Predatory Loans and How They’re Regulated
Subprime Mortgages and Housing Discrimination
Payday Loans
Car Title Credit
Can Regulations Keep Up With the advancements in technology?
Predatory Lending FAQs
The Bottom Line
Personal Finance Lending
Predatory Lending Laws: What You Need to Be aware of
These rules help to safeguard borrowers from fraud
By Tom Barkley
Updated August 25, 2022
Review by Katie Miller
When you’re in need of credit, it’s easy to fall prey to scams involving lending that are predatory. It doesn’t matter if they demand a high-interest rate on a payday loan, taking your car title as collateral or pushing a bigger mortgage than you can afford There are a myriad of ways for unscrupulous lenders to take advantage of borrowers.
These lenders typically target the most vulnerable, like someone who recently lost their job, has a poor credit, or just does not know what to look for. Black as well as Latinx communities, specifically have been a victim to abusive lending practices.1
There are laws designed to protect the borrowers from loan sharks as well as other lenders who are predatory. The laws limit interest rates, ban discriminatory practices and prohibit certain kinds of lending. Although Congress has passed a few federal credit laws, many states have taken the initiative to curb predatory lending. With regulations and the products for credit constantly evolving, it’s essential to familiarize yourself with the latest rules and regulations.
Important Takeaways
The predatory lender may employ aggressive tactics as well as unfair loan conditions, such as excessive interest rates and fees to profit from unsuspecting borrowers.
These lenders usually target the weakest and least knowledgeable borrowers, often targeting Black and Latinx communities.
A plethora of laws have been put in place to safeguard borrowers, from establishing limits on interest rates to banning discrimination as well as other unsavory ways of doing business.
Definition of a Loan Shark
Predatory Loans and How They’re Regulated
Initiatives to stop the practice of predatory lending have gone since the time individuals have borrowed funds. It all started centuries ago when various religions condemned the use of usury and charging excessive interest rates.
The U.S., a patchwork of laws at both the federal and state levels have been developed to protect borrowers, but they sometimes have to adapt to evolving predatory practices. Here are a few illustrations of predatory loans, as well as the specific laws and regulations relevant to the various types of financing. Knowing the specifics of these loans will help you identify one that is offered to you, and help avoid being caught. It’s sometimes difficult to tell.
Subprime Mortgages and Housing Discrimination
Subprime mortgages, which are available to borrowers with weak or subprime credit ratings, aren’t usually considered predatory.2 The greater interest rate is viewed as a compensation to subprime lenders, who are taking more risk when lending to borrowers with a poor credit score.
However, some lenders have been aggressively promoting subprime loans to homeowners who are unable to pay for them, or sometimes are eligible for better loan conditions, but they don’t know it. Such unscrupulous tactics occurred at a mass scale in the months leading up to subprime’s mortgage crises that occurred in 2008, which led to the Great Recession.3
The fallout from the financial crisis struck Black and Latinx home owners the hardest.4 A lot of these neighborhoods that had for decades faced racial discrimination in getting access to mortgages and other loans, also called redlining, were the targets of what is known as “reverse redlining” by predatory lenders charging the highest interest rates.5
Black as well as Latinx residents were at a higher risk of being targeted by subprime lending as one study revealed, even when considering factors such as credit scores and how much income goes toward home and debt costs.6
Discrimination is still a problem according to a different study, which revealed that the racial disparities in mortgage rates have remained constant over the past four decades.7
Furthermore the discriminatory practices in mortgage lending have increased the gap in wealth between racial groups as per the Urban Institute, with Black homeowners accumulating just more than a quarter the wealth in housing of White homeowners.8
Housing Laws that Guard Borrowers
Over the past six decades, significant progress has been made in protecting homeowners from discrimination and abuse despite the persistance of predatory practices. The year 1968 saw two new laws used different strategies to enhance homeowner protections, and they are constantly evolving. The Fair Housing Act (FHA) banned discrimination in the real estate market as well as mortgage borrowers.9 In the beginning, it prohibited discrimination due to race religious belief, national origin, religion or gender The law was later amended to cover disabilities and family status as well.10
