"Predatory lending" happens when a lender uses deception, fraud, or manipulation to convince a borrower to take out a mortgage loan with abusive or unfair terms. While various state and federal laws prohibit lenders from using these tactics, the most effective deterrent is an informed consumer.
What Is Predatory Mortgage Lending?
It's difficult to define a predatory loan exactly. Federal law doesn't explicitly define it, and state laws describe it differently. Generally, however, predatory lending means any unscrupulous practice in which the lender takes advantage of a borrower.
A court will typically consider a loan to be predatory if the lender:
- used pushy and deceptive sales tactics to get a vulnerable or unsophisticated borrower to agree to unfavorable terms
- charged a very high interest rate to a borrower who is likely to default
- misrepresented the actual costs, risks, or appropriateness of the loan terms, or
- charged excessive amounts for tasks or expenses like appraisals, closing costs, and document preparation.
Five Examples of Predatory Lending Practices
Here are a few examples of typical predatory lending practices.
1. Loan Flipping
The lender encourages the borrower to refinance an existing loan into a new one, which generates fees for the lender but doesn’t benefit the borrower. If the borrower doesn’t benefit from the mortgage—but the lender does—the loan is most likely predatory.
For example, say you get a call from a lender telling you that interest rates have fallen and you should refinance your mortgage loan. The lender charges you discount points and a high fee to apply. After the refinance, your monthly payment increases and so does your principal balance, even though the interest rate went down by a little bit.
2. Loan Packing
The lender adds unnecessary products to the loan, like credit insurance, which pays the debt off if the borrower dies. Predatory lenders often tell borrowers that they must buy these products to get a loan, even though it isn’t true.
3. Reverse Redlining
With reverse redlining, the lender targets residents within a particular area, usually a low-income neighborhood, for unfair loans. ("Redlining," on the other hand, is when a lender denies services to entire neighborhoods based on race or ethnicity.)
So, if a specific lender offers extremely expensive mortgages to customers in specific neighborhoods based on their racial and ethnic composition, this activity is considered reverse redlining.
4. Steering
The lender pushes the borrower into taking out a risky, high-cost loan even when the borrower has good credit and should qualify for a low-cost, conventional loan.
5. Targeting
The lender targets certain borrowers—often elderly, low-income, and minority borrowers—for abusive loan products.
Laws Against Predatory Lending
Various federal laws protect borrowers against predatory lending practices. The Truth in Lending Act (TILA) requires lenders to disclose the terms and costs associated with a mortgage loan. The Home Ownership and Equity Protection Act (HOEPA), which is an amendment to TILA, protects homeowners from predatory lenders.
The federal Fair Housing Act (FHA) can also be used to combat predatory lending. In a 2017 case (Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017)), the U.S. Supreme Court decided that cities can sue a lender under the FHA if the lender targets minorities for predatory loans and the city suffers harm because of these lending practices.
Many states also have laws that attempt to prevent predatory lending by restricting the terms or provisions of certain loans.
Signs of a Predatory Lender
Borrowers who take out predatory loans often end up in foreclosure. To avoid this, consumers should steer clear of predatory loans in the first place.
Predatory lenders often advertise on television, through direct mailings, and by door-to-door solicitations. Mailed solicitations tend to look official and might even use the words "government" or "official" to induce homeowners to open the envelopes.
Some companies start with pushy phone calls and follow up with a visit to the potential borrower's home. These tactics are deceptive and can trick homeowners into taking out expensive and unnecessary loans.
If you think you might be dealing with a predatory lender, check the Consumer Financial Protection Bureau’s complaint database and the Better Business Bureau for complaints about the company before you sign loan documents. Also, be sure to shop around and compare the interest rates and fees of different lenders.
Getting Help
If you think you’re a victim of predatory lending, consider talking with a lawyer experienced with anti-predatory lending laws and a HUD-approved housing counselor. You can also file a complaint about a predatory lender with the Consumer Financial Protection Bureau or your state Attorney General's office.