Predatory lending is a pejorative term used to describe practices of some lenders. There are no legal definitions in the United States of predatory lending, though there are laws against many of the specific practices commonly identified as predatory, and various federal agencies use the term as a catch-all term for many specific illegal activities in the loan industry. Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... It has been suggested that this article or section be merged with pejoration. ... It has been suggested that this article or section be merged into loan. ... For other uses, see Loan (disambiguation). ...

One less contentious definition of the term is "the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against."^[1] Other types of lending sometimes also referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high. A shop window in Falls Church, Virginia advertises payday loans. ... Look up credit card in Wiktionary, the free dictionary. ... Consumer debt is consumer credit which is outstanding. ...

Although predatory lenders are most likely to target the less educated, racial minorities and the elderly, victims of predatory lending are represented across all demographics.^[2][3]

Predatory lending often occurs on loans backed by some kind of collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Collateral within a financial context is used to indicate assets that secure a debt obligation. ... In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e. ... Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. ... Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a piece of real property due to the owners default on its promissory note. ...

Abusive or unfair lending practices

There are many lending practices which have been called abusive and labeled with the term "predatory lending." There is a great deal of dispute between lenders and consumer groups as to what exactly constitutes "unfair" or "predatory" practices, but the following are sometimes cited.

• Risk-based pricing. This is the practice of charging more (in the form of higher interest rates and fees) for extending credit to borrowers identified by the lender as posing a greater credit risk. The lending industry argues that risk-based pricing is a legitimate practice; since a greater percentage of loans made to less creditworthy borrowers can be expected to go into default, higher prices are necessary to obtain the same yield on the portfolio as a whole. Some consumer groups argue that higher prices paid by more vulnerable consumers cannot always be justified by increased credit risk.^[4]

• Single premium credit insurance. This is the purchase of insurance which will pay off the loan in case the homebuyer dies. It is more expensive than other forms of insurance because it does not involve any medical checkups, but customers almost always are not shown their choices, because usually the lender is not licensed to sell other forms of insurance. In addition, this insurance is usually financed into the loan which causes the loan to be more expensive, but at the same time encourages people to buy the insurance because they do not have to pay up front.

• Failure to disclose loan price is negotiable.^[4] Many lenders will negotiate the price structure of the loan with borrowers. In some situations, borrowers can even negotiate an outright reduction in the interest rate or other charges on the loan. Consumer advocates argue that borrowers, especially but not only unsophisticated borrowers, are not aware of their ability to negotiate, and might even be under the mistaken impression that the lender is placing the borrower's interests above its own. Thus, many borrowers do not take advantage of their ability to negotiate.^[4]

• Short-term loans with disproportionally high fees, such as payday loans, credit card late fees, checking account overdraft fees, and Tax Refund Anticipation Loans, where the fee paid for advancing the money for a short period of time works out to an annual interest rate significantly in excess of the market rate for high-risk loans. The originators of such loans dispute that the fees are interest.

• Servicing agent and securitization abuses. The servicing agent is the entity that receives the mortgage payment, keeps the payment records, provides borrowers with account statements, imposes late charges when the payment is late, and pursues delinquent borrowers. A securitization is a financial transaction in which assets, especially debt instruments, are pooled and securities representing interests in the pool are issued. Most loans are subject to being bundled and sold, and the rights to act as servicing agent sold, without the consent of the borrower. A federal statute requires notice to the borrower of a change in servicing agent, but does not protect the borrower from being held delinquent on the note for payments made to the servicing agent who fails to forward the payments to the owner of the note, especially if that servicing agent goes bankrupt, and borrowers who have made all payments on time can find themselves being foreclosed on and becoming unsecured creditors of the servicing agent.^[5] Foreclosures can sometimes be conducted without proper notice to the borrower. In some states (see Texas Rule of Civil Procedure 746), there is no defense against eviction, forcing the borrower to move and incur the expense of hiring a lawyer and finding another place to live while litigating the claim of the "new owner" to own the house, especially after it is resold one or more times. When the debtor demands that the current claimed note owner produce the original note with his signature on it, the note owner typically is unable or unwilling to do so, and tries to establish his claim with an affidavit that it is the owner, without proving it is the "holder in due course", the traditional standard for a debt claim, and the courts often allow them to do that. In the meantime, the note continues to be traded, its physical whereabouts difficult to discover.

