Predatory Lending

In: Business and Management

Submitted By pierce911
Words 1224
Pages 5
Predatory lending is directed at borrowers in the subprime sector, who do not qualify for conventional loans. These loans have high interest rates and fees due to the higher risk to the lender. Predatory lenders target the financially vulnerable, specifically the elderly, the poor or racial minorities. Many of their targets could have qualified for a regular prime loan at much lower interest rates. This difference in interest rates would mean thousands of dollars saved by the homeowner. Predatory lending practices can leave victims homeless while the lenders make profits. (Pridgen, 2005)
The U.S. Government Accountability Office (GAO) defines predatory lending as transactions that contain terms and conditions that ultimately harm borrowers. (Bond, Musto, & Yilmaz, 2009) Determining who benefits in the financial transaction helps to determine whether or not a transaction can be labeled as predatory. When a borrower does not benefit, the mortgage is viewed as a predatory lending practice.
Predatory lenders often use aggressive sales tactics to compel borrowers into refinancing when the financing terms are not in the borrower’s interest. They pack excessive fees into the transactions, such as insurances, prepayment penalties, and yield spread premiums. (Pridgen, 2005)
A refinanced mortgage can be filled with excessive, unnecessary fees. A predatory lender typically adds them into the loan amount to disguise them. The most common extra charge is insurance, including mortgage, fire, hazard, life, disability, and health insurance. Insurance premiums are added in to the loan, hiding it from the borrower. The lender receives large commissions every year on the insurance premiums paid. Predatory lenders make their money by adding extras.
In 2001, Yasmeen El, a 61 year old woman in Philadelphia, received an unsolicited check in the mail from Household Finance for…...

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