How Predatory Lending Practices Lead to Foreclosure: A Grim Realty
Despite regulatory measures meant to prevent it, predatory lending is a major problem in the U.S. today. People are sometimes desperate to purchase a home or are uneducated on specific details of mortgages, and some lenders seek to take advantage of that.
Predatory lending refers to any unfair, deceptive or abusive loan terms that predatory lenders impose on borrowers. Most of these loans will have high interest rates and fees, might strip the borrower of the equity in their home or even place a creditworthy borrower in a loan that’s rated for people with lower credit.
These lenders seek to take advantage of someone’s lack of understanding of financial vehicles by using aggressive sales tactics to get them to agree to something that isn’t in their best interest.
There are many different types of predatory lending practices, including subprime credit cards, overdraft loans and payday loans — all of which have interest rates that can only be termed as unreasonably high.
Anyone can become the victim of predatory lending, regardless of their income, demographics or education level. Understanding what predatory lending is, and what it can result in, is essential to avoiding signing on the dotted line for one of these loans.
Predatory Lending Tactics
Predatory lenders are looking to do one thing — take advantage of people who are vulnerable to lend them money at unreasonable terms.
“Vulnerable,” in this regard, can refer to many different people in many different situations. Vulnerable populations for predatory loans include people who have limited access to financial education, who are in a desperate situation when it comes to their housing and/or have low credit scores and, as a result, fewer options for credit than others.
Predatory lenders seek out people in these populations and then use deceptive practices to make them feel as if they’re getting a good deal. In reality, though, they take advantage of borrowers’ financial struggles, and profit from them, with high interest rates, exorbitant fees and other unfair loan terms.
These lenders know exactly what they’re doing, and they play to these borrowers’ emotions and situation. They might use aggressive sales tactics, exploit borrowers’ lack of understanding, and even ignore or hinder a borrower’s ability to repay debts.
Some even hire mortgage brokers to specifically target certain borrowers so they can sell them predatory loans.
One common tactic that these lenders use is called loan flipping. This occurs when a lender refinances a loan with a higher interest rate and fees, which ultimately hamper’s the borrower’s ability to repay the loan.
The Impact of Predatory Lending
There are many impacts of predatory lending, both on a micro and macro level.
From a micro perspective, predatory lending can have a huge negative impact on individual borrowers. It can lead to them entering a debt spiral and experiencing significant financial struggles, which can ultimately lead to foreclosure for borrowers.
Not only can this result in borrowers losing their home, it can also create significant mounds of debt, financial instability and, in the worst case, even bankruptcy.
From a macro perspective, predatory lending can exacerbate social and economic inequalities, which then perpetuates cycles of financial instability and poverty.
That’s because predatory lenders often target minority groups, including ethnic and racial minorities, because they commonly have limited access to financial and credit resources.
Who is Affected by Predatory Lending?
While anyone can technically be affected by predatory lending, minority groups and those of lower economic standing are the ones who are often targeted by predatory lending. That’s because, in essence, these lenders rely on having an advantage of information over their borrowers, and these borrowers typically have less information and knowledge about finances and credit than others do.
In addition to minority groups, low-income families and individuals are often the target of predatory lending practices. So, too, are elderly homeowners who might not only not be “up-to-date” on predatory lending tactics, but also have limited access to additional credit.
Predatory lenders take advantage of these vulnerabilities, and much more, to prey on borrowers who often don’t know any better. That’s why anyone can be a victim of this type of lending, regardless of their income, demographic background or education level.
Prevention and Protection
Since predatory lending relies on a lack of information and education on the part of borrowers, the best way to avoid a predatory loan is to be educated about them. The more knowledge you have about predatory loans, and the more research you do about them, the better prepared you will be to avoid them.
In addition, it’s important to know what your credit rating is so you can identify any potential issues before even applying for a loan. Federal law allows all U.S. residents to obtain a free copy of their credit report at annualcreditreport.com.
When you are presented with a loan offer, it’s important that you read all the documents carefully and understand all of the terms before you sign your name on the dotted line.
If you want more information or resources about mortgages, you can always seek help from credit and housing counselors, who can help you decide whether a loan is right for you.
Ultimately, it’s important to trust your instincts and ask questions. If a deal sounds too good to be true, it probably is.
Reporting and Addressing Predatory Lending
If you suspect that a company is using predatory lending practices, you should report it to the proper agencies. There are actually a few agencies that can help you in this regard, both from the federal and state level.
The Consumer Financial Protection Bureau (CFPB) accepts complaints on its website and over the phone. So does the Federal Trade Commission (FTC), which is an agency that’s dedicated to protecting U.S. consumers.
Legitimate banks, lenders and credit unions should all also have a regulatory agency that is responsible for oversight. You can find out which agency that is and report them there, too.
Every state should also have a consumer protection organization. In Washington State, for instance, the Washington State Department of Financial Institutions (DFI) is responsible for regulating and enforcing all lending practices.
By filing complaints with the appropriate agencies, you can help to hold predatory lenders accountable and prevent other borrowers from falling prey to their practices.
Seeking Justice and Compensation
If you believe you’re a victim of predatory lending and can prove that your lender violated federal or local laws, it might be a good idea to file a lawsuit. A good place to start is to contact your state’s consumer protection agency, as they can provide you proper guidance and support.
Federal law, and most state laws, provide consumers with the right to file a lawsuit against predatory lenders and seek compensation for damages incurred. It’s possible that if you’ve been a victim, you could gain compensation or some other form of relief.
If you believe you’ve been a victim of predatory lending in Michigan, contact the experts at Babi Legal Group.
The Role of Regulation in Combating Predatory Lending
Predatory lending was a major cause of the 2008 financial crisis. In fact, subprime mortgages were the main driver of the U.S. economy, and many economies around the world, crashing.
To prevent a similar situation from happening in the future, the federal government passed the 2010 Dodd-Frank Act, which not only established provisions that sought to minimize predatory lending but also created the CFPB.
Many states have also established anti-predatory lending laws, with some outlawing practices such as payday lending completely.
Other agencies that play a role in regulating and enforcing lending practices include the FTC and Housing and Urban Development (HUD). Laws such as the Equity Protection Act also work to protect borrowers from predatory lending practices and other abusive loan terms.
While state-specific and federal laws, as well as federal agencies, were created to combat predatory lending, protections and rules are always subject to change.
Seek Justice and Compensation if You are the Victim of Predatory Lending
Predatory lending is a serious issue that can have devastating consequences for individual borrowers, entire communities and society at large. The key to avoiding predatory loans and protecting yourself from them is to increase education and awareness about them.
Regulation and enforcement also play essential roles in not only combating these predatory practices but also in promoting fair lending practices.
If you believe you’ve been the victim of predatory lending, you should seek justice and compensation, as well as report the practices to the relevant authorities.
In Michigan, the experts at the Babi Legal Group can help you with your claim. We have more than 10 years of experience in debt collection, debt settlement and bankruptcy, with another 20 years of experience in real estate.
To learn more, contact us today.