Property type redirects here. ... Credit Insurance is an insurance policy associated with a specific loan or line of credit which pays back some or all of any money owed should certain things happen to the borrower, such as death, disability, or unemployment. ... A shop window in Falls Church, Virginia advertises payday loans. ... // A (Tax) Refund Anticipation Loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund. ... This article is about securitization in finance. ...

Disputes over predatory lending

The organization ACORN claims that predatory loans are usually made in poor and minority neighborhoods where better loans are not readily available.^[6] Organizations such as AARP, Inner City Press, and ACORN have worked to stop what they describe as predatory lending. ACORN has targeted specific companies such as HSBC Finance and H&R Block, successfully forcing them to change their practices.^[7] For other uses, see Acorn (disambiguation). ... Current logo for AARP, in use since January 2007 For the AppleTalk protocol developed by Apple Computer, see AppleTalk address resolution protocol (AARP). ... This article or section needs to be wikified. ... For other uses, see Acorn (disambiguation). ... HSBC Finance Corporation is a financial services company and a member of the HSBC Group. ... H&R Block (NYSE: HRB) is the leading tax preparation company in the United States, and claims more than 22 million customers worldwide, with offices in Canada, Australia and the United Kingdom. ...

On the other side of the issue are various subprime lending advocates, such as the National Home Equity Mortgage Association (NHEMA), which say many practices commonly called "predatory," particularly the practice of risk-based pricing, are not actually predatory, and that many laws aimed at "predatory lending" significantly restrict the availability of mortgage finance to lower-income borrowers.^[8]

Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race.^[9] As African Americans and other minorities are being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts.^[10] Even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender, though not necessarily a sub-prime loan.^[9] Subprime lending, also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. ... Mortgage discrimination or mortgage lending discrimination is the practice of banks, governments or other lending institutions denying loans to one or more groups of people primarily on the basis of race, ethnic origin, sex or religion. ... Subprime lending, also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. ...

Underlying issues

There are many underlying issues in the predatory lending debate:

• Judicial practices: Some argue that much of the problem arises from a tendency of the courts to favor lenders, and to shift the burden of proof of compliance with the terms of the debt instrument to the debtor. According to this argument, it should not be the duty of the borrower to make sure his payments are getting to the current note-owner, but to make evidence that all payments were made to the last known agent for collection sufficient to block or reverse repossession or foreclosure, and eviction, and to cancel the debt if the current note owner cannot prove he is the "holder in due course" by producing the actual original debt instrument in court.

• Risk-based pricing: The basic idea is that borrowers who are thought of as more likely to default on their loans should pay higher interest rates and finance charges to compensate lenders for the increased risk. In essence, high returns motivate lenders to lend to a group they might not otherwise lend to -- "subprime" or risky borrowers. Advocates of this system believe that it would be unfair -- or a poor business strategy -- to raise interest rates globally to accommodate risky borrowers, thus penalizing low-risk borrowers who are unlikely to default. Opponents argue that the practice tends to disproportionately create capital gains for the affluent while oppressing working-class borrowers with modest financial resources.^[11] Some people consider risk-based pricing to be unfair in principle.^[4] Lenders contend that interest rates are generally set fairly considering the risk that the lender assumes, and that competition between lenders will ensure availability of appropriately-priced loans to high-risk customers. Still others feel that while the rates themselves may be justifiable with respect to the risks, it is irresponsible for lenders to encourage or allow borrowers with credit problems to take out high-priced loans.^[4] For all of its pros and cons, risk-based pricing remains a universal practice in bond markets and the insurance industry, and it is implied in the stock market and in many other open-market venues; it is only controversial in the case of consumer loans.