Another key law that was adopted in 1968, known as the Truth in Lending Act (TILA) was a law that required mortgage lenders and other lenders to provide the terms for their loans.11 It was expanded numerous times to include the full range of real estate practices. In 1994, TILA was amended to include an additional provision, the Home Ownership and Equity Protection Act (HOEPA), which helped protect borrowers against excessively expensive, predatory mortgages.1213
The Equal Credit Opportunity Act (ECOA) is another important security measure for borrowers, was enacted in 1974. While initially focused on banning discrimination in credit against women, it was later expanded to cover race and color or religion, national origin and age as well as the participation of public assistance programs.14
The ECOA and FHA were utilized in a few of the largest enforcement actions against discriminatory practices which occurred in the 2008 economic crisis. Settlements were reached that included penalties of $335 million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department ordered banks to compensate Black and Latinx clients who were unfairly directed to subprime loans.1516
In 2010 in 2010, the Dodd-Frank Act, enacted in response to the financial crisis, placed the newly created Consumer Financial Protection Bureau (CFPB) with the responsibility of ensuring oversight over ECOA along with TILA. The CFPB introduced new, specific and clarified disclosure requirements under TILA and every new president administration, reexamines the priorities as well as disclosures and rules under its purview.17
Payday loans
It’s usually very simple to obtain an payday loan. You can go to the office of a payday lender and leave with an loan. You will not have to provide anything to the lender in order to obtain the loan the same way you would in the pawnshop. Instead the lender will usually ask you for permission to electronically withdraw cash from your bank, credit union or prepaid card account. Sometimes, the lender may request that you sign a
Make sure you check the amount due for repayment, which the lender will cash when it is due. loan is due.18
Payday loans can be costly. The payday lenders charge very high rates of interest, as much as 780% in annual percentage rates (APR), with an average loan that is close to 400 percent.
Payday lenders say that their high interest rates are a lie since if you pay off the payday loan on time, you won’t be charged a high rate of interest. In some cases, that might be true, but 80percent of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB), indicating most of payday loans aren’t paid back in time.19
There are ongoing concerns regarding the fairness of these loans. A study has found the following: Black salaried workers are 3 times as likely as White salaried people–and Latinx workers are two times as likely borrow payday loan.20 The use for payday loans has also been associated with a doubled increase in bankruptcy rates.21
400%
APR is the annual percentage rate (APR) which payday loans often approach–one reason they are loans are considered a predatory product
Payday Loan Regulations
Oversight of payday loans has largely been given to states, even though federal laws offer some protections for the borrowers. TILA For instance, TILA requires payday lenders–just like other financial institutions to disclose the cost of loans to the borrowers, which includes fees for financing and the APR.22
The majority of states have laws on usury which limit interest rates to anywhere from 5% to 30 percent. But payday lenders fall under exemptions that permit their high interest rates. 16 states – Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and the District of Columbia, which either prohibits outright on extremely high-cost payday lending or have implemented restrictions capping interest rates.23
Seven states — Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia and Washington have put in place some form of regulation that include term limits, fee limits, or number of loans per borrower that provide some form of protection for consumers.
In 2017, the CFPB implemented measures to enhance payday loan user protections, requiring payday lenders to determine when they underwrite whether a borrower can repay the loan and also limiting aggressive collection tactics by lenders for late payments.24 However, in July, 2020 the organization removed the mandatory “ability to repay” requirement. The CFPB has established a deadline for implementation for their full and updated “Payday Rule” for June 2022.25
Car Title Loans
A car title loan, like an auto loan is one that uses your vehicle’s title as collateral. However, while an auto loan is used to buy a car, the cash from the title loan can be used for any reason. In addition, short-term, high-interest title loans can be a source of financial trouble. The lenders often target those who may have difficulty paying back the loan and could cause the borrower to refinance with a soaring costs and potentially lose their car.
