Predatory lending relates to unethical practices that are deceptive, fraudulent, and unfair. These unscrupulous lending practices are executed by lending institutions during the lending process. By employing aggressive sales tactics and exploiting borrowers’ lack of understanding of financial transactions, predatory lenders facilitate borrowers’ execution of loans that they cannot reasonably repay. Predatory lending also imposes unfair and abusive loan terms on borrowers. Some of these unfair and abusive terms include high interest rates, high hidden fees, and other terms that deny equity to borrowers.
The economic impact of COVID-19 increased the susceptibility of cash-strapped consumers and vulnerable communities to predatory loans. These vulnerable communities included women, Black Americans, and Latinos. Many borrowers are placed at risk with predatory lenders. Predatory lending targets borrowers with very few credit options. This typical borrower also has limited income which prohibits the ability of the consumer to generate and maintain cash that is adequate to make ends meet.
Consumers with low credit scores, limited access to credit education, or those subject to discriminatory lending practices because of their race, ethnicity, age, or disability, are also primary targets of predatory lenders. Predatory lending is primarily designed to benefit the lender substantially while eliminating or hindering the borrower’s ability to repay a debt. Predatory lending tactics to be avoided include, but are not limited to, 1) abusive and excessive fees, 2) balloon payments, 3) loan flipping, 4) asset-based lending combined with equity stripping, 5) unnecessary add-on products or services, 6) steering, and 7) reverse redlining. Steering is when lenders steer borrowers toward subprime loans, even when the borrowers qualify for prime loans. Reverse redlining is when Black or Latino communities are target by predatory and subprime lenders.
Try to avoid getting yourself into dire financial straits. Do not become consumed with easy financial fixes. Educate yourself on credit and lending regulations and know your rights as a borrower and a consumer. Shop loan rates and terms to ensure the executed loan rates and terms are the most favorable that can be obtained given the present circumstances and financial market. Consider alternative financing arrangements. Gain a comprehensive understanding of all the terms and conditions for any debt that you undertake.
The Federal Deposit Insurance Corporation (“FDIC”) stops predatory lending by curtailing abusive practices through examination and supervisory actions. The FDIC also promotes fair treatment of consumers by all the lending institutions it supervises. The FDIC provides assistance to banks to serve all sectors of the communities and to provide consumer resources that allow a borrower to make well-informed financial decisions.
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Nicole Michelle
Finance and Money Wiz
September 22, 2022
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