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What is Predatory Lending?
How does Predatory Lending Work
Strategies to Keep an Eye On
Different types of predatory loans
New Forms of Predatory Lending
Anti-Predatory Lending Laws
How to Prevent Predatory Lending
Predatory Lending FAQs
The Bottom Line

Personal Finance Lending

Predatory Lending
By Adam Hayes
Updated July 03, 2022
Review by Khadija Khartit
Khadija Khartit

What Is Predatory Lending?

Predatory lending typically means the imposition of unfair, deceptive or indecent loan terms on customers. In many cases, these loans have significant fees and rates of interest and deprive the borrower of equity, or place the creditworthy borrower in a less rated credit (and more costly) loan, all to the lender's benefit.

The predatory lenders typically employ aggressive sales tactics and capitalize on the borrowers' ignorance regarding financial transactions. Through deceptive or fraudulent actions and a lack or transparency they can or induce an individual borrower to take out an loan they would not be able to repay.
The most important takeaways

Predatory lending is any lending practice that imposes unfair or unfair loan conditions on borrowers.
Some aspects of predatory lending include high interest rates, high fees, and terms that strip the lender of their equity.
The economic effects of COVID-19 gave way for cash-strapped consumers to be vulnerable to predatory loans.1
Predatory lending disproportionately affects women, Black, and Latinx communities.
Predatory lending is often used when mortgages are used to purchase homes.

How Predatory Lending Works

Predatory lending includes any unscrupulous methods employed by lenders to entice, induce, mislead, and help borrowers to take out loans they are unable to pay back reasonably or must pay back at a cost which is far above market rate. The lenders who prey on borrowers' circumstances or lack of knowledge.

For instance, a loan shark, as an example, is the archetypal example of a predatory lender, someone that loans money at a high-interest rate and may even threaten violence in order to get their debts paid. However, a lot of predatory lending is executed by established institutions such as banks, mortgage brokers, finance companies, attorneys, or real estate agents.

Predatory lending can put many borrowers at risk however, it is especially targeted those who have limited credit options or at risk in different ways: people with a poor income who create constant and urgent demands to get cash in order to meet their needs and those with poor credit scores, people who have less access to education or those who are that are subject to lending practices that discriminate against them because of their race, ethnicity, or disability.

These lenders typically target communities where few other credit options exist, which makes it more difficult for consumers to shop around. They attract customers through the use of aggressive sales tactics, such as mail, phone, TV, radio, and even door-to door, and usually employ various devious and misleading tactics to earn a profit.

Predatory lending is beneficial to the lender and ignores or hinders the borrower's ability to repay the loan.
Predatory Lending Tactics to Watch out for

Predatory lending is designed foremost, to benefit the lender. It is a denial or impedes the borrower's ability to pay the loan. The lending strategies are usually deceitful and attempt to make use of a borrower's lack of understanding of financial terms and the regulations governing loans. They can be a result of the strategies recognized as such by Federal Deposit Insurance Corporation (FDIC) as well as a variety of other ones:

Fees that are excessive and abusive can be disguised or downplayed because they are not included in a loan's rate. Based on the FDIC, fees totaling more than 5% from that loan value aren't uncommon. The excessive prepayment penalty is another example.2
The balloon payment is one substantial payment at the end of a loan's term, frequently utilized by predatory lenders in order to create a monthly installment appear to be low. The issue is that you might not be able to afford the balloon payment and will need refinance, incur new costs, or default.
A lender pressures a borrower to refinance, again and again in order to earn points and fees for the lender every time. As a result, a borrower can end up trapped in a growing debt burden.2
Equity stripping and loan-based loans: The lender grants the loan according to the value of your asset like a house or car, and not than on your ability to pay back the loan. You risk losing your vehicle or your home when you fall behind in payments.2 Cash-strapped, equity-rich individuals with fixed incomes might be targeted by loans (say, for a house repair) which they may have difficulty repaying and that will jeopardize their equity in their home.
Unnecessary add-on products or services for example, single-premium insurance for mortgage.
The steering: Loan lenders steer borrowers into expensive subprime loans regardless of whether their credit score and other characteristics make them eligible for prime loans.
Redlining: Reverse redlining, the housing policy that discriminated against people of color and effectively blocked Black families from getting mortgages, was banned by the Fair Housing Act of 1968.34But redlined communities are still inhabited by Black or Latinx communities.5 In a kind of reverse redlining, they're frequently targeted by subprime and predatory lenders.

