This discussion focuses on the concept of fair lending taking into consideration related themes as unscrupulous lender activities. It offers an introduction to fair lending laws and illegal lending practices and cases (such as predatory lending lawsuits) to outline the responsibility that lenders have towards providing a fair service to the market. This article will also provide an explanation of some of the legal language commonly used in this topic area, providing a background predatory lending definition for those who are unclear of what this constitutes.
Fair Lending Laws
The U.S. government, in recent years, has enacted fair lending laws that include the Equal Credit Opportunity Act and the Fair Housing Act. These laws are intended to ensure that no borrower is discriminated against when dealing with a lender. They bar the lender from using such attributes as sex, race or color, etc. from affecting their lending decisions. They may not discriminate against the person who gets public assistance income, is single or married, is of a certain religion, or is handicapped. Discrimination against age is also prohibited as long as the person has the capacity to enter into a contract.
Predatory Lending Definition
Any lending institution that uses abusive practices against a borrower may be guilty of predatory lending practices. Abuses include being unfair to the borrower, deceptive in describing what a contract generally means, or using fraudulent practices. One of the recently discovered deceptive practices occurred when a lender convinced a borrower to take out an adjustable rate mortgage with a large balloon payment at the end and an attractive interest rate, but when the borrower needed to refinance the mortgage, the interest rate actually raised the monthly payment by 50 percent.
Excessive interest rates are another abuse that lenders may employ against borrowers that are not able to get credit elsewhere. Some lenders charge excessively high fees when a borrower needs cash quickly and doesn’t have the time to shop around.
Other Discriminatory Lending Practices
When a borrower applies for credit, the lender will obtain a credit report. If there is an entry that raise a legitimate red flag, the lender may refuse the credit. If this is consistently done, there is no abuse. However, if the lender resolves the problem with a caucasian and issues the credit, but refuses to discuss it with a person of another race and denies that person credit that is an abuse of ECOA rules.
“Redlining” is also prohibited. This is the action of a lender who figuratively places a red line around a certain area of the locale or state in which they operate and denies credit to anyone living or wishing to live in that area.
Lawsuits and Laws Against Predatory Lending
Many states have enacted legislation to guard their residents against predatory lenders. These have produced some predatory lending lawsuits that point up the necessity for these laws. Mortgage lenders have become especially vulnerable to these lawsuits since homeowners, who have lost their homes through fraudulent lending practices, are taking their lenders to court. Some borrowers were granted credit in excess of their ability to pay, while others are fighting foreclosures.
There are 36 states with laws prohibiting some predatory lending practices. Each state’s laws may contain some of the provisions but not all. There are provisions against “flipping”, negative amortization, prepayment penalties, inability to pay a loan and a requirement for consumer credit counseling. There are 20 states that ban flipping a loan. Flipping is the practice of frequently refinancing a loan causing the borrower to pay fees or lose better loan terms.
Some state attorney generals are filing predatory lending lawsuits against mortgage lenders in an effort to stop foreclosure and force lending institutions to modify their lending practices.