"Predatory lending" happens when a lender uses deception, fraud, or manipulation to convince a borrower to take out a mortgage with abusive or unfair terms. Federal and state laws prohibit lenders from using predatory tactics.
Some examples of predatory lending include:
If your lender used predatory or unfair mortgage lending practices when you took out your mortgage loan, you might be able to fight a foreclosure.
Generally, predatory mortgage lending means any unscrupulous practice in which a lender takes advantage of a borrower. With a predatory loan, the lender imposes unfair and abusive terms on the borrower, like a higher interest rate than normal, excessive fees, or terms that strip the borrower's equity.
Basically, predatory lending is when a lender makes a loan to benefit the lender, not the borrower. Predatory lenders convince borrowers to get loans they don't need or can't afford.
Predatory lenders typically use aggressive sales tactics and deception to get people to take out loans they can't repay.
Often, predatory lenders target vulnerable populations, such as minorities, older persons, and less-educated people.
A court will typically consider a mortgage loan to be "predatory" if the lender:
Borrowers who get predatory loans can end up in a cycle of debt and, eventually, go through a foreclosure when they can't repay the mortgage loan.
Here are ten typical examples of predatory lending practices.
Mortgage lenders review your credit scores when you apply for a loan. People with high credit scores get the best interest rates because, in theory, the higher your score, the less likely you'll default. People with low scores might be denied a loan, or the lender might charge a higher interest rate.
Before you apply for a mortgage loan, review your credit reports and scores. Then, research the current mortgage interest rates. That way, you'll know what sort of interest rate to expect. You should get quoted that rate or something better if you have excellent credit. If you have fair credit, you might be offered a slightly higher rate.
But if a lender gives you a much higher rate, that's a red flag.
Lenders charge various fees throughout the mortgage process, such as an appraisal fee, a credit report fee, a title search fee, and an application fee. Do some research to find out what these costs are on average. If your lender is charging significantly more, that might indicate that the loan is predatory.
Predatory lenders also sometimes try to hide certain fees in your loan's terms, like an illegal prepayment penalty or a balloon payment you can't afford.
A predatory lender might try to sell you unnecessary services, like an auto-club membership, which increases the cost of credit. If a lender says you have to get the added service, the lender is probably trying to take advantage of you.
Asset-based lending happens when the lender makes a loan based on the borrower's equity in a property rather than on the borrower's income and ability to repay the loan. The lender assumes the borrower will default, and then the lender will be able to foreclose. This predatory lending practice is also known as "equity stripping."
With a negative amortization loan, the borrower makes monthly payments in an amount less than what's needed to cover the principal and interest due. So, the loan balance increases over time, even though you're making payments.
The lender encourages the borrower to refinance an existing loan into a new one, which generates fees for the lender but doesn't benefit the borrower.
The lender adds unnecessary products to the loan, like credit insurance, which pays the loan off if the borrower dies. Predatory lenders often tell borrowers that they must buy these products to qualify for a loan, even though it isn't true.
The lender targets residents within a particular area, usually a low-income neighborhood, for unfair loans. ("Redlining" happens when a lender singles out a community for loan denials based on race and ethnicity.)
The lender pushes borrowers into taking out risky, high-cost loans, even when they have good credit and should qualify for low-cost, conventional loans.
The lender targets specific borrowers—often elderly, low-income, and minority borrowers—for abusive loan products.
In some circumstances, it's possible to stop a foreclosure by raising claims related to the loan's origination. The mortgage or deed of trust might not be valid or legally enforceable due to unfair lending practices, like fraud, or violations of federal or state law. Or the terms of the loan might be unconscionable.
You might be able to rescind the mortgage transaction or be entitled to damages (money) or a setoff against the amount you owe on the loan.
Various federal laws protect borrowers against predatory lending practices.
Many states also have anti-predatory lending laws that restrict the terms or provisions of certain loans.
State unfair and deceptive practices acts (UDAP) statutes, which generally prohibit unfair or deceptive business practices, might also be useful in challenging a foreclosure.
Here are a few tips to avoid becoming the victim of a predatory mortgage lender:
Again, a lender's misconduct at loan origination can, in some cases, be a defense to foreclosure or the basis for a damages claim.
The laws surrounding unfair lending practices are complicated. If you think you were a victim of predatory lending and are facing a foreclosure, consider talking to a foreclosure defense lawyer.
A foreclosure defense attorney can advise you about relevant predatory lending laws, tell you what you can do in your particular situation, and let you know if you have any other potentially valid defenses to a foreclosure.