Common predatory lending practices include charging excessive points and fees, steering borrowers to higher-rate loans when they qualify for better terms, balloon payments designed to force refinancing, requiring unnecessary products as a condition of the loan, and equity stripping through repeated refinancing. Federal laws including TILA, RESPA, HOEPA (Home Ownership and Equity Protection Act), and state consumer protection laws provide safeguards against predatory lending.
A loan officer steers a minority borrower into a subprime loan at 9% interest even though the borrower's credit score qualifies for a conventional loan at 6.5%. The loan also includes $8,000 in unnecessary fees. This is predatory lending.
The exam tests your ability to identify predatory practices. Key indicators: targeting vulnerable borrowers, excessive fees, steering to higher rates, balloon payments designed to trap borrowers, and equity stripping. Know that HOEPA provides specific protections for high-cost mortgages.
Related Terms
Related Concepts
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Frequently Asked Questions
Study This in Your State
Predatory Lending may have state-specific rules. Choose your state to study Financing with localized content: