime loans regardless of whether their credit score and other characteristics make them eligible as prime loans.
Reverse redlining: Redlining, the discriminatory housing policy that effectively stifled Black families from obtaining mortgages, was ended with the Fair Housing Act of 1968.34But redlined neighborhoods are still largely filled with Black or Latinx communities.5 In the case of reverse redlining, they are often targeted by subprime and predatory lenders.

Common types of predatory loans
Subprime Mortgages

Classic predatory lending centers around home mortgages. Because home loans are backed by a homeowner's real estate, a predatory lender can gain not just from loan terms stacked in their favor , but also from the sale homes foreclosed if a borrower defaults. Subprime loans aren't necessarily predatory. Their higher interest rates banks argue, reflect the greater cost of lending riskier to those with poor credit. However, even if there are no deceitful practices, a subprime loan is more risky for borrowers because of the tremendous financial burden it creates. The rapid increase in subprime loans resulted in the possibility of predatory lending.6

When the housing market crashed, as well as a crisis in foreclosure precipitated and triggered the Great Recession, homeowners with subprime mortgages became vulnerable. Subprime loans became an disproportionate proportion in residential foreclosure. Black and Latinx homeowners were particularly affected.
Predatory Lenders

Predatory mortgage lenders had targeted them aggressively in predominantly communities of minority regardless of income or creditworthiness. Even after controlling for credit score and other risk factors such the loan-to value (LTV) ratios and subordinate liens as well as ratios of debt to income (DTI) proportions the data suggests that Black Americans and Latinos were more likely to receive subprime loans at higher costs.

Women were also victimized during the housing boom that sank dramatically the year 2008, regardless their earnings or credit ratings. Black women who had the top earnings are five times more likely males with similar incomes to be eligible for subprime loans.7

Predatory Lenders typically target vulnerable populations like those who are struggling to make ends meet or those who been laid off recently; and people who are denied access to a greater variety of credit options for criminal reasons, for instance, discrimination due to a absence of education or age.


Settlements

As of 2012 Wells Fargo reached a $175 billion settlement with the Justice Department to compensate Black and Latinx people who had the ability to get loans and were assessed higher fees or rates or were improperly directed to subprime loans.8 Other banks also made settlements. But the damage to families of color will last. Homeowners have lost not only their homes but the chance to recover their investment as housing prices climbed again, adding again to the racial inequality of wealth.

In October 2021 in October 2021, the Federal Reserve (Fed) revealed that on average, Black as well as Hispanic or Latino household earn 50% less than white households and have only 15% to 20% of the net wealth.9
Payday loans

In the payday loan industry lends billions of dollars every year in low-dollar high-cost loans as an interim measure until the next payday. These loans typically are for two weeks, with annual percentage rates (APR) ranging from 390% to 780%.10 Payday lenders operate online and through storefronts largely in financially underserved--and disproportionately Black and Latinx--neighborhoods.1112

While the federal Truth in Lending Act (TILA) requires payday lenders to reveal their financing costs however, many do not consider the costs.13 Most loans are for 30 days or less and assist the borrowers meet their short-term obligations. The amounts of these loans are usually from $100 to $1,000, with $500 being common. The loans typically can be rolled over for additional finance charges, and many customers--as much as 80% of them--end up as repeat customers.14

With new fees added each time the payday loan is refinanced, the amount of debt could quickly spiral out of control. A study from 2019 found that the use of payday loans doubles the rate of personal bankruptcy.15 Many court cases have been brought against payday lenders, since lending laws have been enacted since the 2008 financial crisis to ensure a more transparent and fair the lending industry for customers. But research indicates that this market of payday loans has only expanded in the past year and has saw a surge during the 2020-2022 COVID-19 pandemic.16

If a loan provider tries to hurry into approving your application, fails to answer any of your questions, or suggest you take out more than you're capable of paying, you should be wary.
Auto-Title Loans

They are one-time loans based on a percent of the value of your car. They come with high interest rates and a requirement to hand over the vehicle's title as well as a spare set of keys to be used as collateral. If you're one of the five borrowers who see their vehicle seized because they're not able to repay the loan It's not just an expense in terms of money and can also affect the ability to work and provide the care of a family.17
New Types of Predatory Lending

