Predatory Lending

What is Predatory Lending?

Predatory lending involves several types of abusive, unethical, and/or illegal behavior on the part of a variety of housing market actors including mortgage brokers, mortgage lenders and servicers, real estate agents, and home repair and construction companies.

Predatory lending is closely associated with sub-prime mortgage loans. Prior to the housing crisis, the advocates of subprime mortgages would often defend themselves by saying, “all predatory loans are subprime, but not all subprime loans are predatory.” However, given the voluminous evidence of poor, fraudulent underwriting in the subprime market, the distinction between subprime and predatory loans, always blurry, has become nearly meaningless.

Widespread predatory practices occurred at every level of the U.S. mortgage market ranging from predatory sales practices to consumers and the targeting of minority neighborhoods all the way up to the corrupt credit rating system where poorly underwritten subprime loans were bundled into securities that gained undeserved A ratings from credit rating firms. The corruption of the U.S. mortgage system is amply documented in the 639-page document titled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.

Predatory lending practices were not limited to the subprime sector. Thus, it is more useful to simply examine predatory lending broadly. With that in mind, a useful distinction can be made between predatory sales activities and predatory loan terms. The predatory loan trail often begins with targeted marketing to customers that are considered vulnerable to the blandishments of predatory sale agents. Elderly homeowners are frequent targets because they live on a fixed income, own older homes that are more likely to need major repairs, and often have substantial equity in their home. One of the characteristic predatory scams is to target elderly homeowners for home improvement schemes.

Low-income minority borrowers are also a recurrent target market. Predatory lenders post flyers, make marketing calls, and even hire local residents to market their expensive products to cash-strapped homeowners. In Minneapolis, Minnesota, predatory mortgage brokers hired trusted members of local churches to promote their products. Because minority consumers inhabit common neighborhoods, minority targeting translates into spatial concentrations of predatory loans.

Predatory loans have a number of characteristics that separate themselves from other subprime loans. Predatory sales practices also involve using unscrupulous tactics to persuade borrowers to sign off on loans that put them into severe financial jeopardy. One common strategy is to hurry consumers through the process. Often, people are told that they must close that day or risk losing the deal. Such pressure tactics are especially effective when vulnerable individuals are the targets. Another frequent aspect to predatory loan sales is to hide or to misrepresent the terms of the loan, such as the excessive fees, often associated with predatory home loans. High-pressure sales tactics and hidden fees are an all-too-common strategy deployed by the predatory lender.

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