Predatory lending is a term typically used to describe unconscionable lending practices where a borrower is provided with an unfair loan. The Office of the Comptroller of the Currency (OCC), which regulates and supervises all national banks and federal savings associations, has described predatory lending as the disregard of basic principles of loan underwriting.
If there was unethical, deceptive, unfair, or fraudulent activity during your loan origination process, your lender may have engaged in predatory lending. Some common examples of predatory loans are negative amortization loans, adjustable rate mortgages, high interest mortgages, and balloon payment loans.
What Constitutes a Predatory Loan?
Predatory lending encompasses several different types of abuses that loan originators may engage in. According to the OCC, the fundamental characteristic of predatory lending is “the aggressive marketing of credit to prospective borrowers who simply cannot afford the credit on the terms being offered.” The following are a few situations that may constitute predatory lending:
- Packing of excess or hidden fees in the amount financed
- Loan flipping (frequent refinancings that result in little or no economic benefit to the borrower but generate loan fees, prepayment penalties, and other fees for the lender)
- Refinancing of special subsidized mortgages that results in the loss of loan terms beneficial to the borrower
- Loan terms or structures (for example, negative amortization) that make it more difficult or impossible for the borrower to reduce or repay the indebtedness
- Marketing inappropriate or excessively expensive products to borrowers who are older, are financially unsophisticated, or qualify for mainstream credit products and terms
- Using balloon payments to conceal the true burden of financing and to force borrowers into costly refinancing transactions or foreclosures; and
- Inadequate disclosure of true costs and risks.
- There are also certain features associated with predatory loans, including:
- Higher rates than the borrower qualifies for
- Balloon payments in short-term transactions
- An interest rate increase triggered when a borrower defaults on the loan
- Prepayment penalties that are not limited to the early years of the loan
- Financing points, fees, penalties, or other charges; and
- Mandatory arbitration clauses.
There is no bright line that a loan must cross to be considered predatory; an assessment must be made on a case by case basis. In court cases, the court will look at each of the factors making up the loan and decide whether the factors, taken as a whole, constitute predatory lending. If a court determines that a loan was predatory, it could order the lender to modify the terms of the loan or cancel the debt, or take any other equitable action.
What to Do if You are a Victim of Predatory Lending
In 2003, the OCC ordered banks to establish appropriate due diligence and monitoring procedures to ensure that they avoid becoming involved in predatory lending. As such, predatory lending can be raised as a defense to foreclosure by borrowers.
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