Sure, this is a subject oftened talk about and frequently talked about on Active rain. But I wanted to give a little more information on what predatory lending is all about and not the misconception of what most might think it is.
Anyone’s commitment in the financing/mortgage industry should be to provide borrowers with the best possible financing, in the least amount of time, and for a reasonable fee. Home ownership is an American Dream and it is priceless. A loan should not be offered that would keep that dream from coming true. Or actually hurt that client down the road that would later hurt this dream and financially bankrupct them.
Predatory lending is often confused with Sub prime lending. Sub prime lending, the provision of loans to households with relatively poor or no credit histories, is a necessary component of our housing and consumer finance system. These loans are priced at a premium in return for the higher risk that the lender assumes with buyers who have lower Credit ratings. But when sub prime lending oversteps the reasonable risk-return tradeoff, it can do more harm than good for borrowers and communities and can be considered predatory. Predatory lending is “a set of loan terms and practices that falls between risk-based pricing by sub prime lenders and outright fraud.” Determining an exact definition for predatory lending is difficult because of the complex manner in which predatory lenders operate.
Three broad features, either alone or in a combination, can constitute predatory lending practices:
- Aggresive and targeted marketing to financially vulnerable households, including low-income, minorities, and the elderly. Basically steering borrowers to sub prime loans just to make more money.
- Unreasonable and unjustifiable loan terms. As much as 35 to 50 percent of the borrowers in the sub prime market could have qualified for the lower-cost prime market loans. This could include excessive fees which would be 3 to 4 percent of the loan amount, depending on the loan. And even the prepayment penalties that trap borrowers into high-cost loans.
- Outright fraudulent behavior, either before or after closing of the loan. And actions that maximize the destructive financial impact of inappropriate strategies. This could be loan flipping or repeated refinancing that does not benefit the borrower. Falsifying loan documents such as appraisals or required disclosures.
Although a loan that involves any one of these tactics might legally be considered predatory, much predatory lending combines all three which would extract the greatest profit for the lender and inflict the greatest financial harm on its victim.
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