• Competition: Some believe that risk-based pricing is fair but feel that many loans charge prices far above the risk, using the risk as an excuse to overcharge. These criticisms are not levied on all products, but only on those specifically deemed predatory. Proponents counter that competition among lenders should prevent or reduce overcharging.

• Financial Education: Many observers feel that competition in the markets served by what critics describe as "predatory lenders" is not affected by price because the targeted consumers are completely uneducated about the time value of money and the concept of Annual percentage rate, a different measure of price than what many are used to.

• Caveat Emptor: There is an underlying debate about whether a lender should be allowed to charge whatever it wants for a service, even if it seems to make no attempts at deceiving the consumer about the price. At issue here is the belief that lending is a commodity and that the lending community has an almost fiduciary duty to advise the borrower that funds can be obtained more cheaply. Also at issue are certain financial products which appear to be profitable only due to adverse selection or a lack of knowledge on the part of the customers relative to the lenders. For example, some people allege that credit insurance would not be profitable to lending companies if only those customers who had the right "fit" for the product actually bought it (i.e., only those customers who were not able to get the generally cheaper term life insurance). ^[4]

• Discrimination: Some organizations feel that many financial institutions continue to engage in racial discrimination. Most do not allege that the loan underwriters themselves discriminate, but rather that there is systemic discrimination. Situations in which a loan broker or other salesman may negotiate the interest rate are likely more ripe for discrimination. Discrimination may occur if, when dealing with racial minorities, loan brokers tend to claim that a person's credit score is lower than it is, justifying a higher interest rate charged, on the hope that the customer assumes the lender to be correct. This may be based on an internalized bias that a minority group has a lower economic profile. It is also possible that a broker or loan salesman with some control over the interest rate might attempt to charge a higher rate to persons of race which he personally dislikes. For this reason some call for laws requiring interest rates to be set entirely by objective measures.^[12]

Property type redirects here. ... Competition is the act of striving against others for the purpose of achieving gain, such as income, pride, amusement, or dominance. ... Annual Percentage Rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. ... Caveat emptor is Latin for Let the buyer beware. Generally Caveat Emptor was the property law doctrine that controlled the sale of real property after the date of closing. Under the doctrine of Caveat Emptor, the buyer could not recover from the seller for defects on the property that rendered... Adverse selection or anti-selection is a term used in economics and insurance. ... Credit Insurance is an insurance policy associated with a specific loan or line of credit which pays back some or all of any money owed should certain things happen to the borrower, such as death, disability, or unemployment. ... Manifestations Slavery Racial profiling Lynching Hate speech Hate crime Genocide (examples) Ethnocide Ethnic cleansing Pogrom Race war Religious persecution Gay bashing Blood libel Paternalism Police brutality Movements Policies Discriminatory Race / Religion / Sex segregation Apartheid Redlining Internment Anti-discriminatory Emancipation Civil rights Desegregation Integration Equal opportunity Counter-discriminatory Affirmative action Racial...

United States legislation combating predatory lending

Many laws at both the Federal and state government level are aimed at preventing predatory lending. Although not specifically anti-predatory in nature, the Federal Truth in Lending Act requires certain disclosures of APR and loan terms. Also, in 1994 section 32 of the Truth in Lending Act, entitled the Home Ownership and Equity Protection Act of 1994, was created. This law is devoted to identifying certain high-cost, potentially predatory mortgage loans and reining in their terms. The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. ... Annual Percentage Rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. ... For other uses, see Loan (disambiguation). ... Year 1994 (MCMXCIV) The year 1994 was designated as the International Year of the Family and the International Year of the Sport and the Olympic Ideal by the United Nations. ... A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). ...

