Predatory Loans and How They’re Regulated
Home Discrimination and Subprime Mortgages
Payday loans
Car Title Credit
Can Regulations Keep Up With the advancements in technology?
Predatory Lending FAQs
The Bottom Line
Personal Finance Loans
Predatory Lending Laws: What You Need to Be aware of
These regulations help safeguard borrowers from fraud
By Tom Barkley
Updated August 25 2022
Reviewed by Katie Miller
If you’re in the market for credit, it can be easy to fall prey to scams that take advantage of borrowers. Whether demanding an exorbitant interest rate on a payday loan, taking your car title as collateral or attempting to get a larger loan than you can pay for There are a myriad of ways for unscrupulous lenders to profit from borrowers.
Predatory lenders often target the most vulnerable, such as someone who has recently lost their job, has poor credit, or just isn’t sure what to look for. Black as well as Latinx communities, in particular are prone to predatory lending practices.1
Fortunately, there are laws designed to protect the borrower from loan sharks and other lenders that are predatory. These laws cap interest rates, prohibit discriminatory practices, and even ban certain types of lending. While Congress has passed some federal credit laws, many states have taken on the initiative to rein in the practice of predatory lending. With the rules and credit products continuously changing, it’s vital to be aware of the most current regulations.
Key Takeaways
The predatory lender may employ aggressive tactics and unfair loan terms–such as excessive interest rates and fees to take advantage of unsuspecting borrowers.
These lenders usually focus on the most vulnerable and least educated borrowers often targeting Black and Latinx communities.
A variety of laws have been created to protect borrowers, from setting the limits of interest rates to prohibiting discrimination and other unethical methods.
Definition of a Loan Shark
Predatory Loans and How They’re Regulated
The fight against lenders who are predatory have been in place since the time the people who have borrowed money. It all started centuries ago , when different religions condemned the practice of excessively high interest rates.
Within the U.S., a patchwork of laws at both the federal and state levels have been crafted to protect consumers, however, they do struggle to keep pace with evolving predatory practices. Here are a few instances of predatory loans along with the specific regulations and laws that apply to each type of financing. Understanding the features of these loans will help you identify the one you’re offered you and prevent you from being caught. It’s sometimes difficult to recognize.
Subprime Mortgages and Housing Discrimination
Subprime mortgages, which are offered to borrowers with subprime or weak credit ratings, aren’t usually considered predatory.2 The higher interest rate is seen as a form of compensation for lenders who are subprime, who are taking on more risk by lending to borrowers with a poor credit score.
But some lenders have been aggressively promoting subprime loans for homeowners who cannot afford them–or sometimes qualify for better loan conditions, but they don’t know it. Such unscrupulous tactics occurred at an alarming rate in the lead-up into the mortgage subprime crisis in 2008, which led to the Great Recession.3
The repercussions of the financial crisis hit Black as well as Latinx homeowners hardest.4 A lot of these neighborhoods that had for decades faced racial discrimination in getting access to mortgages, a practice called redlining, were targets of so-called «reverse redlining» by predatory lenders charging high interest rates.5
Black and Latinx home owners were more at risk to being targeted by subprime lenders, one study found, even when considering aspects like credit scores and the amount of income goes toward home and debt costs.6
Discrimination remains a problem, according to a separate study, which found that differences in mortgage costs between racial groups have remained constant over the past four decades.7
Additionally, discriminatory mortgage practices have exacerbated the racial wealth gap according to the Urban Institute, with Black homeowners accumulating just more than a quarter the property wealth of White homeowners.8
Housing Laws That Help the Borrower
In the last six decades significant advancements have been made to safeguard homeowners from abuse and discrimination, despite the persistence of predatory practices. In 1968, two laws used different strategies to strengthen homeowners’ protections–and they are constantly evolving. It was the Fair Housing Act (FHA) prohibited discrimination in real estate and mortgage borrowers.9 In the beginning, it prohibited discrimination in the context of race, religion, national origin or gender The law was later amended to cover families with disabilities as well.10
The other key law passed in 1968, the Truth in Lending Act (TILA) mandated mortgage companies as well as other lenders to reveal the terms of the loans.11 It was expanded numerous times to include various real property practices. The law was amended in 1994. TILA included the Home Ownership and Equity Protection Act (HOEPA) which helped protect borrowers against the risk of predatory, high-cost mortgages.1213
The Equal Credit Opportunity Act (ECOA), another security measure for borrowers, was enacted in 1974. Although initially geared towards preventing discrimination in the field of credit for women, the law has since been extended to cover race or color and religion, as well as 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 that took place in the 2008 economic crisis. Settlements were reached with penalties in the amount of $335million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department required the banks to be compensated Black and Latinx borrowers who were improperly guided into subprime loans.1516
In 2010, in 2010, the Dodd-Frank Act, enacted in response to the crisis, established the new Consumer Financial Protection Bureau (CFPB) with the responsibility of ensuring oversight over ECOA and TILA. The CFPB introduced new, specific and clarified disclosure requirements under TILA and every new president administration, reviews priority as well as disclosures and rules within its purview.17
Payday loans
It’s usually very simple to get the payday loan. You can go to a payday lender’s office and leave with an loan. It is not necessary to pay any money to the lender to get the loan, as you would in the in a pawnshop. Instead the lender will usually require your permission to electronically take money from your credit union or prepaid card. Sometimes, the lender may require you to sign a
Make sure you check the amount due for repayment to the lender, which they will cash at the time you pay the loan is due.18
Payday loans can be expensive. Payday lenders charge very high rates of interest, as much as 780% as an annual percentage rate (APR), with an average loan running at nearly 400%.
