(This article was provided by the National Community Reinvestment Coalition.)

A predatory loan is an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. Predatory loans are a subset of subprime loans, which are made to people with less-than-perfect credit. A predatory loan has one or more of the following features:

  • Charges more in interest and fees than is required to cover the added risk of lending to borrowers with credit imperfections;
  • Contains abusive terms and conditions that trap borrowers and lead to increased indebtedness;
  • Does not take into account the borrower's ability to repay the loan; or
  • Violates fair-lending laws by targeting women, minorities and communities of color.

Some characteristics of predatory lending:

Marketing:

  • Aggressive solicitations to targeted neighborhoods;
  • Home improvement scams;
  • Kickbacks to mortgage brokers (such as yield-spread premiums); and
  • Racial steering to high-rate lenders.

Sales:

  • Purposely structuring loans with payments the borrower can not afford;
  • Falsifying loan applications (particularly income level);
  • Adding insincere co-signers;
  • Making loans to mentally incapacitated homeowners;
  • Forging signatures on loan documents (i.e., required disclosure);
  • Paying off lower income mortgages;
  • Shifting unsecured debt into mortgages;
  • Loans in excess of 100% LTV; and
  • Changing the loan terms at closing.

The loan itself:

  • High annual interest rates;
  • High points or padded closing costs;
  • Balloon payments;
  • Negative amortization;
  • Inflated appraisal costs;
  • Padded recording fees;
  • Bogus broker fees;
  • Unbundling (itemizing duplicate services and charging separately for them);
  • Required credit insurance;
  • Falsely identifying loans as lines of credit or open end mortgages; and
  • Forced placed homeowners insurance.

After closing:

  • Flipping (repeated refinancing, often after high-pressure sales);
  • Daily interest when loan payments are late;
  • Abusive collection practices;
  • Excessive prepayment penalties;
  • Foreclosure abuses;
  • Failure to report good payment on borrower's credit reports; and
  • Failure to provide accurate loan balance and payoff amount.

Predatory mechanisms:

  • Targeting property owners with substantial equity in their property and/or the ability to make a substantial payment at closing;
  • Misrepresenting loan terms;
  • Establishing impossible repayment terms;
  • Inducing borrowers to obtain loans that the lender or mortgage broker knows or should know that borrowers will be unable to repay;
  • Charging undisclosed and/or improper fees;
  • Failing to satisfy their obligations under loan agreements;
  • Foreclosing on loans to obtain properties at a discount;
  • Rigging or manipulating auctions on foreclosed properties; and
  • Selling foreclosed properties at a substantial profit.