There are a number of different forms that predatory lending takes. In each instance, however, a financial institution takes unfair advantage of a consumer’s financial needs by charging usurious interest rates and other unconscionable fees and charges. Predatory mortgage lending involves a wide array of abusive practices. The following are brief descriptions of some of the most common.
Excessive fees: Points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they are easy to disguise or downplay. On competitive loans, fees below one percent of the loan amount are typical. On predatory loans, fees totaling more than five percent of the loan amount are common.
Abusive prepayment penalties: Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80 percent of all subprime mortgages carry a prepayment penalty -- a fee for paying off a loan early. An abusive prepayment penalty typically is effective more than three years and/or costs more than six months’ interest. In the prime market, only about two percent of home loans carry prepayment penalties of any length.
Kickbacks to brokers (yield spread premiums): When brokers deliver a loan with an inflated interest rate (i.e., higher than the rate acceptable to the lender), the lender often pays a “yield spread premium" -- a kickback for making the loan more costly to the borrower.
Loan flipping: A lender "flips" a borrower by refinancing a loan to generate fee income without providing any net tangible benefit to the borrower. Flipping can quickly drain borrower equity and increase monthly payments, sometimes on homes that had previously been owned free of debt.
Unnecessary products: Sometimes borrowers may pay more than necessary because lenders sell and finance unnecessary insurance or other products along with the loan.
Mandatory arbitration: Some loan contracts require "mandatory arbitration," meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.
Steering and targeting: Predatory lenders may steer borrowers into subprime mortgages, even when the borrowers could qualify for a mainstream loan. Vulnerable borrowers may be subjected to aggressive sales tactics and sometimes outright fraud. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms. According to a government study, over half (51 percent) of refinance mortgages in predominantly African-American neighborhoods are subprime loans, compared to only nine percent of refinances in predominantly white neighborhoods.
