Predatory Lending: The abusive practice and ways to avoid it

If you are planning to pledge your assets for a loan, make sure that you do not fall prey to the illegal practices of predatory lenders. These predatory lenders mostly take advantage of people from low income groups.

What is predatory lending?

Predatory lending is a common practice carried out by some lenders, who take advantage of borrower’s ignorance. They use various tricks to persuade borrowers into taking out mortgage with high interest rate and other junk fees.

Who are the targets of these predatory lenders?

Predatory lenders mark their victims from financially weak groups on basis of race, ethnicity, age and gender. Minors, elderly person, military personnel and low income homeowners are the most common targets of predatory lenders.

What are the abusive practices in predatory lending?

Predatory lending is often associated with tricky practices that strip the consumers to helplessness. Predatory lenders target people on basis of their personal characteristics and provide unfair loan terms. They often underwrite loans thereby ignoring the borrower’s inability to manage a mortgage.

Given below are 6 most common practices of predatory lenders:

Equity stripping: The lender takes away a portion of the borrower’s home equity without providing any value to the owner.

Asset Based Lending: Providing finance based on home equity without considering the borrowers’ financial capacity to repay.

Mortgage Flipping: Lenders allow refinancing continuously and charge high fees and penalty from the consumer’s home equity.

Packing: This involves the lender forcibly charging various service fees, especially purchase of insurance that has not been requested by the consumer.

Property Flipping: Speedy resale of property at a price that is higher than market-value using fake assessment. Practice of property flipping involves false documentation and second mortgage payable to the seller.

Home improvement Scams: Predatory lenders put pressure on homeowners for unnecessary home improvement loans which are often highly charged.

How can predatory lending be stopped?

More and more people fall victim to the practice of predatory lending. To stop the corrupt processing, it is very important to follow the 5 solutions stated below:

1) Proper development and enforcement of consumer protection laws

2) Increase in prime market lending to people of all groups

3) Improved education on loans and mortgage to consumers

4) Spread of awareness among people about various financial opportunities and services

5) Reasonable limitations on penalties and fees according to the economy of the borrower

Borrowers can avoid predatory lending if they are aware and careful about the mortgage loan basics. Make sure to read through the terms and conditions of the loan carefully. Do not sign on any paperwork without proper knowledge about it. If you see any extra charges, ask the lender to give you a detail break-down of the loan costs involved.