Predatory Loans and How They’re Regulated
The Subprime Mortgage and the Housing Discrimination
Payday Loans
Car Title Credit
Are regulations up to date with Technology?
Predatory Lending FAQs
The Bottom Line
Personal Finance Lending
Predatory Lending Laws: What You Need to Know
These rules help to safeguard borrowers from fraud
By Tom Barkley
Updated August 25 2022
Read by Katie Miller
When you’re in need of credit, it can be easy to fall victim to scams that take advantage of borrowers. Whether demanding an exorbitant interest rate on the payday loan, taking your car title as collateral or attempting to get a larger loan than you’re able to afford There are numerous ways unscrupulous lenders try to profit from the borrowers.
These lenders typically target those who are most vulnerable, such as someone who has recently lost a job, has bad credit, or doesn’t know what to watch out for. Black as well as Latinx communities, specifically have been a victim to abusive lending practices.1
Fortunately, there are laws designed to protect borrowers against loan sharks as well as other lenders who are predatory. The laws limit interest rates, prohibit discriminatory practices, and even ban certain types of lending. Although Congress has passed several federal credit laws, numerous states have taken on the initiative to curb predatory lending. With the rules and credit products continuously evolving, it’s essential to be aware of the latest regulations.
The most important takeaways
Predatory lenders can employ aggressive tactics and unjust loan terms–such as excessive interest rates and fees to take advantage of unsuspecting borrowers.
These lenders tend to focus on the most vulnerable and least educated borrowers often targeting Black and Latinx communities.
A patchwork of laws has been created to safeguard borrowers, by imposing limits on interest rates to banning discrimination and other unethical methods.
Loan Shark Definition
Predatory loans and how they’re Regulated
Initiatives to stop the practice of predatory lending have gone on almost as long as individuals have borrowed funds, starting centuries ago when various religions condemned the practice of the use of usury and charging excessive interest rates.
Within the U.S., a patchwork of laws at the federal and state levels have been developed to protect borrowers, but they sometimes are unable to keep up with new predatory practices. Here are a few instances of predatory loans, as well as the specific regulations and laws that apply to each kind of loan. Knowing the specifics of these loans can help you recognize the one you’re offered you and avoid being caught. It’s sometimes difficult to discern.
Subprime Mortgages and Housing Discrimination
Subprime mortgages, provided to those who have subprime or weak credit scores, aren’t necessarily considered predatory.2 The higher interest rates are seen as a form of compensation for lenders who are subprime, who are taking on more risk by lending to borrowers who have a bad credit score.
Some lenders have also been aggressively promoting subprime loans to homeowners who can’t afford them. Sometimes, they can qualify for better loan terms but don’t realize it. These shady tactics were seen on large scale during the period leading up to subprime’s mortgage crises that occurred in 2008, which resulted in the Great Recession.3
The aftermath of the financial crisis slammed Black and Latinx home owners the hardest.4 Many of the same neighborhoods that for decades had to contend with racial discrimination when it came to getting mortgage loans which is known as redlining, became victims of what’s known as «reverse redlining» by predatory lenders charging the highest interest rates.5
Black as well as Latinx homeowners were more likely to be targeted by subprime lenders according to a study regardless of taking into account aspects like credit scores and the amount of money is spent on the housing and debt costs.6
Discrimination is still a problem according to a separate study, which revealed that differences in mortgage costs between racial groups have remained constant over the past four decades.7
Furthermore the discriminatory practices in mortgage lending have created a racial wealth divide as per the Urban Institute, with Black homeowners earning little more than a quarter the property wealth of White homeowners.8
Housing Laws that Protect the Borrower
Over the past six decades substantial progress has been made to safeguard homeowners from discrimination and abuse, despite the persistence of illegal practices. Two laws used different strategies to strengthen homeowners’ protections–and they continue to evolve. In 1968, the Fair Housing Act (FHA) prohibited discrimination in real estate and mortgage borrowers.9 The first law banned discrimination due to race or religion, national origin or gender However, the legislation was amended later to cover the status of family members and disabilities as well.10
The other key law passed in 1968, the Truth in Lending Act (TILA) was a law that required mortgage lenders as well as other lenders to reveal the terms for the loans.11 This law has been expanded numerous times to include the full range of real property practices. In 1994, TILA was amended to include it with 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 a different pillar of protection for borrowers, became law in 1974. While initially focused on banning discrimination in the field of credit for women, it has since been extended to cover race or color, religion, national origin or age, as well as the participation of public assistance programs.14
The ECOA and FHA were utilized in a few of the biggest legal actions to stop discrimination which occurred during the 2008 crisis. In settling settlements, with fines of $335 million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department demanded that banks pay Black and Latinx clients who were unfairly guided into subprime loans.1516
In 2010 the Dodd-Frank Act, enacted in response to the financial crisis, placed the new Consumer Financial Protection Bureau (CFPB) with the responsibility of ensuring the oversight of ECOA as well as TILA. The CFPB established new, detailed and clear information requirements for TILA and with each new presidential administration, revisits priority, disclosures, and rules that fall within its purview.17
Payday Loans
It’s generally very easy to obtain the payday loan. You can walk into the office of a payday lender, and walk out with an loan. There is no requirement to provide anything to the lender in order to get the loan, as you would with 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 require you to sign a
check for the repayment amount, which the lender will cash when the loan is due.18
Payday loans aren’t cheap. Payday lenders charge extremely high rates of interest, as much as 780% as an annual percentage rate (APR) as well as an average loan that is close to 400%.
