predatory lending practices

Posted : March 1, 2018
Last Updated : March 1, 2018
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predatory lending practices

Predatory lending occurs when companies offer loan products using certain marketing tactics, abusive collection practices, and loan terms that deceive and exploit borrowers. Most of the problems aren’t caused by federally insured financial institutions.
 

Subprime Lending

Subprime lending involves extending credit to borrowers whose credit history reflects late payments, collections, bankruptcy, etc. Subprime lending can be beneficial, if performed in a fair, reasonable, and legal manner. It may be the only alternative available to some borrowers.
 

Predatory Payday Loans

Two types of predatory loans that you should be aware of are: predatory payday loans and predatory mortgage loans.

Payday loans are small cash advances, usually of $500 or less. To get a loan, you must give a payday lender a postdated personal check or an authorization for automatic withdrawal from your bank account. In return, you receive cash, minus the lender’s fees. Remember that payday loans should only be used for emergencies. If you can’t fully repay the loan within a few pay periods, you should consider a longer term loan from a financial institution.
 

Several Indicators of Possible Predatory Payday Lending Practices

There are several signs that a payday loan may be a predatory loan:
  • The company advertises terms that it doesn’t actually offer.
  • You aren’t given disclosures listing terms (e.g., the finance charge and APR).
  • There is no waiting period between the time you repay a payday loan and the time you’re allowed to obtain another loan.
  • You can get a payday loan even if you currently owe payday loans to other companies at the same time.
  • You can obtain as many payday loans as you want each year.
  • You can get a payday loan to finance unpaid interest and fees.
  • The payday lender encourages you to borrow the maximum you’re eligible to borrow.
  • The company threatens to prosecute you criminally for writing a bad check even though it knew you had insufficient funds in your account to pay the check and you paid it a payday loan fee.
 

Predatory Mortgage Lending Practices

Predatory mortgage loans involve a wide variety of abusive practices:
  • Excessive Fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they’re easy to disguise or downplay. On predatory loans, fees totaling more than five percent of the loan amount are common.
  • Abusive Prepayment Penalties: Borrowers with higher interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, most subprime mortgages carry a prepayment penalty – a fee for paying off a loan early. Be careful of prepayment penalties that last more than three years and/or cost more than six months’ interest.
  • Kickbacks to Brokers (Yield Spread Premiums): When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays the broker a fee known as a yield spread premium. This payment makes the loan more costly to the borrower. You can avoid this by shopping around for the best rate.
  • Loan Flipping: A lender flips a loan by refinancing it several times within a short timeframe to generate fee income, without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments – sometimes on homes that had been previously owned free of debt.
  • Unnecessary Products: Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
  • Asset-Based Lending: Predatory lenders may approve a loan based on the value of a customer’s equity in the home instead of his or her ability to repay the loan. The lender may later encourage the customer to default so the lender can get ownership of the home.
  • Steering and Targeting: Predatory lenders may steer borrowers into subprime mortgages, even when the borrowers could qualify for a less expensive, typical loan. Vulnerable borrowers may face aggressive sales tactics and sometimes outright fraud.



Source: PlanningYourDreams.org
 

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