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Predatory Lending: A Fair Housing Issue

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What is Predatory Lending?

Predatory lending typically refers to lending practices that impose unfair, deceptive, or abusive loan terms on borrowers.

Why is Predatory Lending a Fair Housing Issue?

Often predatory lenders target members of protected classes for the marketing of higher priced and unequal loan products.

It usually involves aspects where individuals of protected classes are treated differently than comparably members of other classes.

Even when the policies and practices are not being offered only because of a persons’ protected class, the policies and practices often impact members of particular protected classes more severely and therefore have a disparate impact on protected class members. 

Characteristics of Predatory Lending

  • Targets vulnerable consumers
  • Is unreasonably costly to the borrower
  • Uses overly aggressive and/or deceitful practices
  • No regard for ability to meet obligation
  • Potentially strips the equity from borrowers and leads to foreclosure
  • Supports a credit system that promotes inequality and poverty 

Predatory Lending or Subprime Lending: One in the Same?

Subprime lending is not necessarily predatory lending, but the two often overlap.

Subprime lending is lending that provides credit to borrowers with past credit problems at a higher cost than conventional lending products.

Good subprime lending is needed for those with impaired credit and can be profitable without engaging in predatory practices. 

However, it is typically more profitable, especially in the short-term, to engage in predatory subprime lending.

  • This typically happens with subprime loans are given to borrowers with good credit, who qualify for better product.  This is both unethical and predatory.  

Potential Victims of Predatory Lending

  • Homeowners with high equity and credit problems who need cash
  • Elderly households
  • Low-income households
  • Minority households
  • Households in financial crisis
  • Homeowners who lack financial management skills or knowledge
  • Homeowners with sub-par credit histories 

Predatory Lending Practices        

  • Aggressive marketing and solicitations to targeted neighborhoods
  • Home improvement scams
  • Racial steering to high-rate lenders
  • Marketing only subprime products to minority neighborhoods
  • Using non-traditional marketing methods with the intention to reach vulnerable populations
  • Falsification of loan applications (particularly income levels)
  • Shifting unsecured debt into mortgage
  • Purposely structuring loan payments the borrower cannot afford
  • Loans in excess of 100% Loan to Value
  • Changing loan terms at closing (especially fixed to adjustable-rate mortgage)
  • Charging excessive interest, points, and fees
  • Repeatedly refinancing a loan without providing any real value to the borrower     

Indicators of Predatory Loans in Loan Documents

  • High annual interest rates
  • High points/padded closing costs
  • Balloon payments
  • Negative amortization
  • Inflated appraisal costs
  • Bogus broker fees/no logical explanation and/or duplication of services/charges
  • Unbundling (itemizing duplicate services and charging separately for them)
  • Requiring credit insurance
  • Falsely identifying loans as lines of credit
  • Forced placed homeowner’s insurance
  • Mandatory arbitration clauses 

Indicators of a Predatory Loan After Closing

  • Flipping (repeatedly 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
  • Failure to provide accurate loan balance or payoff amount

For more information on the Fair Housing Act generally, see our Fair Housing Act blog post.

For more information on predatory lending, see our presentation.