Payday lenders say that their high interest rates are false since if you pay back the payday loan on time, you won’t be charged a high rate of interest. In certain instances, this may be the case, however 80% of payday loans are renewed multiple times, as per the Consumer Financial Protection Bureau (CFPB) which indicates most of the loans aren’t paid back on time.19
There are ongoing concerns concerning the fairness of these loans. One study showed that Black wages earners were three times as likely than White salaried people–and Latinx wage earners are twice as likely take out a payday loan.20 The usage of payday loans has also been linked to a doubling in bankruptcy rates.21
400%
The annual percentage rate (APR) that payday loans often approach–one reason these loans are often deemed to be a scam product
Payday Loan Regulations
The oversight on payday loans has largely been given to states, even though federal laws offer certain protections to borrowers. TILA, for example, requires payday lenders–just like other financial institutions–to disclose the costs of loans to borrowers, including finance charges and the APR.22
Many states have usury laws which limit interest rates between 5% to 30 percent. However, payday lenders fall under exemptions which allow their high interest rates. Sixteen 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–either outright bans on payday loans that are extremely expensive or have implemented restrictions that limit interest rates.23
Seven states — Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia and Washington — have implemented some kind of measure that include fees limits, term limitations, or the number of loans per borrower which offer some protection for consumers.
In 2017 the CFPB made changes to strengthen payday loan user protections, requiring payday lenders to determine when they underwrite whether the borrower will be able to pay back the loan and limiting aggressive collection strategies by lenders to collect late payments.24 However, in July 2020, the agency revoked the obligatory «ability to repay» requirement. The CFPB has set a date for the final implementation for their full and updated «Payday Rule» for June 2022.25
Car Title Credit
A car title loan similar to an auto loan, uses your car’s title as collateral. While an auto loan can be used to purchase the vehicle, the funds from a title loan can be used for any reason. Additionally, short-term high-interest title loans are often predatory. They typically target those who may have difficulty paying back the loan that could make them to refinance their loan at astronomical costs , and even be forced to sell their vehicle.
Around one-in-five car title loan customers end up with their vehicle seize according to Consumer Financial Protection Bureau.26
Car Title Loan Regulations
As with payday loans, car title loans are regulated by the states. The majority of all states allow the use of car title loans.27 Some states combine these along with payday loans and regulate them with usury laws, capping the rates that lenders are able to charge.
Some treat them the same way as they are pawnshops, hence they are referred to as «title the pawn.» For instance, in Georgia for instance, a bill has been proposed to make title pawns legal. They could carry an APR of up to 300% as per the state’s pawnshop regulations–under the laws governing usury in Georgia which limit interest rates at 36%.28
Do regulations keep up with Technology?
The explosive growth of mobile and online lending creates new challenges for consumers’ protection. The fintech sector’s share of personal loan originations has doubled in four years, and was around half of the market as of September of 2019, according to credit reporting firm Experian.29 Half of the cash flow from payday loans is driven by online companies as per the CFPB.30
Because online lenders typically use the «rent-a-bank» commercial model of business, in which they partner with a bank to avoid state usury laws and other rules, predatory lending practices can be difficult to regulate, some consumer advocates argue. States have found some success in clamping down on online lenders’ predatory strategies in courts, however the rules governing fintechs are always changing as the technology and regulatory environment innovates, adjusts and evolves.
What is an example Of Predatory Lending?
Whenever a lender seeks to profit from the borrower by tying them into unfair or unmanageable loan conditions, it may be classified as predatory lending. Telling signs that you are an apex predator include the aggressive solicitations, excessive borrowing costs as well as high prepayment penalties huge balloon payments, as well as being urged to constantly change loans.
Does Predatory Lending Constitute a Crime?
In the theory of things the case, it is. If you’re lured to take out a loan that carries higher fees than your risk profile warrants or you’re not likely to be able to repay the loan, you could be the victim of a crime. There are laws to protect consumers against 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 the laws of your state or federal such as federal laws, including the Truth in Lending Act (TILA) You may be interested in the possibility of filing a lawsuit. It’s never easy going against a wealthy financial institution. However, if you can show proof that this lender broke rules, you have a reasonable chance of being compensated. As a first step make contact with your state’s department of consumer protection.
The Bottom Line
Despite decades of progress in protecting borrowersfrom predatory lending, it is still a constant and growing risk. If you’re in need of cash, you should do your homework by exploring other options for funding, taking a look at the small text of credit terms and becoming aware of the rights of consumers and their protections as well as the range of rates for the kind of loan you are looking for.
The Federal Deposit Insurance Corporation (FDIC) has suggestions on how mortgage holders are protected and the CFPB provides tips regarding payday loans and how to stay clear of scams.3132
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Related Terms
Predatory Lending
Predatory lending can impose unfair, deceptive or abusive loan conditions on the customer. There are many states with anti-predatory lending laws.
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What is a Payday Loan? How It Works, How to Get One, and Legality
A payday loan is a type of borrowing that’s short-term and where a lender can provide high-interest credit according to your earnings.
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Usury Rate
The term»usury» refers to an amount of interest considered to be excessive as compared to the market rate.
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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 in their dealings with lenders and creditors.
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What Is Usury? Definition, how it functions Legality, Example, and Definition
Usury is the act of loaning money at a rate that is considered unreasonably excessive or higher than the maximum rate allowed by the law.
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Unlawful Lending
An illegal loan is one that is a loan that fails to comply with lending laws, such as loans with unconstitutionally high interest rates or which exceed the size limit.
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