Twenty-five states have passed anti-predatory lending laws. Arkansas, Georgia, Illinois, Maine, Massachusetts, North Carolina, New York, New Jersey, New Mexico and South Carolina are among those states considered to have the strongest laws. Other states with predatory lending laws include: California, Colorado, Connecticut, Florida, Kentucky, Maine, Maryland, Nevada, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Wisconsin, and West Virginia. These laws usually describe one or more classes of "high-cost" or "covered" loans, which are defined by the fees charged to the borrower at origination or the APR. While lenders are not prohibited from making "high-cost" or "covered" loans, a number of additional restrictions are placed on these loans, and the penalties for noncompliance can be substantial. Official language(s) English Capital Little Rock Largest city Little Rock Largest metro area Little Rock Metropolitan Area Area  Ranked 29th  - Total 53,179 sq mi (137,002 km²)  - Width 239 miles (385 km)  - Length 261 miles (420 km)  - % water 2. ... Official language(s) English[1] Capital Springfield Largest city Chicago Largest metro area Chicago Metropolitan Area Area  Ranked 25th  - Total 57,918 sq mi (140,998 km²)  - Width 210 miles (340 km)  - Length 390 miles (629 km)  - % water 4. ... Official language(s) None (English and French de facto) Capital Augusta Largest city Portland Area  Ranked 39th  - Total 33,414 sq mi (86,542 km²)  - Width 210 miles (338 km)  - Length 320 miles (515 km)  - % water 13. ... This article is about the U.S. state. ... Official language(s) English Capital Raleigh Largest city Charlotte Largest metro area Charlotte metro area Area  Ranked 28th  - Total 53,865 sq mi (139,509 km²)  - Width 150 miles (240 km)  - Length 560[1] miles (900 km)  - % water 9. ... This article is about the state. ... This article is about the U.S. state. ... Capital Santa Fe Largest city Albuquerque Largest metro area Albuquerque metropolitan area Area  Ranked 5th  - Total 121,665 sq mi (315,194 km²)  - Width 342 miles (550 km)  - Length 370 miles (595 km)  - % water 0. ... Official language(s) English Capital Columbia Largest city Columbia Largest metro area Columbia Area  Ranked 40th  - Total 34,726 sq mi (82,965 km²)  - Width 200 miles (320 km)  - Length 260 miles (420 km)  - % water 6  - Latitude 32° 2′ N to 35° 13′ N  - Longitude 78° 32′ W to 83... This article is about the U.S. state. ... Official language(s) English Capital Denver Largest city Denver Largest metro area Denver-Aurora Metro Area Area  Ranked 8th  - Total 104,185 sq mi (269,837 km²)  - Width 280 miles (451 km)  - Length 380 miles (612 km)  - % water 0. ... Official language(s) English Capital Hartford Largest city Bridgeport[3] Largest metro area Hartford Metro Area[2] Area  Ranked 48th  - Total 5,543[4] sq mi (14,356 km²)  - Width 70 miles (113 km)  - Length 110 miles (177 km)  - % water 12. ... This article is about the U.S. State of Florida. ... Official language(s) English[1] Capital Frankfort Largest city Louisville Area  Ranked 37th  - Total 40,444 sq mi (104,749 km²)  - Width 140 miles (225 km)  - Length 379 miles (610 km)  - % water 1. ... Official language(s) None (English and French de facto) Capital Augusta Largest city Portland Area  Ranked 39th  - Total 33,414 sq mi (86,542 km²)  - Width 210 miles (338 km)  - Length 320 miles (515 km)  - % water 13. ... Official language(s) None (English, de facto) Capital Annapolis Largest city Baltimore Largest metro area Baltimore-Washington Metropolitan Area Area  Ranked 42nd  - Total 12,407 sq mi (32,133 km²)  - Width 101 miles (145 km)  - Length 249 miles (400 km)  - % water 21  - Latitude 37° 53′ N to 39° 43′ N... This article is about the U.S. State of Nevada. ... This article is about the U.S. State. ... For other uses, see Oklahoma (disambiguation). ... Official language(s) (none)[1] Capital Salem Largest city Portland Area  Ranked 9th  - Total 98,466 sq mi (255,026 km²)  - Width 260 miles (420 km)  - Length 360 miles (580 km)  - % water 2. ... This article is about the U.S. State. ... For other uses, see Texas (disambiguation). ... This article is about the U.S. state. ... Official language(s) None Capital Madison Largest city Milwaukee Largest metro area Greater Milwaukee Area  Ranked 23rd  - Total 65,498 sq mi (169,790 km²)  - Width 260 miles (420 km)  - Length 310 miles (500 km)  - % water 17  - Latitude 42° 30′ N to 47° 05′ N  - Longitude 86° 46′ W to... Official language(s) English Capital Charleston Largest city Charleston Largest metro area Charleston metro area Area  Ranked 41st  - Total 24,244 sq mi (62,809 km²)  - Width 130 miles (210 km)  - Length 240 miles (385 km)  - % water 0. ...