Payday lenders claim that their high interest rates are a lie since if you pay back the payday loan on time, you won’t be charged high rates of interest. In some instances, that may be the case, however 80% of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB) which indicates an overwhelming majority these loans are not paid off on time.19
There are ongoing concerns with the fairness of payday loans. A study has found it was Black salaried workers are 3 times more likely than White workers–and Latinx payees are more than twice likely get a payday loan.20 The use of payday loans has also been associated with a doubled increase in bankruptcy rates.21
400%
Annual percentage rates (APR) which payday loans often approach–one reason these loans are considered a predatory product
Payday Loan Regulations
Control for payday loans has largely been handed over to states, even though federal laws offer some protections for the borrowers. TILA For instance, TILA demands that payday lenders–just as other financial institutions to disclose the price of loans to the borrowers, which includes interest charges as well as the APR.22
The majority of states have laws on usury that limit interest charges between 5% to 30%. Payday lenders are under exemptions which allow 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–either outright bans on payday loans that are extremely expensive or have implemented restrictions capping interest rates.23
Seven states–Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia and Washington — have imposed some measure that include time limits, fee limits, or the number of loans per borrower that provide some protection for consumers.
In 2017, the CFPB took steps to strengthen payday loan user protections, obligating payday lenders to decide when they underwrite whether the borrower is able to repay the loan and restricting aggressive collection tactics by lenders to collect late payments.24 However, in July 2020, the agency removed the obligatory «ability to pay» requirement. The CFPB has set a final implementation date for their updated and complete «Payday Rule» for June 2022.25
Car Title Loans
A title loan, like an auto loan, uses your car’s title to secure collateral. However, while an auto loan is used to help buy a car, the money from a title loan can be used for any purpose. More important, short-term, high-interest title loans can be predatory. They typically target those who are unable to repay the loan and could cause them to refinance their loan at astronomical costs , and even lose their car.
About one in five car title loan customers end up with their vehicle seize as per Consumer Financial Protection Bureau.26
Car Title Loan Regulations
Like payday loans, car title loans are controlled by states. The majority of states permit the use of car title loans.27 Some states combine them together with payday loans and regulate them by using usury laws. They also limit the rate that lenders can charge.
Some treat them the same way as they do pawnshops, thus they are referred to as «title pawn.» For instance, in Georgia for instance, a bill has been made to allow title pawns, which can carry an APR as high as 300% in the state’s pawnshop regulations – under the laws governing usury in Georgia which limit interest rates at 36%.28
Do regulations keep up with the advancements in technology?
The rapid growth of loans via apps and online creates new challenges for consumers’ security. The fintech sector’s share of personal loan originations doubled over 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 made by online lenders, according to the CFPB.30
Online lenders generally utilize the «rent-a-bank» commercial model of business, which involves partnering with a bank in order to get around state-specific usury laws and other rules, predatory lending practices are difficult to enforce, some consumer advocates argue. States have had some success in cracking down on lenders who use predatory tactics in court, however regulations pertaining to fintechs are always changing as the technology and regulatory environment innovates, adjusts and expands.
What’s the best example Of Predatory Lending?
When a lender attempts to gain a profit from the borrower by tying them to unreasonable or inflexible loan conditions, it could be considered predatory lending. Signs that you’re being targeted include aggressive offers and excessive costs for borrowing, high prepayment penalties, big balloon payments, and being encouraged to consistently change loans.
Is the practice of predatory lending a crime?
In the theory of things, in theory. If you’re conned into taking out the loan that carries higher fees than your risk profile warrants or that you are unlikely to be able to pay back it, you may have been the victim of a crime. There are laws in place to protect consumers from lenders who are predatory, but a lot of lenders are still able to get away with it, partly because consumers aren’t aware of their rights.
Can I Sue to recover Predatory Lending?
If you can prove that the lender you used to lend to violated the laws of your state or federal such as federal laws, including the Truth in Lending Act (TILA) If you believe that your lender violated federal or local laws, you might think about the possibility of filing a lawsuit. It’s not an easy task to take on the financial institution that is wealthy. However, if you have proof that this lender broke rules, you have the chance of being paid. First, contact your state Consumer Protection Agency.
The Bottom Line
Despite the decades of progress made in safeguarding borrowers, predatory lending continues to be a recurring and ever-changing risk. If you’re in need money, it helps to be aware of the risks by investigating different options for financing, understanding the fine details of the terms used in credit, and learning about consumer rights and protections and the rates available for the kind of loan you seek.
The Federal Deposit Insurance Corporation (FDIC) has tips on how mortgage borrowers can safeguard themselves. CFPB offers tips on payday loans and how to beware of scams.3132
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Related Terms
Predatory Lending
Predatory lending places unfair, misleading, or abusive loan terms to a borrower. Many states have Anti-predatory loan laws.
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What Is a Payday Loan? How Does It Work, How to obtain One, and Legality
An payday loan is a type of borrowing that’s short-term and where a lender can provide high-interest credit dependent on your income.
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Usury Rate
The term usury rate is a term used to describe a rate of interest considered to be excessive as compared to prevailing market interest rates.
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Truth in Lending Act (TILA): Consumer Protections and Disclosures
The Truth in Lending Act (TILA) is a law of the federal government enacted in 1968 to help protect consumers in their dealings with creditors and lenders.
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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 which is thought to be unreasonably excessive or higher than the rate permitted by the law.
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Unlawful Loan
An illegal loan is a loan that fails to comply with lending laws, such as loans with illegally high interest rates or those that are larger than the limit.
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