DEFINING PREDATORY LENDING
Predatory lending encompasses a variety of practices. The most prevalent of these practices, however, is predatory lending in connection with home mortgage loans. These loans are targeted at homeowners who may be living on fixed or lower incomes, and those who have checkered credit histories.
Unlike most prime loans, subprime mortgage loans are generally based on the equity in a borrower’s house instead of his or her ability to make the scheduled payments. Therefore, problems meeting scheduled payments frequently arise due to the borrower’s lack of liquidity, a problem obviously foreseeable, yet ignored, by the lender. When this occurs, the predatory lender encourages the borrower to refinance the loan into another unaffordable loan, thus increasing the loan amount owed, primarily due to new finance fees. This “refinancing” severely decreases the borrower’s equity in his or her home and is a common practice referred to as “loan flipping.”
Another practice utilized by predatory lenders is “packing.” This is the practice of surreptitiously placing lender-protective credit insurance or other goods and services into consumer loans. For example, a predatory lender will state a fixed monthly payment to the borrower. Upon closure, however, the loan papers will include numerous single premium payment insurance policies which need to be added to the quoted monthly payment. These insurance policies are not mentioned during the loan negotiations as an additional cost. The lender ultimately hopes the borrower will not notice the added charges at all; if, however, the borrower is lucky enough to recognize the hidden costs, predatory lenders are equipped with numerous tactics to force the loan through despite the borrower’s misgivings. The most prevalent tactic is to threaten the closing of the loan by stating that deletion of the challenged costs will either cause delay, or effect the borrower’s loan eligibility. Given the financial situations of most of these borrowers, the threat of not receiving the loan, or even just a delay in the closing of the loan, can be enough to make the borrower forget about the added charges
Although many borrowers become aware of these hidden charges when they receive their first statement, other hidden terms and penalties are included that become apparent only when the borrower decides to get out of the loan.
One of the most potent tools used by predatory lenders to keep borrowers defenseless is the prepayment penalty. According to Standard & Poor’s, subprime loans contain prepayment penalties 80% of the time, while prime loans only 2% of the time. Since it is lower income individuals who are targeted by predatory lenders, the threat of thousands of dollars in prepayment penalties obviates the lenders fear of the borrower prepaying the balance through a more affordable prime loan. The prepayment penalties trap the individual in a long-term unaffordable loan that can only be refinanced by the lender who misrepresented the loan terms in the first place.
Predatory loans can be financially devastating. A borrower owing up to three times as much as he or she has borrowed is not an uncommon occurrence with a sub-prime predatory home mortgage loan.
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