Around one-in-five title loan customers ends up having their vehicle seized according to Consumer Financial Protection Bureau.26
Car Title Loan Regulations
Like payday loans, car title loans are controlled by states. In general, around half of states offer auto title loans.27 Some states combine them together with payday loans and regulate them by imposing usury laws and limiting the rates that lenders are able to charge.
Others treat them as they do pawnshops, thus they are referred to as “title pawn.” For instance, in Georgia for instance there’s a bill introduced to bring title pawns–which can carry an APR as high as 300% in Georgia’s pawnshop regulations — under the state’s usury laws which limit interest rates at 36%.28
Do regulations keep up with Technology?
The rapid growth of mobile and online lending creates new challenges for consumers’ protection. Fintech’s share of personal loan originations has doubled in four years to account for around half of the market as of September 2019, according to credit reporting firm Experian.29 Half of the profits from payday loans are generated by online players, according to the CFPB.30
Since online lenders often employ the “rent-a-bank” commercial model of business, partnering with a bank to avoid state usury laws and other regulations, predatory lending tactics can be difficult to enforce as some consumer advocates claim. States have found some success in cracking down on lenders who use predatory tactics in court. However, rules related to fintechs are changing constantly as the technology and regulatory environment innovates, adjusts and expands.
What is an example of Predatory Lending?
If a lender tries to profit from the borrower by binding them to unsustainable or unfair loan conditions, it may be considered predatory lending. The indicators that you’re being targeted include aggressive offers and excessive costs for borrowing, high prepayment penalties, huge balloon payments, as well as being urged to constantly flip loans.
Is the practice of predatory lending a crime?
In theory the case, it is. If you’re lured to take out a loan that carries higher fees than your risk profile warrants or that you are unlikely in your ability to repay, you have potentially been the victim of an offense. There are laws to safeguard consumers from lenders who are predatory, but a lot of lenders continue to escape prosecution, partly because consumers don’t understand their rights.
Can I Sue for Predatory Lending?
If you can prove your lender broke local or federal laws which include federal laws, including the Truth in Lending Act (TILA) If you believe that your lender violated federal or local laws, you might be interested in making a claim. It’s never easy going against an institution with a large amount of money. If you can provide proof that this lender broke the law, you stand an opportunity to be paid. In the first instance make contact with your state’s consumer protection agency.
The Bottom Line
Despite decades of advancement in protecting borrowers, predatory lending is still a constant and growing risk. If you’re in need of cash, you should be aware of the risks by investigating different options for financing, understanding the small details of the terms used in credit, and becoming aware of consumer rights and protections , as well as the rates available for the type of loan you’re looking for.
The Federal Deposit Insurance Corporation (FDIC) offers guidelines on how mortgage borrowers can protect themselves and the CFPB provides tips on payday loans and how to stay clear of scams.3132
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Related Terms
Predatory Lending
Predatory lending places unfair, misleading, or abusive loan terms to a customer. Many states have anti-predatory lending laws.
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What is a payday loan? How It Works, How to Get One and the Lawfulness
The term payday loan is a type of short-term borrowing where a lender will extend high-interest credit dependent on your income.
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Usury Rate
The term”usury rate” refers to an amount of interest considered to be too high in comparison to market interest rates.
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Truth in Lending Act (TILA): Consumer Protections and Disclosures
The Truth in Lending Act (TILA) is a federal law enacted in 1968 to help protect consumers when they deal with lenders and creditors.
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What Is Usury? Definition, How It Works Legality, Example, and Definition
Usury is the act of lending money at an interest rate that is considered unreasonably excessive or is greater than the maximum rate allowed by the law.
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Unlawful Loan
An illegal loan is one that is a loan that fails to comply with lending regulations, such as loans with unconstitutionally high interest rates or which exceed the size limit.
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