Predatory Lending As a Foreclosure Defense

"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. Various federal and state laws exist to stop lenders from using predatory tactics.

If your lender used unfair lending practices when you took out your mortgage loan, you might be able to fight a foreclosure.

Predatory Mortgage Lending In a Nutshell

Generally, predatory lending means any unscrupulous practice in which a lender takes advantage of a borrower. A court will typically consider a loan to be "predatory" if the lender:

• used pushy and deceptive sales tactics to get a vulnerable or unsophisticated borrower to agree to unfavorable terms
• charged a very high interest rate to a borrower who is likely to default
• misrepresented the actual costs, risks, or appropriateness of the loan terms, or
• charged excessive amounts for tasks or expenses like appraisals, closing costs, and document preparation.

Borrowers who get predatory loans often end up going through a foreclosure.

Predatory Lending Practices

Here are a few typical examples of predatory lending practices.

• Loan flipping. 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.
• Loan packing. 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.
• Reverse redlining. The lender targets residents within a particular area, usually a low-income neighborhood, for unfair loans. ("Redlining" happens when a lender singles out a neighborhood for loan denials based on race and ethnicity.)
• Steering. 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.
• Targeting. The lender targets certain borrowers—often elderly, low-income, and minority borrowers—for abusive loan products.

Anti-Predatory Lending Laws and Foreclosure

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 because of violations of federal or state law, or because the terms of the loan are 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.

Federal Laws

Various federal laws protect borrowers against predatory lending practices. The Truth in Lending Act (TILA) requires lenders to disclose the terms and costs associated with a mortgage loan. The Home Ownership and Equity Protection Act (HOEPA), which is an amendment to TILA, also protects homeowners from predatory lenders.

State Laws

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.

Talk to a Lawyer

Again, a lender's misconduct at the time of loan origination can, in some cases, act as a defense to a foreclosure or as a damages claim. But 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, provide advice about what you can do in your particular situation, and tell you if you have any other potentially valid defenses to a foreclosure.