The Real Estate Encyclopedia
Predatory Lending
Category - Real Estate Glossary - Real Estate Terminology
Predatory lending has been defined as the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against. The Center for Responsible Lending in Durham, North Carolina, has outlined the seven signs of predatory lending:

  • Excessive Fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below 1% of the loan amount are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.
  • Abusive Prepayment Penalties: Borrowers with higher-interest sub-prime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all sub-prime mortgages carry a prepayment penalty - a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months' interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.
  • 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 a "yield spread premium" - a kickback for making the loan more costly to the borrower.
  • Loan Flipping: A lender "flips" a borrower by refinancing a loan 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 previously been 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.
  • Mandatory Arbitration: Some loan contracts require "mandatory arbitration," meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.
  • Steering & Targeting: Predatory lenders may steer borrowers into sub-prime mortgages, even when the borrowers could qualify for a mainstream loan. Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with sub-prime mortgages could have qualified for loans with better terms.


References
 
Category(s)
Real Estate Glossary - Real Estate Terminology
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