Definition of "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.

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

Allowing the interest rate and points to vary with changes in market conditions, as opposed to 'locking' them. Floating may be mandatory until the lender's lock requirements have been met. ...

To define a home equity line of credit, we can also take a look at how credit cards work. Similarly to credit cards, home equity lines of credit are sources of funds that can be accessed ...

An option attached to a mortgage, which allows the borrower to pay only the interest for some period. A mortgage is 'interest only' if the monthly mortgage payment does not include any ...

A collateralized debt obligation, also known as CDO, defines a complex financial product. Various loans, mortgages, bonds, and valuables back this commodity, and institutional investors ...

The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application. ...

Same as term Bridge Loan: A short-term loan, usually from a bank, that 'bridges' the period between the closing of a home purchase and the closing of a home sale. To qualify for a bridge ...

Refinancing for an amount in excess of the balance on the old loan plus settlement costs. When the main objective of a refinancing is to raise cash, the relevant question is whether the ...

A biweekly mortgage on which biweekly payments are applied to the balance every two weeks, rather than monthly, as on a conventional biweekly. ...

The lender's risk that, between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling ...

Popular Mortgage Questions