Predatory Loans and the Way They're Regulated
The Subprime Mortgage and the Housing Discrimination
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Are regulations up to date with Technology?
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Personal Finance Lending

Predatory Lending Laws: What You Need to Be aware of

These rules protect borrowers from scams
By Tom Barkley
Updated August 25, 2022
Review by Katie Miller

When you're in need of credit, it's easy to fall victim to scams that take advantage of borrowers. If they are requesting a high interest rate on the payday loan, taking your car title as collateral, or offering a higher loan than you're able to afford There are a myriad of ways for unscrupulous lenders to extort borrowers.

Predatory lenders often target the most vulnerable, for instance, someone who recently lost a job, has poor credit, or simply isn't sure what to look out for. Black as well as Latinx communities, in particular are prone to abusive lending practices.1

There are laws that protect the borrower from loan sharks as well as other lenders that are predatory. The laws limit interest rates, prohibit discriminatory practices, and even prohibit certain kinds of lending. Although Congress has passed some federal credit laws, many states have taken the initiative to regulate loans that are based on predatory practices. With rules and credit products continuously evolving, it's essential to be aware of the latest rules and regulations.
The most important takeaways

Predatory lenders may use aggressive tactics and unfair loan conditions--like excessive interest rates and fees to make money off of borrowers who aren't aware.
They tend to focus on the most vulnerable and least knowledgeable borrowers, often targeting Black and Latinx communities.
A patchwork of laws has been enacted to safeguard borrowers, from setting limitations on interest rates, to banning discrimination and other unethical methods.

Loan Shark Definition
Predatory loans and how they're Regulated

Efforts to combat lenders who are predatory have been in place since the time the people who have borrowed money, beginning hundreds of years ago when various religions condemned the practice of the use of usury and charging excessive interest rates.

In the U.S., a patchwork of laws on both the federal and state levels have been crafted to protect those who borrow, yet they often are unable to keep up with evolving predatory practices. Here are a few illustrations of predatory loans and the specific laws and regulations relevant to the various types of loan. Knowing the characteristics of these loans can help you recognize one that is offered to you and avoid being taken in. It's not always easy to tell.
Subprime Mortgages and Housing Discrimination

Subprime mortgages, available to borrowers who have subprime or weak credit ratings, aren't always considered predatory.2 The greater interest rate is viewed as a form of compensation for lenders who are subprime who are taking more risk when lending to borrowers with poor credit history.

Some lenders have also actively promoted subprime loans for homeowners who cannot pay for them, or sometimes are eligible for better loan terms but don't realize it. This kind of shady practice was seen on large scale during the months leading up into the mortgage subprime crisis that occurred in 2008, which led to the Great Recession.3

The fallout from the financial crisis hit Black and Latinx homeowners hardest.4 A lot of these communities that for years been subject to discrimination based on race when seeking mortgage loans which is called redlining, were targets of so-called "reverse redlining" by predatory lenders charging excessive interest rates.5

Black and Latinx homeowners were more likely to be targeted by subprime lending, one study found that was true even taking into account aspects like credit scores and the amount of income goes toward home and debt costs.6

Discrimination is still a problem according to a separate study, which revealed that differences in mortgage costs between racial groups have remained constant over the past four decades.7

Furthermore mortgage discrimination has increased the gap in wealth between racial groups according to the Urban Institute, with Black homeowners having built up little more than a quarter of the housing wealth of White homeowners.8
Housing Laws That Protect the Borrower

Over the past six decades, significant progress has been made to safeguard homeowners from discrimination and abuse, despite the persistence of unfair practices. In 1968, two laws used different strategies to strengthen homeowners' protections--and they are constantly evolving. It was the Fair Housing Act (FHA) prohibited discrimination in real estate and mortgage borrowers.9 In the beginning, it prohibited discrimination based on race religious belief, national origin, religion or gender The statute was changed later on to include disabilities and family status as well.10

Another important law that was passed in 1968, the Truth in Lending Act (TILA) was a law that required mortgage lenders as well as other lenders to reveal the terms for their loans.11 The law was expanded multiple times to encompass a range of real property practices. The law was amended in 1994. TILA changed to incorporate the Home Ownership and Equity Protection Act (HOEPA) which protected borrowers from predatory, high-cost mortgages.1213

The Equal Credit Opportunity Act (ECOA), another pillar of protection for borrowers, became law in 1974. While initially focused on banning credit discrimination against women, it was later expanded to include race and color, religion, national origin or age, as well as involvement in government assistance programs.14

The ECOA and FHA were used in a number of the most significant enforcement actions against discriminatory practices that took place in the 2008 economic crisis. In settling settlements, that included penalties of $335 million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department required the banks to pay Black and Latinx clients who were unfairly directed to subprime loans.1516

In 2010 in 2010, the Dodd-Frank Act, enacted in response to the crisis, put the newly created Consumer Financial Protection Bureau (CFPB) in charge of supervision over ECOA and TILA. The CFPB established new, detailed and clarified, requirements for disclosure under TILA and with each new presidential administration, reexamines the priorities as well as disclosures and rules under its purview.17
Payday loans

It's generally very easy to obtain a payday loan. You can go to the office of a payday lender and walk out with a loan. You will not have to provide any money to the lender to secure the loan, as you would in the Pawnshop. Instead the lender will usually ask you for permission to electronically transfer money from your bank, credit union, or prepaid card account. Sometimes, the lender will require you to sign an
Check the amount of repayment to the lender, which they will pay when it is due. loan is due.18

Payday loans can be expensive. Payday lenders charge extremely large amounts of interest: up to 780% in annual percentage rates (APR), with an average loan being nearly 400%.