Common Types of Predatory Loans
Subprime Mortgages

Classic predatory lending centers around home mortgages. Because home loans are backed by the borrower's real property, a predatory lender can gain not just from loan conditions that are stacked in their favor but also from the sale a foreclosed home if a borrower defaults. Subprime loans aren't always precarious. Their higher interest rates banks argue are a reflection of the higher costs of lending riskier to people with weak credit. However, even if there are no deceitful practices Subprime loan is riskier for consumers due to the massive financial burden it creates. The rapid growth of subprime loans resulted in the possibility of predatory lending.6

After the market for housing crashed, which led to a mortgage crisis that led to and triggered the Great Recession, homeowners with subprime mortgages became vulnerable. Subprime loans came to represent the largest proportion in residential foreclosure. Black and Latinx homeowners were especially affected.
Predatory Lenders

Predatory mortgage lenders had targeted them with aplomb in predominantly communities of minority, regardless of their financial status or creditworthiness. Even after adjusting for credit score as well as other risk factors such the loan-to value (LTV) ratios and subordinate liens as well as ratios of debt to income (DTI) proportions research suggests that Black Americans and Latinos were more likely to get subprime loans with higher cost.

Women were also targeted during the housing boom that sank massively during 2008 regardless of earnings or credit ratings. Black women with the highest incomes were five times more likely than white men of similar incomes to receive subprime loans.7

Predatory Lenders usually concentrate on vulnerable populations, such as those struggling to meet monthly expenses; people who have just lost jobs; and those who are not able to gain access to a wider range of credit choices due to unlawful reasons, like discrimination based on lack of education or an older years of age.


Settlements

As of 2012 Wells Fargo reached a $175 billion settlement with the Justice Department to compensate Black and Latinx borrowers who qualified for loans and were charged higher fees or rates or improperly diverted into subprime loans.8 Other banks also made settlements. But the damage to families of color is lasting. Homeowners lost not just their homes but also the chance to recover their investment as housing prices climbed again, adding another to the wealth gap.

In the month of October 2021, in October 2021, the Federal Reserve (Fed) revealed that the average Black or Hispanic or Latino households make about 50% less than the white average household, and own only about 15 percent to 20% more net wealth.9
Payday Loans

The payday loan industry lends billions of dollars every year in low-dollar, high-cost loans as an alternative to the following payday. These loans typically are for two weeks, with annual percentage rates (APR) ranging from 390% to 780%.10 Payday lenders operate online and through storefronts largely in financially underserved--and disproportionately Black and Latinx--neighborhoods.1112

While there is a Federal Truth in Lending Act (TILA) obliges payday lenders to disclose their finance charges but many individuals do not realize the costs.13 Most loans are for a period of 30 days or less and assist borrowers to meet short-term liabilities. The loan amounts for these loans typically range from $100 to $1,000 with $500 being the norm. The loans typically can be rolled over for additional costs of finance, and many borrowers--as high as 80percent of them--return as customers.14

There are new charges added each when a payday loan is refinanced, the amount of debt could quickly spiral out of control. A study in 2019 revealed that using payday loans doubles the rate of personal bankruptcy.15 A number of court cases have been brought against payday lenders, since lending laws have been enacted since the 2008 financial crisis to ensure a more transparent and equitable consumer-friendly lending marketplace. But research indicates that payday loans' market payday loans has only expanded since 2008 and was booming during the COVID-19 pandemic.16

If a lender attempts to hurry into approving your application, does not answer your questions, or recommends you take out more than you're capable of paying, you should be wary.
Auto-Title Loans

