What are Predatory Loans?

Predatory loans are best described as fraudulent practices that occurred by lending companies during the loan process. At this time, there is no true definition for this practice but the definition from the office of inspector general of the FDIC states, as "imposing unfair and abusive loan terms on borrowers." There are laws in many states against such practices but it seems to be a phrase for several different illegal actions found in the loan industry.

Another definition you will hear associated with predatory loans or predatory lending is "the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against." In most cases, these are mainly associated with payday loans or credit cards. The sad news is that most predatory loans are seen with those that are racial minorities, the elderly, or those that are less educated.

You will of course find that when it comes to lenders and consumers the definition as to what exactly is predatory is totally different.

The most common predatory loans include unjustified risk based pricing, avoiding to present the loan price as negotiable, single-premium credit insurance, avoid to clearly and accurately disclose terms and conditions, servicing agent and securitization abuses, and discrimination on the basis of race.

Unjustified risk based pricing is a practice of charging a person higher interest rates and fees by stating the borrower is a high credit risk. Lending institutions state this practice is legal as loaning money to those with a low credit score are more apt to default.

Avoiding to present the loan price as negotiable as the majority of lending companies offer the chance to negotiate the price structure of the loan such as interest rate or other fees found in the loan agreement. It is believed that most borrowers do not realize they have the right to negotiate such options of their home loan agreement.

Single-premium credit insurance is an insurance that is used to pay off the home loan in the case that the homeowner passes away prior to the home loan being paid off. This insurance does not need any type of medical check and in most cases if very expensive. Many lenders will talk borrowers into this insurance, which will raise their monthly payment in some cases, higher than their budget.

Avoid to clearly and accurately disclose terms and conditions is nothing more than not explaining the conditions and terms of the agreement so the person understands fully what the home loan details. When there are several pages of legal documents without any explanation at all, this is often a predatory loan.

Servicing agent and securitization abuses often occur when one agent is responsible for receiving and maintaining all documents and payments while providing the homeowner with account statements and late fees. These are loans that are sold without the knowledge of the borrower and with these changes; the homeowner has no protection against late payments due to the servicing agent, as the money was not sent forward properly to ensure the payment was not late.

To ensure you do not become a victim of a predatory loan, be sure to read every document, only sign once you understand thoroughly, and always remember to negotiate.