How Predatory Lending Laws Help the Borrower

Predatory lending laws are designed to protect borrowers from fraudulent and deceptive practices used to sell a loan. These protections are necessary because of the unscrupulous or unethical nature of some lenders to take advantage of the most vulnerable borrowers in the market. This includes borrowers with bad credit and seniors.

What Is Predatory Lending?

Predatory lending is a practice of failing to disclose or purposely withholding information concerning the costs, fees and other penalties associated with a loan. In many instances, a lender commits outright fraud by engaging the borrower for the purpose of offering an auto or home owner’s loan.

Examples of Predatory Lending

An example of this type of fraud has to do with a lender who uses the borrower to obtain loans and additional financing on a property. The borrower unwillingly signs over the title to the home or car to the lender who uses it as an asset to borrow against or use the equity. As new borrowers become harder to find, the lender simply closes up shop and moves on, leaving the borrower with a second debt that they were unaware of. This results in the borrower losing their property because of the fraud.

Another example of predatory lending has to do with the offer of low interest rate or certain interest-rate only products to sub-prime borrowers. Such loans begin with low monthly payments only to change into a principal plus interest loan with an extremely high interest rate. Such “bait and switch” tactics are employed to lure borrowers to the door with the aim to force higher fees and payments onto the unsuspecting borrower.

Policing Lenders

Failure to disclose the fees associated with a loan is a common predatory lending practice. With all of these practices aimed at profiting at the expense of borrowers who may not have any other recourse to receive a loan, many local and state governments as well as the federal government through HUD and the Fair Housing Authority (FHA) have stepped in to police the lending activities of the industry.

The efforts of local, state and the federal government have served notice to lenders to engage in honest, principled and ethical behavior designed to protect the interests of the borrower. Providing full and complete disclosure about fees and charges allows a borrower to understand the true costs of a loan and prevent them from becoming targets of a fraudulent or deceptive scheme.