“Predatory lending” happens when a lender uses deception, fraud, or manipulation to convince a borrower to take out a mortgage with abusive or unfair terms. While there are various state and federal laws designed to stop lenders from using these tactics, the most effective deterrent is an informed consumer.
Understanding Predatory Mortgage Lending
It’s difficult to come up with an exact definition of predatory lending. Federal law doesn’t specifically provide a definition, and state laws describe predatory lending in different ways. Generally, though, 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.
Predatory Lending Practices
Here are a few common examples of predatory lending practices.
- 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 does not benefit from the mortgage—but the lender does—the loan is most likely predatory.
- Loan packing. The lender adds unnecessary products to the loan, like credit insurance (which pays the loan off if the borrower dies). Predatory lenders often tell borrowers that they must buy these products to qualify for a loan, even though it isn’t true.
- Reverse redlining. The lender targets residents within a certain area, usually a low-income neighborhood, for unfair loans.
- Steering. The lender pushes borrowers into taking out risky, high-cost loans—even when they have good credit and should qualify for low-cost, conventional loans.
- Targeting. The lender targets certain borrowers—often elderly, low-income, and minority borrowers—for abusive loan products.
Anti-Predatory Lending Laws
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 v. Miami, 581 U. S. ____ (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.
Tips to Avoid Becoming a Victim
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. Here are a few tips to avoid becoming the victim of a predatory lender:
- Beware of lenders that promise you a loan approval, regardless of your credit history.
- Before you apply for a loan, get a copy of your credit report so that you have an idea of the types of loans for which you qualify. Consumers with a good credit history should qualify for a low-cost loan. If you have good credit, but the lender pressures you to take out a loan with excessive points (fees to reduce the interest rate) or a high interest rate, for example, walk away from the deal.
- Don’t sign any paperwork until you fully understand all the terms of the loan. Read the loan documents carefully. If the loan terms don’t make sense to you, get a lawyer to review them.
- If the interest rate or fees for certain items seem unusually high, question the lender about them.
- Refuse any additional unnecessary products, like credit insurance.
- Don’t sign any documents that have blank spaces. The lender might fill them in later, entering a rate or term you didn’t agree on.
If you think you’re a victim of predatory lending, you might want to speak with a lawyer experienced with anti-predatory lending laws. You can also file a complaint about a predatory lender with the Consumer Financial Protection Bureau or your state Attorney General's office.