Predatory lending is a malicious attempt that lenders make to take advantage of borrowers. With predatory lending, the lender persuades the borrower to enter into a lending agreement that only benefits the lender and generally sets the borrower up for failure, such as with a disproportionate interest rate or unreasonably long loan term.
Most of these lenders prey on borrowers who don’t have much knowledge of loans or finances, such as young or low-income consumers. Predatory lenders may also target borrowers who are in bad or desperate financial situations, such as potential borrowers with low credit scores who need cars or want to buy homes. These borrowers are prime targets for predatory lending because they’re more likely to agree to unfavorable loan terms without questioning them.
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Predatory Lending Practices
To avoid predatory lending, you’ll need to be able to identify commonalities among these predatory lenders. There are some common practices you can associate with a predatory lender, including:
- False disclosure: Hiding or misrepresenting loan terms or the true cost of the loan agreement.
- Inflated fees: Administrative fees, service charges, and other costs that are much higher than other lenders usually charge.
- Risk-based pricing: Charging very high interest rates to high-risk borrowers who are likely to default on their loans.
- Loan packing: Adding unnecessary products like credit insurance to the loan cost.
- Loan flipping: Encouraging a borrower to refinance a current loan into a larger loan with more fees, higher interest, or other negative terms.
- Asset-based lending: Offering a refinancing loan based on a borrower’s amount of home equity rather than income or ability to repay the loan.
- Reverse redlining: Targeting residents of neighborhoods with limited resources and charging higher rates to borrow money, regardless of credit history or income.
- Negative amortization: Requesting monthly loan payments so small that interest is barely covered, resulting in a loan amount higher than what was originally borrowed.
- Questionable prepayment penalties: Factoring in an exorbitant prepayment penalty that forces the borrower to stay in the loan to avoid being financially penalized.
- Mandatory arbitration: Presenting a loan contract that makes it illegal for the borrower to take any legal action against the lender, including for fraud or misrepresentation.
Predatory Lending Warning Signs
It’s important to be aware of certain red flags when dealing with lenders. These red flags should help you identify predatory lenders so you can stay away.
If a lender makes empty promises, it may be too good to be true. Predatory lenders often make claims that no matter what your credit history or score is, you can qualify for a certain loan amount. While the lender may get you into a loan, it’ll come at a cost of a high interest rate, hefty fees, or a long loan term. Analyze the loan terms before you agree to them if your credit score or other factors didn’t matter in the loan qualification process.
If you feel the loan process is rushed and you’re being pushed into signing paperwork without time to discuss the terms, it’s a definite red flag. Your lender should be patient and give you time to analyze and read the paperwork before signing. If there are unclear parts of the contract, ask questions first. If your lender doesn’t want to answer these questions, it’s time to walk away.
Unlicensed Loan Officers
A loan officer who’s licensed understands the loan process and has completed ethics training. If you’re being solicited by loan offers through the mail or by phone, the lender may not be licensed. Before doing business with a lender, ensure they’re licensed to provide the type of loan you’re applying for.
High Interest Rates and Fees
A predatory lender isn’t concerned with your ability to pay off the loan. You’ll need to take matters into your own hands and do the math to ensure you feel comfortable with the loan terms. If there are high fees or a high interest rate within the loan terms, question it. It’s important to comparison shop your loan so you can be sure you choose the best one for your financial situation.
Blank spaces in a loan contract are also a red flag. Blank spaces allow a predatory lender to potentially commit fraud by having you sign the contract, then changing the terms. While there may be blank spaces for additional signatures, such as government officials, the important terms that concern you should already be filled in before you sign. If the document looks sparse, don’t sign anything until it’s been completed first and you agree to the terms.
Predatory Lending Legal Protections
The Equal Credit Opportunity Act (ECOA) was designed to protect you and all consumers from predatory lending. It upholds important legislation that helps prevent predatory lenders from discriminating against potential borrowers. Since most predatory lenders attempt to identify and seek out borrowers with bad credit, poor financial history, or low credit scores, the ECOA was enacted to make preying on these potential borrowers illegal.
The ECOA makes it illegal for lenders to discriminate or offer unfavorable loan terms to potential borrowers based solely on their age, race, religion, national origin, or whether they obtain public assistance. Lenders are also not allowed to discriminate based on whether a borrower has a telephone account or based solely on the neighborhood the borrower lives in.
While the ECOA attempts to make predatory lending hard for creditors, it’s still important to keep your guard up when shopping for a loan. If you identify a predatory lending common practice or a red flag, don’t sign the loan contract. Continue searching for a lender who will provide you with fair loan terms so you can protect your financial future.
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