They are one-time loans that are based on a percent of the value of your car. They carry high-interest rates and a requirement to hand over the vehicle's title and spare keys to secure the loan. For the roughly one in five borrowers who see their vehicle confiscated due to inability to pay back the loan the loan, it's not only an expense in terms of money, but can also threaten access to employment and childcare for a family.17
New Methods of Predatory Lending

There are new schemes popping up in the known as gig economy. For example, Uber, the ride-sharing service, signed a settlement of $20 million in 2017 with the Federal Trade Commission (FTC) in 2017 and partially for auto loans with uncertain credit terms that the platform extended to its drivers.18

Additionally, many fintech companies are launching new products dubbed "buy now, make payments later." These products are not always transparent about the charges and rates of interest and may entice consumers to enter a debt spiral they will never be able to get out of.
Is Anything Being Done About Predatory Lending?

To protect consumers, many states have anti-predatory lending laws. Certain states have banned payday lending completely, while other states have put limits on the amount lenders can charge.192021

The U.S. Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB) have also taken measures to combat lenders who are predatory. But, as the shifting position of the latter agency demonstrates, rules and protections are subject to change.

In June 2016 in June 2016, the CFPB issued an official rule that imposed more stringent regulations regarding the underwriting of auto-title and payday loans.22 After a change in leadership in July 2020 the CFPB revoked that rule and delayed further actions, greatly lessening federal consumer protections to these precarious lenders.2314
How to Prevent Lending

Learn to educate yourself. Being financially educated can help borrowers recognize red flags and steer clear of untrustworthy lenders. The FDIC has tips for protecting yourself when taking on a mortgage, including the steps to cancel private mortgage insurance (PMI) (paid for by you, the PMI is to protect the lender).13 HUD also advises on mortgages , and CFPB provides advice on payday loans.2425
Find out about your loan before signing the to sign the dotted line. If you've faced discrimination from lenders in the past, you'll need to end the process in the shortest time possible. Don't let the lenders win this time. Comparing offers can give you an advantage.
Think about alternative options. Before taking on a costly payday loan, consider turning to your family and friends or your local church or public assistance programs, which aren't likely to create the exact financial harm.

What Is an Example of Predatory Lending?

When a lender attempts to profit from a borrower and tie them to unmanageable or unfair loan conditions, it could be considered predatory lending. Telling signs of a predatory lender include aggressive solicitations, excessive borrowing costs and high prepayment penalties. huge balloon payments, as well as being encouraged to consistently switch loans.
Is the practice of predatory lending a crime?

In theory the case, in theory. If you are enticed and conned into taking out a loan which has higher costs than what your risk profile allows or is unlikely not to pay it back the loan, you could be the victim of the crime. There are laws in place to safeguard consumers from lenders who are predatory, but a lot of lenders continue to get away with it in part because the consumers don't know their rights.
Can I sue for Predatory Lending?

If you can prove that the lender you used to lend to violated federal or local laws which include those governed by the Truth in Lending Act (TILA), you may want to consider the possibility of filing a lawsuit. It's never easy going against a wealthy financial institution. If you can provide evidence that the lender violated the law, you have an opportunity to be compensated. First make contact with your state's consumer protection agency.
The Bottom Line

Predatory lending is a lending method that is characterized by unfair and unfair loan terms on the borrower with high interest rates, fees that are high, and conditions that deprive the lender of equity. These lenders usually employ tricks of sales and deceit to convince borrowers to accept loans they are unable to pay. And in many cases, predatory lenders have targeted the most vulnerable people.

These lenders aren't just loan sharks. A great deal of predatory lending is performed by established institutions, such as banks, mortgage brokers, finance companies attorneys, lawyers, or real estate agents. The subprime mortgage boom during the period prior to 2008 was, arguably, an instance of precarious lending.26

Education and research are crucial to avoiding predatory loans. Make sure you understand any loan documents you sign and estimate the amount you'll be liable. However, if you are enticed and conned into taking out the loan with higher fees than your risk-based profile would warrant or is unlikely to be able to repay the loan, you could be the victim of a crime.
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