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.