Predatory Lending News: Examples of Unfair Lending Practices

Predatory lending practices can be sneaky, but being aware of the warning signs can help you avoid getting taken advantage of.

In 2019, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against a company called LendingClub for allegedly engaging in deceptive practices, including charging excessive fees to borrowers.

Some predatory lenders use high-pressure sales tactics to convince people to take out loans with unfavorable terms.

Predatory lenders may use a variety of tactics to take advantage of borrowers. One common practice is to charge abnormally high prepayment penalties, which can greatly exceed the amount of interest left to pay on the loan.

Early Payoff Penalties can be a red flag for predatory lending. These penalties can be a way for lenders to ensure they make their money in interest, even if you pay off your loan early.

Excessive or hidden fees are another type of predatory lending practice. Lenders may charge high prices for closing costs or other expenses, or they may charge fees that serve no real purpose other than to make more money off borrowers.

Loan flipping is a tactic used by some predatory lenders to refinance your loan into one with a higher interest rate and a longer term. This can end up costing you more in the long run, and a reputable lender would advise against refinancing unless it helps you financially.

Loan flipping is a type of predatory lending practice where a lender refinances your loan into one with a higher interest rate and a longer term. A reputable lender would advise against refinancing unless it helps you financially.

A predatory lender could flip your loan multiple times, stripping you of more fees and up-front costs. This is according to Ron Wynn, a real estate broker in Los Angeles.

Be wary of lenders who recommend refinancing multiple times, as they can make more money off you. A predatory lender can show you that you should refinance again while hiding the true costs.

High interest rates are another red flag, especially if they're extremely low or too good to be true. Research current mortgage interest rates to give you a good sense of what you can expect.

An unusually high rate is definitely a warning sign, and you should pay close attention to the annual percentage rate, or APR. This includes the costs of fees, so make sure you understand what you're getting into.

Excessive or hidden fees can also be a sign of predatory lending. Pay attention to vague-sounding items on your loan estimate, like "administrative fees", and ask what they're for.

Prepayment penalties can be a fee charged when you pay off your mortgage before the end of the loan term. Federal law limits prepayment penalties on most mortgages, so if your loan includes one, ask your lender to clarify why it's there.

A prepayment penalty can greatly exceed the amount of interest you have left to pay, which is a good indicator of predatory lending.

Balloon payments can be a sneaky way for lenders to take advantage of you. They start with low payments that increase incrementally over time.

You might think it's fair if you expect your income to increase enough to keep up with the payments, but that's not always the case. If the lender doesn't verify your income at all, you're in trouble.

A balloon payment is a lump-sum payment that can be devastating if you can't afford it. You might start with a low-interest loan and low payments, but then get hit with a huge payment later on.

If you can't pay the balloon payment, you could lose your home. And to make matters worse, the lender might offer to refinance the loan, but this would likely come with more fees that they'd pocket.

Negative Amortization is a sneaky practice that can leave you paying more in the long run. It happens when your monthly payment is too small to cover the interest as it accrues, causing the interest to compound and increase the amount you owe.

A predatory lender benefits from negative amortization, which means they profit from your financial struggles. This can lead to a vicious cycle of debt.

Your lender should provide you with an amortization schedule that shows how much of the interest and principal balance you're paying off throughout your loan term. This is a crucial document that can help you spot negative amortization.

Paying down debt should never lead to more debt, which is exactly what happens with negative amortization. Clearly, something is wrong when paying down debt leads to more debt.

Loan packing occurs when a lender packs unnecessary financial products into your mortgage, like credit or mortgage protection insurance.

This type of insurance pays off your mortgage at death, even if you didn't know about it, ask for it, or need it. Unless you willingly took out a loan that allows you to pay off interest first, your monthly payment should shave off interest and some of the principal balance on your loan.

32 states now cap the APR for a $2000, six-month loan at 36%. The Federal Government has introduced laws and amendments to protect the interest of borrowers, with the Truth in Lending Act (TILA) being a key component.

The Truth in Lending Act forces creditors to give you all the information associated with the cost of your loan, so you can comparison shop and find one that's right for you. Payday lenders are not fans of this because it means, by law, they have to tell you if their loans come with an incredibly high annual percentage rate (APR).

The average payday loan rate is $15-$20 interest for every $100 borrowed, which comes out to an APR between 360% and 400%. This is a stark contrast to the national average APR on credit cards – 16.89%.