Research has found ambiguous results of such legislation, including finding that high-cost mortgage applications can possibly rise after adoption of laws against predatory lending.^[13]

See also

• Loan sharking
• Overdraft protection loans
• Payday loan
• Refund Anticipation Loan
• Settlement (finance)
• Title loan
• Usury
• Mortgage Discrimination
• Securitization

Usury (from the Latin usus meaning used) was defined originally as charging a fee for the use of money. ... This article needs to be wikified. ... A shop window in Falls Church, Virginia advertises payday loans. ... A (Tax) Refund Anticipation Loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund. ... Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades. ... A car title loan or simply a title loan is a high interest loan where the borrower uses their automobile as collateral for the loan. ... Look up usury in Wiktionary, the free dictionary. ... Mortgage discrimination or mortgage lending discrimination is the practice of banks, governments or other lending institutions denying loans to one or more groups of people primarily on the basis of race, ethnic origin, sex or religion. ... This article is about securitization in finance. ...

External links

• Predatory Lending Association, satire site with helpful tips for predatory lenders
• Don't be a victim of loan fraud from HUD.
• Protect yourself in the loan process from the California Department of Real Estate.
• Federal Citizen Information Center, site has links to state and federal regulatory agencies and other consumer information provided by the United States General Services Administration.
• Challenges in combating predatory lending from The United States General Accounting Office.
• Predatory lending article from Dollars & Sense magazine
• Alternatives to payday loans from Virginians Against Payday Loans (VAPL)
• Americans for Fairness in Lending (AFFIL), nonprofit consumer organization with news, articles and advice

The United States Department of Housing and Urban Development, often abbreviated HUD, is a Cabinet department of the United States government. ... Dollars & Sense is a magazine dedicated to providing left-wing perspectives on economics. ...

References

1. ^ Investor Dictionary
2. ^ http://www.knowledgeplex.org/kp/text_document_summary/article/relfiles/hot_topics/Carr-Kolluri.pdf Fannie Mae Overview of Predatory Lending
3. ^ http://www.ftc.gov/opa/2001/04/predlend.htm Federal Trade Commission
4. ^ ^{a b c d e f} [tt_news=19034&tx_ttnews[backPid]=2680&cHash=2669ca5d9e]
5. ^ Will My Mortgage Loan Be Sold?
6. ^ ACORN campaign against predatory lending
7. ^ http://www.thenation.com/doc/20060501/yeung The Nation: Tax Refund Scheme Targets the Working Poor
8. ^ http://www.nhema.org/press.asp?bid=893
9. ^ ^{a b} Study Finds Disparities in Mortgages by Race The New York Times By Manny Fernandez Published: October 15, 2007
10. ^ NAACP Fights Loan Discrimination
11. ^ In Defense of Payday Lending
12. ^ ACORN - Predatory Lending
13. ^ St. Louis Federal Reserve Review, The Varying Effects of Predatory Mortgage Lending Laws on High-Cost Mortgage Applications