Legal Definitions - predatory lending

Predatory lending refers to unethical and often illegal practices by lenders who exploit a borrower's vulnerability, lack of financial sophistication, or urgent need for funds. These lenders impose unfair, deceptive, or abusive loan terms that are designed to benefit the lender disproportionately, often leading the borrower into a cycle of debt or even default, rather than helping them achieve financial stability. The practices typically involve a lack of transparency, excessive fees, or terms that are difficult or impossible for the borrower to meet.

Here are some examples illustrating predatory lending:

• Example 1: The High-Interest Payday Loan Trap

  Imagine a single parent facing an unexpected car repair bill, which is essential for them to get to work. Desperate for quick cash, they approach a storefront lender for a small, short-term loan. The lender offers a "payday loan" with an extremely high annual percentage rate (APR) – perhaps 400% or more – and a repayment period of just two weeks, coinciding with the borrower's next paycheck. The terms are presented quickly, and the borrower, desperate for funds, doesn't fully grasp the true cost or the high likelihood of not being able to repay the full amount by the due date.

  This exemplifies predatory lending because the lender targets a financially vulnerable individual with an urgent need, offering terms (exorbitant APR, short repayment) that are highly likely to lead to default or repeated rollovers, trapping the borrower in a cycle of debt and generating significant fees for the lender.

• Example 2: Deceptive Home Equity Stripping

  Consider an elderly homeowner living on a fixed income, who is approached by a mortgage broker offering a "home equity loan" to cover rising property taxes and necessary home repairs. The loan agreement includes numerous hidden fees, a mandatory purchase of overpriced insurance policies from a company affiliated with the lender, and an adjustable interest rate that starts low but quickly escalates to an unaffordable level. The broker downplays these complex terms and rushes the homeowner through the signing process, emphasizing only the immediate cash benefit.

  This is predatory because the lender exploits the homeowner's age and potential lack of financial literacy, using complex and deceptive terms (hidden fees, escalating rates, unnecessary insurance) to strip equity from their home, ultimately aiming for foreclosure when the homeowner inevitably cannot meet the escalating payments.

• Example 3: The Car Title Loan with Hidden Risks

  A person needs emergency funds and owns their car outright. They see an advertisement for a "title loan" promising quick cash. The lender offers a loan using the car's title as collateral. The interest rate is extremely high, and the repayment period is short. Crucially, the borrower is not clearly informed about the true cost of the loan or the severe consequences of default, which include immediate repossession of their vehicle, a vital asset for their daily life.

  This demonstrates predatory lending because the lender targets individuals with an urgent need for cash, offering a loan with terms (high interest, short repayment, collateral forfeiture) that are highly unfavorable and designed to put the borrower at significant risk of losing a vital asset (their car), often for a relatively small loan amount. The lender profits from the high interest or by repossessing and selling the vehicle.