Here are some key laws and protections:

32 states have capped the APR for a $2000, six-month loan at 36%. This means that lenders in these states can't charge exorbitant interest rates on short-term loans.

The Federal Government has introduced laws and amendments to protect borrowers, with the Truth in Lending Act (TILA) being a key component. TILA forces creditors to give you all the information associated with the cost of your loan, so you can comparison shop and find one that's right for you.

Payday lenders are not fans of TILA because it means they have to tell you if their loans come with an incredibly high annual percentage rate (APR) - between 360% and 400%. Compare that to the national average APR on credit cards – 16.89% — and you can see just how much gouging is going on.

The Equal Credit Opportunity Act makes it illegal for creditors to charge inflated fees and interest rates based on a person's race, color, religion, national origin, sex, or marital status.

Here are some key laws and protections that benefit borrowers:

Lenders can't legally force you to provide your bank account number, but they can offer to help you set up automatic payments from your account.

Be cautious of predatory lenders that might use this to force payments out at will, potentially emptying your bank account and leaving you with overdraft fees.

Predatory lending is a serious issue that affects many people, especially those who are struggling financially or are targeted by discriminatory lending practices. Predatory lenders often target people who are vulnerable and unable to afford the high interest rates and fees associated with these loans.

Nationwide, interest rates for payday loans typically range from 390 to 780 percent, which is significantly higher than the average credit card interest rate of 24 percent. This means that borrowers can end up paying exponentially more than the original loan amount.

Predatory lenders use tactics like "rent-a-bank" schemes to bypass state laws and charge interest rates of 100 percent or more. This is often done through partnerships with national banks, which allows them to operate in states with stricter lending laws.

The effects of predatory lending are magnified in low-income communities, where bankruptcies and foreclosures can have a devastating impact on entire neighborhoods. In fact, 80 percent of payday loans are renewed multiple times, leading to debt spirals that can be difficult to escape.

Here are some common signs of a predatory loan:

To protect yourself from predatory lenders, it's essential to read and understand all the details in every loan document before signing it. You should also shop around for mortgage and refinance rates, compare fees, and ask for guidance from certified housing counselors or homebuying classes.

If you've been the victim of predatory or illegal lending practices, there are a few options depending on your situation.

You can start by reviewing your loan agreement and looking for any red flags, such as extremely high interest rates or fees that seem unfair.

If you've been misled or deceived by a lender, you may be able to file a complaint with the Consumer Financial Protection Bureau (CFPB) or your state's attorney general's office.

There are also non-profit credit counseling agencies that can help you navigate the process of exiting a predatory loan and getting back on your feet financially.

You can also consider seeking the help of a financial advisor or attorney who specializes in consumer law to guide you through the process.

In some cases, you may be able to get out of a predatory loan by refinancing it with a more reasonable lender or by negotiating a settlement with the original lender.

Predatory lenders often use tactics that can catch you off guard. Equity stripping is a common approach where the lender focuses on the equity in your home, rather than your ability to repay the loan.

This can be especially problematic if you have a lot of equity in your home, making you feel confident in your ability to take on another loan. Don't be fooled – you still need to be careful.

Bait and switch tactics are also used to lure you into a loan with an attractive rate that's impossible to pass up. The catch? The true rate that you can't afford often doesn't kick in until a few months later.

If a rate sounds too good to be true, it probably is. Don't fall for the promise of an amazing rate that's only available to a select few with near-perfect credit scores.

Equity Stripping can be a sneaky tactic used by lenders to take advantage of homeowners. If you have a lot of equity in your home, you may be tempted to take out another loan, but beware of being lured into a false sense of confidence.

The lender focuses solely on the amount of equity in your home, not on your ability to repay the loan. This means they're more concerned with how much they can lend you, rather than whether you can afford to pay it back.

Equity Stripping can lead to financial trouble, especially if you're not careful. It's essential to understand the risks involved and not let the promise of quick cash cloud your judgment.

Predatory lenders often advertise amazing rates that are impossible to pass up, but the true rate kicks in a few months later, making it unaffordable.

These incredible rates usually exist for a tiny fraction of the population with near-perfect credit scores, and the lender knows it.

If a rate sounds too good to be true, it probably is, as the lender is aware that most people won't qualify for it.

Predatory lenders will often delay revealing the true rate until after you've committed to the loan, making it harder to back out.

This tactic is a classic example of bait and switch, and it's essential to be cautious when dealing with lenders who offer rates that seem too good to be true.