What is Predatory Lending?
Predatory
lending is a very broad term. However, for our purpose, we will define it as the practice of lenders persuading
homeowners to agree to unfair and intentionally misleading terms of a loan contract in order to make more money at your expense.
Just because your loan
is too expensive and you can’t repay it does not make it predatory.
Lenders, the people or companies who make loans, can be from any number of well-known
corporations. Predatory lending scams have been associated with Ford Motor Company, and more recently,
H&R Block, New Century, Fairbanks, Select Portfolio Servicing, and Fremont Mortgage.
Over the past few years, predatory lending has become one of the biggest reasons
for the increase in mortgage foreclosures. One reason
for this is the increase in loans based on home-equity, not the borrower’s
income.
Let’s
meet Jim. Jim is a homeowner who lives in a town made up of mostly low-income, blue-collar workers.
He works two part-time jobs, making just enough to get by. He is approached by a man from a well-known
lender, and is told that he can qualify for a loan. Using the equity in his home as collateral, Jim can get a loan to pay off his debts and buy a brand new car.
Jim signs a loan application and meets with the lender. The lender quickly goes over the
contract for the loan, explaining it in fancy technical terms that Jim doesn’t fully understand. Jim
is told that he has been informed of everything he needs to know, and that the rest of the contract is just “technical
stuff.” The lender also tells Jim in order to qualify for the loan, he would have to buy (at additional
cost paid from loan proceeds) a credit life insurance plan with the loan. The reason, he tells Jim, is in case Jim is hit
by a meteor, his family won’t have to pay the loan off. Jim, overwhelmed and excited by the promise
of the new loan and a new car, signs the loan contract, believing that the man has kept his best interest in mind.
Jim is barely able to make his payments on time. Three months later, the lender contacts
Jim and asks if he is having trouble making the payments. (See: loan “flipping”) He explains
that if he acts now and refinances his loan, he can qualify for even
more money. This sounds pretty good to Jim. Jim agrees, and refinances.
However, some of the “technical stuff” the lender mentioned at the initial signing explains that if the
loan were refinanced, the credit life insurance plan would be cancelled, even though Jim has already paid for it in full.
Oh yeah, Jim has also been charged extra fees and a hefty prepayment penalty
for refinancing.
Several months later, after Jim can’t afford the make
the payments because his income can’t support the high cost loan, the lender’s company takes action and takes
his home through foreclosure.
Jim
has fallen victim to a predatory lending scam. The lender in this scenario targeted Jim’s
1) NEED FOR THE MONEY
2) IGNORANCE.
He was approved for a loan even though the lender knew that, because of Jim’s financial status, there
was a slim chance of the loan being repaid.
