Predatory lending is a little like pornography as far as the law goes - there's no one good definition, but there are some clues that will help you know it when you see it.
First of all, the term "predatory lending" potentially covers a wide range different types of lending products, from payday loans with usuriously high interest rates, to the practice of preying on existing homeowners with the prospect of pulling out their home equity and refinancing into a loan with higher rates that they may not pay.
But how do they apply to the new home lending market? Some of the same signs apply for all potentially predatory loans. Here are a few potential warning signals that a loan may be predatory, offered by Deborah Goldstein written for the Joint Center for Housing Studies at Harvard University.
- High-cost loans coupled with unscrupulous practices that pressure a borrower into a loan are predatory.
- The form and context in which the lender provided or withheld information from prospective borrowers.
- Ability of the borrower to freely choose not to take the loan or to choose from competing Products
- Whether the lender targeted a vulnerable population or protected class;
- Intentional or systematic patterns of selling over-priced loans to populations whose mental, physical or intellectual status makes them vulnerable to the lenders' sales tactics.
And here are a few guidelines about what predatory lenders do which apply to new home sellers offered by the U.S. Department of Housing and Urban Development.
- Sell properties for much more than they are worth using false appraisals.
- Encourage borrowers to lie about their income, expenses, or cash available for down payments in order to get a loan.
- Knowingly lend more money than a borrower can afford to repay.
- Charge high interest rates to borrowers based on their race or national origin and not on their credit history.
- Charge fees for unnecessary or nonexistent products and services.
- Pressure borrowers to accept higher-risk loans such as balloon loans, interest-only payments and steep pre-payment penalties.