Definition of "Predatory Lending"

Floddy Jules real estate agent

Written by

Floddy Juleselite badge icon

Fave Realty Inc

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.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Terms

A second mortgage offered at preferential (subsidized) terms to those who qualify. For example, a labor union may offer members who are first-time home buyers a silent second to finance ...

A reverse mortgage program administered by FHA. ...

Charging unwary borrowers interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market. ...

The definition of interest is extremely important in today’s business environment where lending and borrowing money are the power stations of our economy. A widespread definition of ...

A lender who delivers loans to another (usually larger) lender against prior price commitments the larger lender has made to the correspondent. Mortgage brokers sometimes evolve into ...

A credit report contains detailed information regarding the relationship history of an individual with several financial institutions. How do I get a Credit Report?You ask a credit bureau. ...

A documentation rule where the borrower discloses income and its source but the lender does not verify the amount. ...

The amount the borrower owes at maturity. ...

The highest rate possible under an ARM contract; same as 'lifetime cap.' It is often expressed as a specified number of percentage points above the initial interest rate. ...

Popular Mortgage Questions