What is the correct answer to: Fee packing, equity stripping, and balloon abuse represent:

The correct answer is Predatory lending practices. Each named practice attacks the terms of the loan itself, through fees, equity or payment structure, in order to profit at the borrower's expense. That is the defining feature of predatory lending.

What background knowledge is needed for this Financing question?

Predatory lending as a recognized legal and regulatory category emerged prominently in the 1990s and early 2000s as subprime mortgage lending expanded rapidly and abusive practices proliferated in communities that lacked access to mainstream credit. HOEPA, enacted in 1994 as an amendment to TILA, was the first federal law to specifically target high-cost mortgage loans and prohibit certain predatory terms. The 2008 financial crisis, which was substantially caused by predatory mortgage lending on a massive scale, led to the sweeping reforms of the Dodd-Frank Act in 2010 and the creation of the CFPB, which now has primary regulatory authority over mortgage lending practices. The ability-to-repay rule, finalized in 2013, was a direct regulatory response to the balloon abuse and equity stripping practices that contributed to millions of foreclosures during the crisis.

What is a good way to remember the answer to this Financing question?

Use the acronym **FEB** to remember the three predatory practices: **F**ee packing, **E**quity stripping, **B**alloon abuse — and remember that FEB stands for 'February,' the shortest month, just like these loans give borrowers the shortest path to losing their homes. Alternatively, visualize a predatory wolf (lender) with three weapons: a bag of hidden fees, a vacuum sucking equity out of a house, and a giant balloon that pops and destroys the borrower's finances. All three weapons = predatory lending. Remember that predatory lending often involves one or all three of these FEE components. When you see these terms together, think of 'FEE' as a warning sign for predatory lending.

What exam tip applies to this Financing question?

Sort lending abuses by what they attack. Terms and fees, such as fee packing, equity stripping, loan flipping and balloon abuse, are predatory lending. Access to credit by neighborhood or protected class, such as redlining, reverse redlining and steering, is discrimination. A rate above the state ceiling is usury.

How does this Financing concept apply in real world practice?

An elderly widow in Detroit owns her home free and clear, with $180,000 in equity built over 40 years. A predatory lender approaches her offering a $120,000 home equity loan, but buries $15,000 in unnecessary fees into the loan balance (fee packing), structures the loan with a $95,000 balloon payment due in three years that the lender knows she cannot pay (balloon abuse), and extends the loan knowing that foreclosure will allow the lender to capture her remaining equity (equity stripping). When she inevitably cannot make the balloon payment, the lender forecloses, strips her of her home and lifetime of equity, and profits from the transaction — a textbook example of all three predatory practices operating together.

FinancingMEDIUM

Fee packing, equity stripping, and balloon abuse represent:

Correct Answer

A) Predatory lending practices

Fee packing loads a loan with excessive or duplicated charges, equity stripping lends against a homeowner's equity without regard for the ability to repay, and balloon abuse buries a lump sum the borrower cannot meet. All three describe a loan structured to profit from the borrower rather than to price credit risk, which is what predatory lending means. Federal law reaches these terms through the high-cost mortgage protections of the Home Ownership and Equity Protection Act and the ability-to-repay rule.

Answer Options

Predatory lending practices

Discriminatory redlining

Usury law violations

Illegal steering practices

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Related Concepts

Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.

Deed (in foreclosure context)

In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.

Discount Points

Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.

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Fee packing, equity stripping, and balloon abuse represent:

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