Predatory Loans and the Way They’re Regulated
The Subprime Mortgage and the Housing Discrimination
Payday loans
Car Title Credit
Do regulations keep up with the advancements in technology?
Predatory Lending FAQs
The Bottom Line
Personal Finance Lending
Predatory Lending Laws: What You Need to Know
These rules safeguard borrowers from fraud
By Tom Barkley
Updated August 25 2022
Reviewed by Katie Miller
When you’re in need of credit, it can be easy to fall prey to scams that take advantage of borrowers. Whether demanding an exorbitant interest rate on an 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 customers.
Predatory lenders often target those who are most vulnerable, such as someone who has recently lost a job, has a poor credit, or just does not know what to look out for. Black and Latinx communities, in particular, have long fallen prey to shady lending practices.1
There are laws designed to protect the borrower from loan sharks as well as other predatory lenders. The laws limit interest rates, ban discriminatory practices and prohibit certain kinds of lending. While Congress has passed several federal laws on credit, a lot of states have taken the initiative to regulate predatory lending. With rules and credit products constantly evolving, it’s essential to familiarize yourself with the latest rules and regulations.
The most important takeaways
Predatory lenders may use aggressive tactics and unjust loan conditions–like excessive interest rates and fees to take advantage of unsuspecting borrowers.
These lenders usually target the weakest and least educated borrowers usually targeting Black and Latinx communities.
A variety of laws have been created to safeguard borrowers, from setting the limits of interest rates to banning discrimination and other unsavory methods.
Loan Shark Definition
Predatory Loans and the Way They’re Regulated
Efforts to combat predatory lending have been going for as long as people have borrowed money, beginning centuries ago , when different religions condemned the practice of excessively high interest rates.
Within the U.S., a patchwork of laws at both the state and federal levels have been developed to protect consumers, however, they do have to adapt to evolving predatory practices. Here are some examples of predatory loans and the specific laws and regulations that pertain to each type of financing. Knowing the characteristics of these loans will help you identify the one you’re offered you, and help avoid being caught. It’s often difficult to tell.
The Subprime Mortgage and the Housing Discrimination
Subprime mortgages, which are available to borrowers with subprime or weak credit scores, aren’t necessarily considered predatory.2 The higher interest rate is seen as a form of compensation for lenders who are subprime, who are taking more risk when lending to borrowers with a poor credit rating.
Some lenders have also been aggressively promoting subprime loans to homeowners who are unable to afford them. Sometimes, they can qualify for more favorable loan terms but don’t realize that they qualify. These shady tactics were seen on an alarming rate in the lead-up into the mortgage subprime crisis in 2008, which resulted in the Great Recession.3
The fallout from the financial crisis slammed Black and Latinx home owners the hardest.4 Many of the same communities that for years been subject to discrimination based on race when seeking mortgage loans which is known as redlining, became the targets of what is known as «reverse redlining» by predatory lenders charging the highest interest rates.5
Black and Latinx residents were at a higher risk of being targeted by subprime lenders, one study found that was true even taking into consideration aspects like credit scores as well as how much money is spent on home and debt costs.6
Discrimination is still a problem according to a different study, which revealed that differences in mortgage costs between racial groups persist over the last 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 housing wealth of White homeowners.8
Housing Laws that Guard Borrowers
In the last six decades, significant progress has been made to protect homeowners from discrimination and abuse despite the persistance of illegal practices. In 1968, two laws took different approaches to protect homeowners from abuse, and they continue to evolve. The Fair Housing Act (FHA) banned discrimination in the real estate market, including for mortgage borrowers.9 The first law banned discrimination based on race or religion, national origin, and sex However, the law was later amended to cover the status of family members and disabilities 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 conditions for their loans.11 This law has been extended several times to cover the full range of real property practices. In 1994, TILA changed to incorporate 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), another safeguard for borrowers, was passed in 1974. Although it was initially designed to ban discrimination in the field of credit for women, the law has since been expanded to include race, color or religion, national origin and age as well as the participation of public assistance programs.14
The ECOA and FHA were applied in some of the biggest enforcement actions against discriminatory practices that took place during the 2008 financial crisis. In settling settlements, that included penalties in the amount of $335million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department demanded that banks be compensated 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 oversight over ECOA as well as TILA. The CFPB established new, detailed and clarified requirements for disclosure under TILA and, with each new presidential administration, revisits priorities as well as disclosures and rules under its purview.17
Payday loans
It’s generally very easy to get a payday loan. You can walk into a payday lender’s office and leave with an loan. You will not have to pay anything to the lender in order to obtain the loan like you would at a pawnshop. Instead the lender will usually request permission to electronically withdraw money from your bank, credit union, or prepaid card account. Sometimes, the lender will require you to sign an
Check the amount of repayment that the lender 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) and an average loan running at nearly 400 percent.
