Predatory Lending

Predatory Lending

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What is a predator? What images come to mind when you think of a predator?

Predatory Lending - Overview

Only a few years ago, the scarcity of credit was a problem for women, low-income Americans, and borrowers in communities of color. Today, because of advances in technology and changes in the marketplace, many in these same populations are overwhelmed with offers from subprime mortgage lenders [bad loans!] and payday lenders. Credit in the United States is now more widely available than ever before. Yet this expansion has been accompanied by a sharp rise in predatory lending, which undermines the economic benefits of home ownership and helps perpetuate [make worse] the widening wealth gap between whites and people of color.

Predatory lending occurs when lenders impose excessive or unnecessary fees or steer borrowers into expensive loans when they could qualify for more affordable loans. These lenders hide fees and costs into loans and take advantage of people.

Fill in the Blanks

Review: What does scarcity mean?

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According to the article, what is predatory lending?

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Credit is more widely available in the U.S. than before. According to the text, why could this be a bad thing for certain groups of people?

We Will Be Reading A Case Study on Predatory Lending

• As you read, remember the ways that banks and lenders targeted the couple with bad loans.

• Think about the ways you can protect yourself from predatory lending practices.

Case Study

As predatory lenders become a major presence in low-wealth neighborhoods, economic justice concerns have shifted away from access and to the terms of credit. White borrowers tend to be better served by banks when applying for loans and other forms of credit. In contrast, people of color, women, and the elderly are targeted by predatory lenders. 

Consider the case of Ira and Hazel Cheatham. Ira Cheatham is a seventy-three-year-old retired veteran who has lived with his wife, Hazel, in a predominantly African American neighborhood of Portland, Oregon, for twenty-one years. In 2002, when they had nearly paid off their mortgage, the Cheathams received a check for roughly $1,000 in the mail from a finance company. For an older couple living on limited retirement income, the sudden appearance of this money seemed like a dream come true. They cashed the check, and in the process, took out a very high-interest loan.

Case Study

The lender followed up by calling the Cheathams and urging them to consolidate the loan with their credit card debt into a single mortgage. The Cheathams, who apparently had good credit at the time, were promised an interest rate between 5 and 6 percent. However, when the loan papers were presented, the interest rate was 9.9 percent, with an annual percentage rate of 11.8 percent. Moreover, their loan contained ten “discount points” amounting to $15,289. The lender financed these points as part of the loan, taking away what the Cheathams had earned through years of mortgage payments. The loan also contained a prepayment penalty, requiring the Cheathams to pay the lender approximately $7,500 to escape their predatory loan. Cheatham noted that once he received a call from the lender when the lender “happened” to be right down the street with a neighbor. It seems clear that this African American neighborhood was being systematically targeted by predatory lenders.

Open Ended

Identify two methods predatory lenders used to trap the Cheathams in a predatory loan.

(Possible Sentence Starter: "One method predatory lenders used was [describe first practice]. Another method used was [describe second practice].")

Multiple Choice

According to the article, was this just a case of bad luck or were the lenders targeting a specific group of people?

• Bad Luck

• They were targeted.

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Based on this story, what might be one way that you can protect yourself against predatory lending?

What you can do!

The best defense against predatory lenders lies in educating yourself about their deceptive practices. Following is a list of some of the things to watch out for:

Unlicensed Loan Offers

Beware of loan offers through the mail, via telephone or door-to-door solicitations. Reputable lenders typically don’t operate in this way. Make sure any lender you work with is licensed.

Promises

Stay clear of lenders who promise that your loan will be approved regardless of your credit history or rating. Get a copy of your credit report, and have some idea of what you should qualify for.

What you can do!

Being Rushed to Sign Papers

Do not let yourself be rushed into the loan process. Study the paperwork, and don’t sign anything you don’t agree with or understand.

High Interest Rates and Fees

Question high interest rates and fees. Refuse to accept payments you know you cannot afford. Decline any additional services “packed” into the loan, like credit or health insurance. Comparison shop and research how to find the best mortgage rates.

Blank Spaces in Documents

Do not sign any documents that contain blank spaces. Read loan documents carefully, and have them checked by a trusted friend or a lawyer, if possible.

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In your own words, explain two ways that you can protect yourself from predatory lending using information from the list.

(Possible Sentence Starter: I can protect myself from predatory lending by . . . )

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Practice! Based on the scenario, explain what the person should have done differently to avoid being caught in a predatory loan.

1) Deena received a letter in the mail stating that she was already approved for a loan and all she needed to do was sign it and deposit it in her bank. She didn't apply for a loan, but she figured she can use the money. Explain to Deena why this was a mistake.

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Practice! Based on the scenario, explain what the person should have done differently to avoid being caught in a predatory loan.

2) Anthony doesn't have good credit, but was approved for a loan through a bank. He was so happy to be approved he didn't bother reading any of the terms of the loan. Explain to Anthony why this was a mistake.

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Practice! Based on the scenario, explain what the person should have done differently to avoid being caught in a predatory loan.

3) PJ was applying for a loan. They wanted to review the terms. The loan officer said that if they don't sign the contract in the next 10 minutes the deal was off. PJ was unsure but felt pressured to sign the deal so the loan did not go away. Explain to PJ why this was a mistake.