Predatory Lending Red Flags
~11 min read · Spot equity stripping, loan flipping, packing and steering before they close.
Predatory lending is legal-looking origination weaponized against the borrower: loans built to strip equity, flip endlessly, or fail profitably. The exam tests the named practices — equity stripping, loan flipping, packing, steering — and the rules built specifically to kill them.
The named practices
Equity stripping: lending against home equity without regard to ability to repay — the lender wins by foreclosure. Loan flipping: repeated refinancing that generates fees each cycle with no borrower benefit (HOEPA bars refinancing a high-cost loan into another within a year absent borrower interest). Fee packing: padding closings with unearned, duplicative, or hidden charges — financed single-premium credit insurance is the classic packed product. Steering: pushing borrowers into worse products than they qualify for because the compensation was better.
- Equity stripping: collateral-based lending, ATR's nemesis
- Flipping: serial refis for fees; benefit-to-borrower is the test
- Packing: junk fees and financed credit insurance
- Steering: product choice driven by originator pay
The rule set built against them
ATR/QM outlaws lending without repayment analysis (killing equity stripping). HOEPA triggers counseling, bans balloons and prepayment penalties on high-cost loans, and polices flipping. The Loan Originator Compensation rule (Reg Z): originator pay may not vary with loan terms (rate, fees, product) — only with loan amount; no steering to less-favorable loans for better comp; and no dual compensation (paid by both borrower and lender on one transaction). State mini-HOEPA statutes stack additional triggers beneath the federal floor.
- ATR: capacity analysis mandatory
- LO Comp: pay varies by amount only — never rate or product
- No dual compensation; no steering incentives
- HOEPA + state high-cost laws layer protections
The benefit test
The practical refinance-ethics screen is net tangible benefit: rate or payment meaningfully reduced, term rationally changed, a genuine cash need served — versus fees consumed. An MLO who cannot state the borrower's benefit in one sentence is describing a flip. Targeting vulnerable borrowers — elderly, limited-English, equity-rich and income-poor — aggravates every predatory pattern in enforcement.
Worked example
A retiree on $2,100/month owns her home outright. An originator proposes a $180,000 cash-out with a $1,450 payment, plus $9,000 in fees including $4,200 of financed single-premium credit life insurance: 'the house qualifies even if the income is thin.' Diagnose every practice present.
'The house qualifies' is equity stripping verbatim — a $1,450 payment against $2,100 income fails any honest ability-to-repay analysis; the loan is built to fail toward foreclosing a paid-off home. The $4,200 financed single-premium credit insurance is textbook packing — the signature product of the subprime era, financed so the borrower pays interest on the padding. Fees at this scale also invite HOEPA's points-and-fees trigger, dragging counseling requirements and feature bans the structure ignores. Targeting an elderly, equity-rich/income-poor borrower aggravates all of it. Correct outcome: no compliant version of this loan exists at this income — the honest conversation is about smaller, needs-based options, not a better-papered strip.
Common exam pitfalls
Calling a loan clean because the borrower signed everything.
Disclosure does not cure predation — ATR, HOEPA, and LO Comp judge the loan's substance.
Missing financed credit insurance as the classic packed fee.
Single-premium credit insurance financed into the loan is the signature packing product.
Justifying serial refis by tiny rate drops.
Net tangible benefit weighs fees against real savings — a 0.25% cut consumed by $8,000 of costs is a flip.
Strip, flip, pack, steer — four verbs, four schemes, one victim.
Recap
- Equity stripping: lending to the collateral, not the borrower
- Loan flipping: fee-harvesting refis without borrower benefit
- Fee packing: junk charges and financed credit insurance
- Steering: comp-driven product placement — killed by LO Comp
- Pay varies by loan amount only; no dual compensation
- Net tangible benefit is the refinance ethics screen
Prove it: 10 questions on this topic
Every lesson ends with a ten-question check in the free course — your progress syncs between the web and the EstatePass app.