Payday lenders say they charge high interest rates are a lie 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 80percent of payday loans are renewed multiple times, as per the Consumer Financial Protection Bureau (CFPB) and this indicates most of payday loans aren’t paid back in time.19
There are still issues with the fairness of payday loans. A study has found the following: Black wages earners were three times as likely as White wage earners–and Latinx workers are two times as likely take out payday loan.20 The usage for 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 considered a predatory product
Payday Loan Regulations
Control on payday loans has largely been given to states, but federal laws offer some protections for borrowers. TILA, for example, makes payday lenders – just like other financial institutions–to reveal the costs of loans to the borrowers, which includes finance charges and the APR.22
The majority of states have laws on usury which limit interest rates to a range of 5% to 30%. But payday lenders fall under exemptions that allow for 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 that limit interest rates.23
Seven states, including Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia, and Washington–have put in place some form of regulation like term limits, fee limits, or number of loans per borrower, which provide some level of protection to consumers.
In 2017 the CFPB implemented measures to enhance payday loan user protections, requiring payday lenders to determine during the underwriting process whether a borrower can repay the loan and also limiting the use of aggressive collection methods from lenders who are unable to collect payments.24 However, in July of 2020, the agency 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 makes use of your car’s name as collateral. However, while an auto loan is used to help purchase the car, the money from a title loan can be used for any purpose. Additionally, short-term high-interest title loans can be a source of financial trouble. The lenders often target those who might have difficulty repaying the loan, which could force them to refinance their loan at astronomical costs and potentially lose their vehicle.
About one in five car title loan borrowers ends up having their vehicle seized, according to Consumer Financial Protection Bureau.26
Car Title Loan Regulations
Like payday loans, car title loans are regulated by states. The majority of all states allow car title loans.27 Certain states classify them along with payday loans and regulate them with usury laws, capping the amount that lenders are allowed to charge.
Others treat them as they do pawnshops, thus the alternative term «title Pawn.» In Georgia for instance there’s a bill made to allow title pawns, which could carry an APR as high as 300% under Georgia’s pawnshop regulations — under the state’s laws on usury, which cap interest rates at 36%.28
Are regulations up to date with the advancements in technology?
The rapid growth of loans via apps and online poses new challenges to consumer protection. The fintech sector’s share of personal loan originations doubled over four years, and was approximately half of the market in September 2019 According to credit reporting firm Experian.29 Half of the revenue in payday lending is generated by online players, according to the CFPB.30
Since online lenders often utilize a «rent-a-bank» method of operation, partnering with a bank to get around state-specific usury laws and other regulations, predatory lending tactics can be difficult to regulate, some consumer advocates argue. States have seen some success in cracking down on predatory online lenders’ tactics in court, however regulations pertaining to fintechs are constantly changing as technology and the regulatory environment develops, changes and evolves.
What Is an Example for Predatory Lending?
If a lender tries to gain a profit from a borrower and tie them to unreasonable or inflexible loan conditions, it may be classified as preposterous lending. Telling signs that you are an apex predator include the aggressive solicitations, excessive borrowing costs and high prepayment penalties. large balloon payments, and being constantly urged to flip loans.
Is Predatory Lending a Crime?
In theory it is possible to say in theory. If you are enticed and conned into taking out an loan with higher fees than your risk profile warrants or that you are unlikely to be able to repay, you have potentially been the victim of an act of crime. There are laws to safeguard consumers from predatory lending, though plenty of lenders are still able to escape prosecution in part because the consumers don’t understand their rights.
Can I Sue on behalf of Predatory Lending?
If you can show that your lender broke the laws of your state or federal which include those governed by the Truth in Lending Act (TILA) You may be interested in the possibility of filing a lawsuit. It’s not an easy task to take on a wealthy financial institution. However, if you have proof that this lender broke rules, you have an opportunity to be paid. In the first instance to contact your state’s Consumer Protection Agency.
The Bottom Line
Despite decades of advancement in safeguarding borrowers, predatory lending continues to be a recurring and ever-changing risk. If you’re in the market for cash, you should do your homework by exploring alternative funding options, reading the small details of the terms used in credit, and learning about consumer rights and protections and the range of rates for the type of loan you are looking for.
The Federal Deposit Insurance Corporation (FDIC) offers guidelines on how mortgage borrowers can safeguard themselves. CFPB offers information regarding payday loans and how to stay clear of scams.3132
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Related Terms
Predatory Lending
Predatory lending imposes unfair, misleading or unjust loan terms to a borrower. Many states have Anti-predatory loan laws.
more
What is a Payday Loan? How It Works, How to get One and the Legality
An payday loan is a type of loan that is short-term in nature. A lender will extend high-interest credit according to your income.
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Usury Rate
The term usury rate refers to an amount 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 that was passed in 1968 to protect consumers when they deal with lenders and creditors.
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What Is Usury? Definition, how it works Legality, and an Example
Usury refers to the act of lending money with an interest rate that is deemed to be unreasonable excessive or is greater than the rate permitted by the law.
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Unlawful Loan
A wrongful loan is an illegal loan that fails to comply with lending laws like loans with illegally high rates of interest or that are larger than the limit.
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