Predatory Lending

A variety of unsavory lender practices designed to take advantage of unwary
borrowers. Predatory lending covers much the same ground as Mortgage Scams and Tricks/Scams by Loan
Providers. The difference is that the term 'predatory lending' has been associated with practices in
the sub-prime market that specifically target unsophisticated and vulnerable borrowers. Scams operate
across a wider spectrum and usually don't leave quite as much human wreckage in their wake. Predatory
Practices: The two most important types of predatory lending are 'equity grabbing' and 'price gouging
'.Equity Grabbing: This is lending that is intended by the lender to lead to default by the borrower
so the lender can grab the borrower's equity. Equity grabbing may be associated with cash-out
refinancing to cash-dazzled customers. In one case, a borrower with significant equity in his home
refinanced a low interest-rate loan into one carrying a high interest rate plus heavy fees, with the
fees included in the new loan. The inducement was the cash, more than the borrower had ever seen at
one time. But the borrower was saddled with a larger repayment obligation that he couldn't meet,
resulting in default and loss of the home. Home improvement scams work in a similar manner. Gullible
homeowners are sweet-talked into contracting for repairs for which they are overcharged, and then the
cost of the repairs plus high loan fees are rolled into a mortgage that they cannot afford. Default
follows and the borrower loses the home. Equity grabs are extremely difficult to regulate away
because they represent an abusive application of legitimate activities. Most borrowers who do a
cash-out refinance retain their equity, and this is true as well for most of those who take out home
improvement loans. There are no remedies that won't curb legitimate transactions, except perhaps for
counseling directed at potential victims. But people can't be compelled to seek counsel or to listen
when they receive it. Price Gouging: This involves charging interest rates and/or fees that are
excessive relative to what the same borrower would have paid had they shopped the market. It also
includes packaging of related services such as credit life insurance, which are over-priced and made
to appear as if they are required. , There are many uninformed borrowers who don't shop, and
government ought to protect them if there were ways to do it that didn't seriously harm other
borrowers. Unfortunately, the regulatory reaction to price gouging is to set maximum prices, which
prevents borrowers from being gouged only by depriving other borrowers of access to credit
altogether. The tradeoff between protection and harm becomes increasingly unfavorable as the market
widens to provide market access to more and more consumers. As offensive as price gouging is, price
controls are not a good remedy.

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