What is Predatory Lending?
Although diverse laws apply to home mortgage lending, none of the relevant statues and regulations governing mortgage transactions provides a definition of predatory lending. Therefore pubic debate focuses on practices and loan terms that alone or in combination, are abusive or put borrowers at high risk of abuse.
Predatory lending, whether undertaken by creditors, brokers, or even home improvement contractors, involves engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower's lack of understanding about loan terms.
Predatory lending strips borrowers of home equity and threatens families with foreclosure. Often borrowers are deceived into accepting unfair loan terms, usually through aggressive sales tactics. Often they are taken advantage of because of their lack of understanding of terms and involvement in complicated transactions. Even more informed consumers are occasionally fooled. Data suggests predatory lending is concentrated in poor and minority communities, where better loans are not readily available. Any list of predatory practices is destined to be incomplete because the bad actors are constantly developing new abusive practice. However, signals of predatory lending practices include, but are not limited to:
- Aggressive and deceptive marketing
- Charging higher interest rates than necessary based on a borrower's credit worthiness
- Loan Flipping – Some mortgage originators refinanced borrowers' loans repeatedly in a short period of time. With each successive refinancing, these originators charged excessively high fees that reduced the borrowers' equity in their homes.
- Excessive fees and "Packing" – While sub prime lending carries higher costs to the lender than prime lending, in many instances excessive fees are added to the loan by third parties such as mortgage brokers, and home improvement contractors; resulting in added finance cost that may not have been adequately disclosed up-front.
- Lending without regard to the borrower's ability to repay – Lending practices based on the borrowers' equity in their home, where the borrowers clearly did not have the capacity to repay the loans. Lending practices where loans were made to elderly people living on fixed incomes where the monthly payments equaled or exceeded their monthly income
Among the factors that contribute to predatory lending are the steering of minorities toward the sub prime market, even when they qualify for prime loans with better terms, an inadequate number of mainstream lending institutions in minority neighborhoods, and a general lack of information in minority communities about available mortgage products. Many consumers have already fallen prey to these lenders.
Discrimination in mortgage lending is prohibited under the City of Dallas Fair Housing Ordinance.