The California Reinvestment Committee (CRC) is currently conducting a study weighing the effect predatory lending has had on Californians. The preliminary findings suggest predatory lending is a very common practice in California:
- 73% of all borrowers saw key loan terms (e.g. interest rate, fixed versus adjustable mortgage, prepayment penalty) change for the worse at the closing of the loan as compared to what was represented to them;
- 61% of all borrowers had loans containing prepayment penalty provisions which lock borrowers into bad loans by assessing a fee of several thousand dollars if borrowers pay off their subprime loans early;
- 64% of borrowers reported refinancing their home loans from two to six times, suggesting widespread “loan flipping” and “equity stripping” by lenders;
- 39% of borrowers reported that the idea to take out a loan secured by their home came from the marketing of subprime lenders. Aggressive marketing through telephone calls, mailers and broker solicitations, was experienced by most study participants.
Although the study is still in its infancy, the preliminary numbers leave no room for doubt that predatory lending has become a tremendous problem in California and is robbing Californians of millions of dollars. The discrepancies in prime loan interest rates and those offered by the subprime lenders has steadily increased.
Subprime lenders state that they serve a very important function, mainly providing credit to borrowers with imperfect credit histories. However, it is this exact premise, the supposed benevolence of subprime lending, on which predatory lenders rely to justify their practices, thereby blending financially feasible subprime lending into predatory lending. Financial Code § 4970 is California’s remedy to this problem.
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