Predatory Lending

predatory-lending

There is no simple checklist for determining whether a particular loan or loan program is predatory. Loan terms that are helpful to one borrower may be harmful to others. For example, it is important to distinguish subprime lending from predatory lending. Subprime lending includes loans to persons who present heightened credit risk because they have experienced problems repaying credit in the past, or because they have only a limited credit history. Loans that serve these borrowers have a legitimate place in the market when they have been responsibly underwritten, priced and administered. Predatory lending, on the other hand, is not limited to one class of borrowers. Signs of predatory lending include the lack of a fair exchange of value or loan pricing that reaches beyond the risk that a borrower represents or other customary standards.

As a general rule, predatory lending involves at least one, and perhaps all three, of the following elements:

  • Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation;
  • Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); or
  • Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.”

The Community Reinvestment Act (CRA) examination process reviews each bank’s record, based on the standards appropriate for its size and operation. Predatory lending can have a negative effect on a bank’s CRA performance, specifically, including violations of: the Fair Housing Act and the Equal Credit Opportunity Act involving discriminatory credit practices; the Truth in Lending Act, regarding rescission of certain mortgage transactions, and regarding disclosures and certain loan term restrictions in connection with credit transactions subject to the Home Ownership and Equity Protection Act; the Real Estate Settlement Procedures Act regarding the giving and accepting of referral fees, unearned fees or kickbacks in connection with certain mortgage transactions; and the Federal Trade Commission Act regarding unfair or deceptive acts or practices. Other practices may warrant the inclusion of comments in an institution’s performance evaluation. These comments may address the institution’s policies, procedures, training programs, and internal assessment efforts.

Predatory lending harms individuals and communities and raises risk management and consumer compliance concerns for financial institutions. Predatory loans can have a negative impact on a bank’s CRA evaluation. The loans may violate fair lending laws and other consumer protection laws, resulting in legal or regulatory action. Questionable loan underwriting and the risk of litigation raise additional safety and soundness concerns.

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To Terminate or Not to Terminate

Termination of employment document

Termination of employment document

 

California Labor Code §1400 affords us the following definitions: under Sec. (c) layoff means a “separation from a position for lack of funds or lack of work.” This means that there is no fault on the part of the employee for a layoff and the employee may be eligible for unemployment and other benefits.

The same paragraph, Sec. (f) defines the word “termination” as “the cessation or substantial cessation of industrial or commercial operations in a covered establishment.” Thus TERMINATION and LAYOFF are the same, but while the former refers to the termination of the business, the latter terminates the employee. Again, there is no stigma attached to “termination.”

What does “being fired” mean in this context? The state of California follows the “at will” presumption, which means that in the absence of an employment contract, there is a presumed “at will” employment. Under “at will” an employee can be fired for any reason or no reason at all, but the reason, if any, may not be unlawful. Unlike with a layoff or termination, the term “I was fired” usually carries the stigma of “for a cause,” such as being late to work, or not performing one’s duties. Employers who are “firing” their at will employees for “lack of funds or lack of work” should therefore use the term layoff or state that they are “terminating” the employment.

The most common “unlawful reason” for firing an employee is usually some kind of public policy violation, which may amount to “wrongful termination.” If there is an apparent “causal connection” between the policy violation, there may be sufficient grounds for a “wrongful termination” action. This causal connection is often in the form of a retaliation against the employee for something he or she has rightfully done:

If an employer discharged an employee in violation of rights granted by the First Amendment to the US Constitution.

If an employer violates his or her own discharge policy (written or implied).

If an employer the employment-related provisions in the Bankruptcy act or Fair Credit Reporting Act.

If an employer violates of a federal or state discrimination law.

If an employer discharged or fired an employee in retaliation for whistle blowing, wage garnishing, exercising union rights, serving in a military, and legally taking a leave under the Family and Medical Leave Act.

Interestingly, some courts (though not all) also recognize the Good Faith and Fair Dealing exception to At-Will Employment. This is a contract concept, which states that although employees are employed “at will,” there is a covenant of good faith and fair dealing between them and the employer, prescribing the latter to treat them fairly: the employer may not be transferring employees to prevent them from collecting sales commissions, misleading them about their chances for promotions and wage increases, fabricating reasons for firing an employee when the real motivation is to replace that employee with someone who will work for lower pay, repeatedly transferring an employee to remote, dangerous, or otherwise undesirable assignments to coerce the employee into quitting without collecting severance pay or other benefits that would normally be due.

 

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Rescission, Reformation, Replevin

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