New schemes are popping up in the so-called gig economy. For instance, Uber, the ride-sharing service, agreed to a $20 million settlement to the Federal Trade Commission (FTC) in 2017 and partly to cover auto loans with questionable credit terms that the platform extended to its drivers.18

Elsewhere, many fintech firms are launching products that are called "buy now, make payments later." These types of products aren't always clear on charges and interest rates, and could cause consumers to enter an unsustainable debt cycle that they will not be able escape.
Is anything being done about Predatory Lending?

To protect consumers, many states have anti-predatory lending laws. Some states have banned payday lending altogether, while others have put caps on the amount lenders are able to charge.192021

The U.S. Department of Housing and Urban Development (HUD) as well as the Consumer Financial Protection Bureau (CFPB) have also taken measures to combat the practice of predatory lending. However, as the shifting stance from the latter indicates that rules and regulations can be changed at any time.

In June 2016, the CFPB issued a final rule establishing more stringent regulations for the underwriting of auto-title and payday loans.22 In the following year, under new leadership in July 2020, the CFPB removed the rule and delayed further actions, greatly weakening federal consumer protections against these lenders. lenders.2314
How to Avoid Predatory Lending

Learn to educate yourself. Becoming more financially literate helps customers spot red flags and avoid untrustworthy lenders. The FDIC offers tips to protect yourself when you take on mortgages, and also provides guidelines for cancelling PMI, or private mortgage insurance (PMI) (paid for by you, it's meant to safeguard the lender).13 The HUD also offers advice on mortgages , and CFPB provides guidance regarding payday loans.2425
Find out about your loan before you sign on the dotted line. If you've had to deal with discrimination in lending in the past, you'll understandably just want to get the process over with as soon as possible. Don't let the lenders prevail this time around. Comparing offers will give you an advantage.
Think about other options. Before you commit to a high-cost payday loan, consider turning to your family and friends or your local church, as well as public assistance, which are unlikely to cause the same financial damage.

What is an example for Predatory Lending?

Whenever a lender seeks to profit from a borrower and tie them into unfair or unmanageable loan conditions, it could be considered predatory lending. Telling signs of a lender that is predatory include aggressive advertising, high cost of borrowing and high prepayment penalties. huge balloon payments, as well as being encouraged to consistently switch loans.
Does Predatory Lending Constitute a Crime?

In the sense of theory it is possible to say in theory. If you're lured to take out an loan that carries higher fees than your risk-based profile would warrant or is unlikely not to pay it back the loan, you could be the victim of an offense. There are laws in place to safeguard consumers from predatory lending, though plenty of lenders continue to escape prosecution, partly because consumers don't understand their rights.
Can I Sue for Predatory Lending?

If you can prove the lender you used to lend to violated federal or local laws, including the Truth in Lending Act (TILA) You may want to consider making a claim. It's not an easy task to take on the financial institution that is wealthy. However, if you can show evidence that this lender has violated the law, you have a reasonable chance of being paid. First, contact your state consumer protection agency.
The Bottom Line

Predatory lending refers to any lending method that has unfair and abusive loan conditions on the borrower, including high-interest rates, fees that are high, and terms that strip the borrower of their equity. The predatory lenders typically employ the use of deceit and aggressive sales tactics to convince borrowers to sign up for loans they are unable to pay. In many cases, predatory lenders have targeted vulnerable populations.

Predatory lenders aren't all loan sharks. A great deal of predatory lending is executed by more established institutions, such as banks as well as finance companies, mortgage brokers lawyers, real estate agents. The subprime mortgage boom during the period that preceded 2008 is, in some ways, an example of the predatory lending.26

Research and education are essential to avoiding precarious loans. Make sure you understand the loan documents you sign and determine how much you'll be liable. Be aware that If you're misled into signing the loan that carries higher fees than your risk profile warrants or is unlikely in your ability to repay it, you may have been the victim of the crime.
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A History of Income Inequality throughout the United States
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