Payday lenders argue that their high rates of interest are a lie since if you pay back their payday loan on time, you won't be charged high rates of interest. In some cases, that might be true, but 80% of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB), indicating that the majority of the loans aren't paid back in time.19

There are ongoing concerns with the fairness of these loans. One study found the following: Black salaried workers are 3 times as likely as White workers--and Latinx wage earners are twice as likely to borrow payday loan.20 The usage for payday loans has also been connected to a rise in bankruptcy rates.21
400%

The annual percentage rate (APR) which payday loans often approach--one reason they are loans are often deemed to be a scam product
Payday Loan Regulations

Control on payday loans has largely been given to states, even though federal laws offer some protections for the borrowers. TILA is one example. It makes payday lenders - just like other financial institutions--to disclose the price of loans to borrowers, including fees for financing and the APR.22

Many states have usury laws which limit interest rates to a range of 5 to 30 percent. However, payday lenders fall under exemptions which allow their high interest. 16 states - Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and the District of Columbia, which either prohibits outright on payday loans that are extremely expensive or have implemented restrictions capping interest rates.23

Seven states--Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia, and Washington--have implemented some kind of measure that include time limits, fee limits, or the number of loans per borrower that provide some level of protection to consumers.

In 2017, the CFPB implemented measures to enhance payday loan user protections, making payday lenders decide in the underwriting process if the borrower will be able to pay back the loan and also limiting the use of aggressive collection methods by lenders to collect late payments.24 However, in July of 2020, the agency revoked the mandatory "ability to repay" requirement. The CFPB has set a date for the final implementation for their complete and updated "Payday Rule" for June 2022.25
Car Title Loans

A title loan, like an auto loan is one that uses your vehicle's name as collateral. While an auto loan is used to help purchase the car, the cash from the title loan can be used for any reason. Additionally, short-term high-interest title loans are often predatory. They typically target those who may have difficulty paying back the loan, which could force them to refinance at ballooning costs and potentially lose their car.

About one in five title loan customers ends up having their vehicle seized according to Consumer Financial Protection Bureau.26
Car Title Loan Regulations

Like payday loans, car title loans are regulated by states. The majority of states permit auto title loans.27 Some states group these along with payday loans and regulate them by imposing usury laws and limiting the rate that lenders can charge.

Others treat them as they do pawnshops, thus the alternative term "title the pawn." In Georgia, for example there is a bill made to allow title pawns, which could carry an APR of as high as 300% in the state's pawnshop regulations - under the laws governing usury in Georgia, which cap the interest rate at 36%.28
Can Regulations Keep Up With Technology?

The rapid growth in mobile and online lending presents new challenges for consumer security. The fintech sector's share of personal loan originations has increased by more than four years to account for about half the market in September according to credit report firm Experian.29 Half of the profits from payday loans are generated by online players, according to the CFPB.30

Online lenders generally utilize the "rent-a-bank" commercial model of business, in which they partner with a bank can help them stay out of state laws on usury and other regulations, predatory lending tactics can be difficult to enforce according to some consumer advocates. States have had some success in clamping down on predatory online lenders' tactics in court, however the rules governing fintechs are changing constantly as the technology and regulatory environment develops, changes and expands.
What's the best example Of Predatory Lending?

When a lender attempts to take advantage of the borrower by binding them into unfair or unmanageable loan conditions, it could be deemed to be predatory lending. Signs that you're an apex predator include the aggressive solicitations and excessive costs for borrowing, high prepayment penalties, large balloon payments, and being urged to constantly switch loans.
Is the practice of predatory lending a crime?

In the theory of things it is possible to say in theory. If you are enticed and misled into taking out an loan with higher fees than your risk profile warrants or you're not likely in your ability to pay back the loan, you could be the victim of a crime. There are laws in place to protect consumers against lenders who are predatory, but a lot of lenders continue to escape prosecution, partly because consumers don't understand their rights.
Can I Sue on behalf of Predatory Lending?

If you can prove that the lender you used to lend to violated local or federal laws which include federal laws, including the Truth in Lending Act (TILA) You may be interested in making a claim. It's never easy going against an institution with a large amount of money. If you can provide evidence that the lender broke rules, you have the chance of being paid. In the first instance, contact your state Consumer Protection Agency.
The Bottom Line

Despite the decades of progress made in protecting borrowersfrom predatory lending, it is still a constant and growing risk. If you're in the market for cash, you should be aware of the risks by investigating alternative funding options, reading the fine print of credit terms, and becoming aware of consumer rights and protections and the rates available for the type of loan you're looking for.

The Federal Deposit Insurance Corporation (FDIC) has suggestions on how mortgage holders are protected and the CFPB has information on payday loans and how to avoid scams.3132
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Related Terms
Predatory Lending
Predatory lending places unfair, misleading or unjust loan terms on a customer. There are many states with anti-predatory lending laws.
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What is a Payday Loan? What is it, how to Get One and the Legality
The term payday loan is a type of loan that is short-term in nature. A lender will extend high-interest credit according to your income.
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Usury Rate
The term usury rate is a term used to describe a rate of interest considered to be high compared to prevailing market interest rates.
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Truth in Lending Act (TILA): Consumer Protections and Disclosures
The Truth in Lending Act (TILA) is a law of the federal government promulgated in 1968 to protect consumers when they deal with creditors and lenders.
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What Is Usury? Definition, how it works Legality, Example, and Definition
Usury is the act of loaning money at a rate which is thought to be unreasonably high or that is higher than the maximum rate allowed by the law.
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Unlawful Loan
An unlawful loan is a loan that fails to comply with lending laws, such as loans that have illegally high interest rates or those that exceed size limits.
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