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NCBLC - National Consumer Bankruptcy Litigation Center

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Predatory Lending

Predatory lending takes many forms, but the term refers generally to situations wherein the lender or broker takes unfair advantage of the borrower. Various federal and state statutes protect borrowers against predatory lending practices, so there is no consistent definition as to precisely what constitutes predatory lending. However, some of the most common elements of predatory lending are:

• Fraud and deception, such as inflated property appraisals, altered loan applications, and "bait and switch" tactics that mislead borrowers about the terms of their loans;
• Lending to borrowers the lender knows will not be able to make payments, based solely on the value of the asset and leading to rapid foreclosure;
• Loan flipping, wherein the mortgage originator refinances a borrower's loan repeatedly in a short period of time, with no advantage to the borrower. The fees associated with these transactions strip the borrower's equity out of the property;
• Failure to disclose the unfavorable impact of certain loan provisions, such as:
  • Adjustable rate mortgages, especially those with interest-only payments at the front end. Not only are these borrowers making monthly payments without building any equity in their homes, they are sometimes caught in a "negative amortization" cycle wherein the principle owed on the loan actually increases each month as unpaid interest is compounded;
  • Prepayment penalties that trap borrowers into high-rate, high-cost loans because the borrower cannot afford to refinance.
• Marketing low-interest loans without adequate disclosure of balloon payments due when the loans mature. Often, these balloon payments are so large that the lender knows that the borrower is unlikely to be able to make payment, and lead to foreclosure after a borrower has made payments on the home for years without building any significant equity.

Subprime lending provides fertile ground for predatory lending because the costs and risks associated with the various subprime loan structures are more significant and more complex. Not all subprime lenders engage in predatory practices, but the nature of subprime loans puts those buyers at higher risk.

The federal government takes a dim view of predatory lending practices because the Department of Housing and Urban Development (HUD) has determined that predatory lending practices weaken communities by causing widespread foreclosures that lower property values.

In the past few years, state and federal governments have reached multi-million dollar settlements with a number of large lenders after predatory lending practices were revealed.

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