What You Should Know About Predatory Lending

It involves using aggressive tactics to manipulate a borrower or taking advantage of a borrower who is uneducated on terms of loans.

This occurs most often where individuals and families are using their homes as collateral to consolidate debt and for other credit purposes. It is happening worldwide so those who understand the concept are trying to inform and educate those who are unaware. One such website that is helping others to see the dangers and preventing them from getting tangled up in it is made by the Louisiana legislature and can be found at: http://www.mortgagebankers.org/state_update/2004/la/HCR107.pdf

Too many people are being sucked into the depths of darkness in predatory lending. Don't be another statistic! Another website to check out is through HUD at http://www.hud.gov/library/bookshelf18/pressrel/treasrpt.pdf to learn more about predatory lending and how you can avoid its pitfalls of despair.

  1. Single Premium Credit Insurance: Credit insurance premiums should not be financed into the loan up-front in a lump-sum payment. One type of credit insurance, credit life, is paid by the borrower to repay the lender should the borrower die. The product can be useful when paid for on a monthly basis. When it is paid for up-front, however, it does nothing more than strip equity from homeowners.

  2. High Fees: The borrower should not be charged fees greater than 3% of the loan amount (4% for FHA or VA loans). Points and fees (as defined by HOEPA) that exceed this amount (not including third party fees like appraisals or attorney fees) take more equity from borrowers than the cost or risk of sub prime lending can justify.

  3. Prepayment Penalties: Sub prime loans should not include prepayment penalties, for the following reasons:
    Prepayment Penalties Haunt Many Refinancers
    • Prepayment penalties trap borrowers in high-rate loans, which too often leads to foreclosure. The sub prime sector should provide borrowers a bridge to conventional financing as soon as the borrower is ready to make the transition, though prepayment penalties are designed to prevent this from happening.
    • Prepayment penalties are hidden, deferred fees that strip significant equity from over half of sub prime borrowers. Prepayment penalties of 5% are common. For a $150,000 loan, this fee is $7,500, more than the total net wealth built up over a lifetime for the median African American family.
    • Only 2% of borrowers accept prepayment penalties in the competitive conventional market, while, according to Duff and Phelps, 80% in sub prime do.

  4. Yield-Spread Premiums: Brokers originate over half of all mortgage loans, and a relatively small number of brokers are responsible for a large percentage of predatory loans. Lenders should identify -- and avoid -- these brokers and refuse to pay yield-spread premiums -- fees lenders rebate to brokers in exchange for placing a borrower in a higher interest rate than the borrower qualifies for.

  5. Steering: Lenders should make sure that borrowers get the lowest-cost loan they qualify for. As Fannie Mae and Freddie Mac have shown, sub prime lenders charge prime borrowers who meet conventional underwriting standards higher rates than necessary. HUD found that steering has a racial impact since borrowers in African-American neighborhoods are five times more likely to get a loan from a sub prime lender -- and therefore pay extra -- than borrowers in white neighborhoods.

  6. Mandatory Arbitration: Increasingly, lenders are placing pre-dispute, mandatory binding arbitration clauses in their loan contracts. These clauses insulate unfair and deceptive practices from effective review and relegate consumers to a forum where they cannot obtain injunctive relief against wrongful practices, proceed on behalf of a class, or obtain punitive damages. Arbitration can also involve costly fees, be required to take place at a distant site, or designate a pro-lender arbitrator.

  7. Flipping: Flipping of borrowers occurs through repeated fee-loaded refinancing. One of the worst practices is for lenders to refinance sub prime loans over and over, taking out home equity wealth in the form of high fees each time, without providing the borrower with a net tangible benefit.


The Evolution of Predatory Lending

In America, homeownership has become a reality for an unprecedented number of families and individuals since the early 90s. At that time, lenders began offering mortgage loans to deprived borrowers, many with blemished credit, and the sub prime market was born. Sub prime loans are geared to those with lower credit scores whose loans are priced higher to accommodate lender risk. Additionally, consumers who live where traditional banking services are in short supply frequently turn to sub prime lenders (often unregulated finance companies) regardless of their personal credit history.

The alarming rise in loans with predatory characteristics has occurred overwhelmingly in the sub prime market. While not all sub prime loans are predatory, all predatory loans are sub prime -- particularly refinances where borrower equity is stripped away by high fees and expensive, unnecessary terms.

Historically, credit availability has been the problem for qualified minority and low-wealth borrowers. In the US today, it is the type of credit and the terms of that credit that pose the greatest economic threat to hard-working people. Currently, those with the fewest financial resources pay the most to obtain financing. Making credit available on fair terms to all borrowers is a major priority of the Center for Responsible Lending.

Visit a HUD approved counseling agency (list available on www.HUD.gov) for more information and advice on predatory lending. Call 801-373-8200 ext. 235 if you live in Utah, Wasatch or Summit County. Community Action Services and Food Bank is a HUD approved Housing Counseling agency and has expertise in dealing with predatory lenders.

815 S Freedom Blvd.
Suite 100
Provo, UT 84601

Phone: 801.373.8200
Fax: 801.373.8228
Email:

United Way logo

HUD Approved Housing Counseling Agency

Helping People. Changing lives.