Predatory lending is the use of high fees, charges, and other unscrupulous lending practices to strip homeowners’ EQUITY. Federal government regulators define predatory lending as one or more of the following:
• unaffordable LOANS based on a borrower’s ASSETS rather than his or her ability to repay the loan
• inducing borrowers to repeatedly refinance their MORTGAGE so that the lender can charge high fees or points
• engaging in FRAUD or deception to hide some of the costs of a loan
Studies have found predatory lending especially hurts minorities and the elderly. A study of North Carolina residents who borrowed from finance companies estimated that predatory lending costs U.S. borrowers over $9 billion annually. Predatory lending differs from subprime lending in that subprime lending focuses on individuals who do not qualify for loans from traditional financial institutions. Predatory lending targets people with assets, often forcing these people into bankruptcy or foreclosure through excessive lending charges. Citibank offers the following “tell-tale signs” of predatory lenders.
• steering—deliberately putting borrowers with good credit into loans with high INTEREST RATES and away from affordable options
• unnecessary INSURANCE—jacking up the cost of credit by needlessly selling credit-life, credit-disability, and involuntary-UNEMPLOYMENT insurance to borrowers at staggering rates
• prepayment penalties—charging fee if a customer wants to pay off the loan early
• flipping—repeated refinancing of loans by rolling the balance of an existing loan into a new loan, with added fees charged each time
• hidden balloon payments—setting up loans so at the end of the loan period the borrower still owes most of the principal amount borrowed
Predatory lending has replaced denial of access to credit as the major ethical and legal concern in consumer lending. Until the 1980s, many states had usury laws limiting interest rates that lenders could charge borrowers. During that period, market rates for some types of loans exceeded maximum rates allowed by law. States responded by replacing usury laws with truth-in-lending statutes requiring full disclosure of fees and rates but placing no limits on the rate lenders could charge. New state laws and policies implemented by the FEDERAL NATIONAL MORTGAGE ASSOCIATION (Fannie Mae) are attempting to curb predatory lending practices. In 2000 Fannie Mae, the largest purchaser of home mortgage loans from lenders, created limits on certain types of loans, refusing to buy loans where the fees and “points” (upfront payments paid in order to get a loan) exceeded 5 percent of the loan value. It also barred mortgages with prepaid single-premium credit-life insurance policies, a questionable product often sold to less-sophisticated homeowners that generates significant commissions to issuers. Fannie Mae also established guidelines on prepayment penalties, as many predatory lenders include significant prepayment penalties to keep duped borrowers from refinancing their loans.