Glossary: Predatory Lending

The Cunningham family became homeowners through the #NACAPurchase Program. Image Courtesy of Neighborhood Assistance Corporation of America (NACA).

The Cunningham family became homeowners through the #NACAPurchase Program.  Image Courtesy of the Neighborhood Assistance Corporation of America (NACA).

Merriam-Webster’s defines the word predatory as, “wrongly harming or using others for pleasure or profit;” and lending is defined an act “to give for temporary use on condition that the same or its equivalent will be returned.” Conversly, Investopedia defines predatory lending as, “unscrupulous actions carried out by a lender to entice, induce and/or assist a borrower in taking a mortgage that carries high fees, a high interest rate, strips the borrower of equity, or places the borrower in a lower credit rated loan to the benefit of the lender.”

Predatory lenders aren’t overtly suspicious characters waiting to pounce on unassuming individuals. Some of the main culprits include a few of the largest lending companies in the United States; Ameriquest and Countrywide are two known culprits.

A lack of knowledge is a key criteria these predators use to their advantage. The manifestations of predatory lending have burdened several populations, especially communities of color, new homeowners, and low income homeowners.

One of the ways to fight back is to understand the manipulative language used. Current homeowners and future homeowners (or anyone who will ever need to borrow money) should familiarize themselves as a means to avoid falling victim to predatory lending.

  • Fees: All of the disclosures on loans will explain these items in words that require a degree in finance. Mortgage News Daily says, the key is to remember that any loan with fees over 5 percent of the loan amount is a sign of a predatory loan.
  • Prepayment Penalties: According to the National Association of Consumer Advocates, a vast majority of subprime loans carry a prepayment penalty. Subprime loans are for borrowers who do not qualify for prime loans (much lower interest rates) due to low credit scores or low income. The interest rates are higher on subprime loans so the borrower may feel inclined to pay it off early. Bad idea. An astounding 80 percent of these loans have penalties for paying early.
  • Steering & Targeting: Lenders tend to target senior citizens and communities of color utilizing aggressive sales tactics, despite the fact that more than half of this targeted population could have qualified for prime loans with lower interest rates.
  • Loan Flipping: Once you sign up for the loan at a certain interest rate, the lender convinces you to repeatedly refinance the loan for a longer-term loan. The lender may make it seem like it is in your best interest to refinance, but the benefit is only for them. Refinancing results in new fees that get rolled into the principal amount of the new loan (not in your best interest).
  • Bait and Switch: Of all of the predatory lending tactics, I think this is the worst one. Lenders will come into your home and tell you they have the best loan for you at the lowest interest rate in the market. Everything is great at the beginning of the process, but when closing, what they have on paper is not what they promised on their way in. Don’t accept this change, you can get better if you do more research.

Other tactics to beware of can be found on the websites below. Always ask for the disclosures in writing, at the beginning and at the end. Be knowledgeable of your credit rating so that you already know what you qualify for. Most importantly, do not go into a loan that has an adjustable interest rate. Know the best-case and worst-case scenario for any loan you sign up for.

ResponsibleLending.org

Washington State Department of Financial Institutions

Neighborhood Assistance Corporation of America

By Melissa Bautista

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2 Comments

  1. Jessica N.

     /  December 7, 2014

    It is so important to draw attention to this issue because predatory lending is so easy for anyone to fall victim to. Related to this problem, on a smaller scale, but relied on by nearly ten percent of Americans, are services from check cashing centers. These places profit off of charging fees to individuals who do not have a bank account, just to access their own money. Unfortunately it is overwhelmingly marginalized communities that fall victim to this abuse. While it is nice to know that there are services out there to help people educate and protect themselves from this type of manipulation, it is even more important to create awareness and move towards policy change. Without stricter policies for lenders to adhere to, they will continue to profit off of less fortunate borrowers. Thank you for bringing attention to this important topic.

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  2. Caroline

     /  September 28, 2015

    Predatory lending seems to be rampant, merely moving substance not mode. We received a cold call from a loan company, a few years ago. They tried to sell my husband a refinancing package. My husband amuses himself with conversational improv when these calls happen, always taking things to the extreme. He mentioned to the caller that he had defaulted on his current loan several times (not true, but sounded ridiculous). That company was so unethical that the caller said it didn’t matter. My husband replied incredulously, asking to make sure they were still making the offer.

    In the end, of course we all ended up laughing, though the caller didn’t. That person was sticking to his script, all the way to the sad end: they don’t care what they get, whether people can repay or not, whether they’ll be upended if they’re in over their heads. Honestly, I’m not sure what the answer is, except not to do anything of the sort over the telephone.

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