Guard Your Grill: Avoiding Predatory Lending
Understanding Predatory Lending
It’s an interesting time to be in the market for a home loan. As banks, credit unions, and lending institutions expand access to credit and financial services, making sure that the lending practices used by these entities are equitable and inclusive should be a top priority. When we talk about fair lending practices, the practices that help fight predatory lending, we are talking about an inclusive, fair, and transparent set of practices that go beyond basic regulatory compliance to create a financial system that supports all communities, regardless of race, gender, income, or geography.
The core principle of fair lending is a commitment to treat all borrowers equally, especially in the practice of evaluating applications. Application evaluation should always be a transparent process that is based solely on creditworthiness and the ability to repay rather than a process rife with discrimination or hidden agendas.
However, even with regulations like the Equal Credit Opportunity Act (ECOA)--which the current administration is looking to weaken–and the Fair Housing Act (another Civil Rights gain the current administration is attacking), predatory lending continues to threaten financial stability, particularly for historically mistreated and under-invested communities.
What is Predatory Lending?
Predatory lending refers to unethical practices that deceive or exploit borrowers. Predatory lending practices are often characterized by: excessive fees, high interest rates, loan terms that trap borrowers in cycles of debt, or misrepresentation of loan conditions. These practices are mostly targeted at low-income individuals, minorities, and the elderly, creating difficult and frustrating financial situations that can strip away wealth and worsen economic hardship.
Telling examples of how predatory lending practices affect not only individuals, families, and communities but the economic health of our country overall can be seen in the multiple stories of financial ruin as a result of the subprime mortgage crisis of the early 2000s.
Currently, financial products like Payday Loans, Car Title Loans, and certain high-interest installment loans still raise serious concerns as these types of loans are primarily offered in low income communities.
How to Recognize and Avoid Predatory Lending Practices
For lenders and financial institutions, avoiding predatory lending practices takes an intentional commitment to transparency and equity. This commitment should include a robust approach to designing and offering loan products that includes: Educating consumers about their rights and the true costs of borrowing, Training staff to explore their hidden biases and reject discriminatory or unethical practices in how they service customers and their loans, Use transparent language that clearly lays out terms in documents that are clear and understandable, and Implement regular, rigorous oversight with internal audits to catch and correct biases and inconsistencies.
For individuals, it’s important to understand that Predatory Lending is a practice that has historically harmed communities and continues to attract unethical institutions as a way to maximize profits at the expense of Black communities and communities of color.
Ways to protect yourself and your family against these kinds of targeted, predatory practices include:
Watch for Excessive and Abusive Fees: These are often disguised or downplayed because they are not included in a loan's interest rate. Excessive prepayment penalties are another example.
Make Note of the Repayment Schedule: Does the repayment schedule include a Balloon Payment, which is one substantial payment at the end of a loan's term. This kind of payment is used to make the initial payments look low while the end of the loan includes larger payments, or one really big payment, that may require refinancing, incurring new costs, or defaulting.
Avoid Loan Flipping: This is when lenders pressure borrowers to refinance repeatedly, which is presented as an opportunity to “lower payments” but is really just a way to generate fees and points for the lender each time, trapping the borrower in an escalating debt burden.
Examine Asset-Based Lending Products Carefully: For loans based on the value of your home or car for example, you can risk losing your home or car when you fall behind on payments. Equity-rich, cash-poor older adults on fixed incomes may be targeted with loans (say, for a house repair) that they will have difficulty repaying, and that will jeopardize their equity in their home.
Be Mindful of Steering: This happens when lenders steer borrowers into expensive, subprime loans although they may qualify for prime loans.
Understand Reverse Redlining: Redlining is racist housing policies that blocked Black families from getting mortgages. Many low income areas are still essentially redlined as Black and Latino communities, creating a targeted area for banks and other lending institutions to introduce predatory loan products disguised as financial repair, economy boosting opportunities.
