Is My Loan Predatory?

Sub-prime and Predatory Lending Defined

Sub-prime Lending:
A sub-prime loan is a loan to a borrower with less than perfect credit. In order to compensate for the added risk associated with sub-prime loans, lending institutions charge higher interest rates. In contrast, a prime loan is a loan made to a creditworthy borrower at prevailing interest rates. Loans are classified as A, A-, B, C and D loans. “A” loans are prime loans that are made at the going rate while A- loans are loans made at slightly higher interest rates to borrowers with only a few blemishes on their credit report. So-called B, C, and D loans are made to borrowers with significant imperfections in their credit history. “D” loans carry the highest interest rate because they are made to borrowers with the worst credit histories that include bankruptcy.

Predatory Lending:
A predatory loan is an unsuitable loan designed to exploit vulnerable and unsophisticated borrowers. Predatory loans are a subset of sub-prime loans. A predatory loan has one or more of the following features:

1. Charges more in interest and fees than is required to cover the added risk of lending to borrowers with credit imperfections,
2. Contains abusive terms and conditions that trap borrowers and lead to increased indebtedness,
3. Does not take into account the borrower’s ability to repay the loan, or
4. Violates fair lending laws by targeting women, minorities and communities of color.

Some characteristics of Predatory Lending

Marketing:

• Aggressive solicitations to targeted neighborhoods
• Home improvement scams
• Kickbacks to mortgage brokers (Yield Spread Premiums)
• Racial steering to high rate lenders

Sales:

• Purposely structuring loans with payments the borrower can not afford
• Falsifying loan applications (particularly income level)
• Adding insincere co-signers
• Making loans to mentally incapacitated homeowners
• Forging signatures on loan documents (i.e., required disclosure)
• Paying off lower income mortgages
• Shifting unsecured debt into mortgages
• Loans in excess of 100% LTV
• Changing the loan terms at closing

The loan itself:

• High annual interest rates
• High points or padded closing costs
• Balloon payments
• Negative amortization
• Inflated appraisal costs
• Padded recording fees
• Bogus broker fees
• Unbundling (itemizing duplicate services and charging separately for them)
• Required credit insurance
• Falsely identifying loans as lines of credit or open end mortgages
• Forced placed homeowners insurance

After closing:

• Flipping (repeated 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 and payoff amount

Predatory Mechanisms:

• Targeting property owners with substantial equity in their property and/or the ability to make a substantial payment at closing;
• Misrepresenting loan terms;
• Establishing impossible repayment terms;
• Inducing borrowers to obtain loans that defendants know or should know
• That borrowers will be unable to repay;
• Charging undisclosed and/or improper fees;
• Failing to satisfy their obligations under loan agreements;
• Foreclosing on loans to obtain properties at a discount;
• Rigging or manipulating auctions on foreclosed properties; and
• Selling foreclosed properties at a substantial profit.

Do you think you have a predatory loan? Get help through the NHSF.

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