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Predatory Lending Practices Essay

3389 words - 14 pages

Predatory Lending Practices
Predatory lending was once a major problem in the United States. This was one of the reasons for the credit crisis in 2008. Unfortunately there were a few companies that were involved in these illegal practices which will be discussed in further detail later. There are different tactics used in predatory lending and several laws were developed to help prevent future predatory lending issues. What is predatory lending?
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through coercive, deceptive, exploitative, or unscrupulous actions for a ...view middle of the document...

While not all predatory lending practices are illegal, they can leave borrowers with unmanageable debt, ruined credit, or even homeless (Krulick, 2014)
There are several types of predatory lending practices which include: inadequate or false disclosure, risk-based pricing, inflated fees and charges, loan packing, loan flipping, asset-based lending, reverse redlining, balloon mortgages, negative amortization, abnormal prepayment penalties, and mandatory arbitration (Krulick, 2014). The several different types vary in definition. Inadequate or false disclosure means the lender hides or misrepresents the true costs, risks and/or appropriateness of a loan’s terms or the lender changes the initial terms after the offer. Risk based pricing is depended on by lenders which is tying interest rates to credit history; however, predatory lenders abuse this practice by charging very high interest rates to high risk borrowers who are most likely to default. Inflated fees and charges are when the lender’s fees and costs are much higher than those charged by reputable lenders and are usually hidden within the fine print. Loan packing is unnecessary products added into the cost of the loan. An example of this is credit insurance which pays off the loan if a borrower dies. Loan flipping is where the lender encourages a borrower to refinance an existing loan into a larger one with a higher interest rate and additional fees. In asset-based lending borrowers are encouraged to borrow more than they should when a lender offers a refinance loan based on their amount of home equity, rather than on their income or ability to repay. Reverse redlining is where the lender targets limited-resource neighborhoods that conventional banks may shy away from. Everyone in the neighborhood is charged higher interest rates to borrow money regardless of credit history, income, or ability to repay. A borrower is convinced to refinance a mortgage with one that has lower payments upfront but excessive (balloon) payments later in the loan term. When the balloon payments can’t be met the lender helps to refinance again with another high-interest, high-fee loan. Negative amortization occurs when a monthly loan payment is too small to cover even the interest, which gets added to the unpaid balance. It can result in a borrower owing substantially more than the original amount borrowed. Abnormal prepayment penalties is where the borrower tries to refinance a home loan with one that offers better terms can be assessed an abusing prepayment penalty for paying off the original loan early. Up to 80% of subprime mortgages have abnormally high prepayment penalties. In mandatory arbitration the lender adds language to a loan contract making it illegal for a borrower to take future legal action for fraud or misrepresentation. The only option then for an abused borrower is arbitration, which generally puts the borrower at a disadvantage (Krulick, 2014).
The U.S. mortgage market of recent years shows...

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