Predatory Loans and How They’re Regulated
Home Discrimination and Subprime Mortgages
Payday Loans
Car Title Loans
Do regulations keep up with the advancements in technology?
Predatory Lending FAQs
The Bottom Line
Personal Finance Credit
Predatory Lending Laws How to Be aware of
These rules protect borrowers from scams
By Tom Barkley
Updated August 25 2022
Read by Katie Miller
When you’re in need of credit, it’s easy to fall prey to scams that take advantage of borrowers. It doesn’t matter if they demand a high-interest rate on the payday loan, taking your car title as collateral or pushing a bigger loan than you’re able to afford There are numerous ways for unscrupulous lenders to extort borrowers.
The most targeted by predatory lenders are the most vulnerable, such as someone who has recently lost a job, has bad credit, or simply doesn’t know what to watch out for. Black and Latinx communities, in particular, have long fallen prey to abusive lending practices.1
There are laws aimed at protecting the borrowers from loan sharks as well as other lenders who are predatory. The laws limit interest rates, ban discriminatory practices, and even outlaw some types of lending. Although Congress has passed some federal laws on credit, a lot of states have taken on the initiative to curb predatory lending. With rules and credit products continuously evolving, it’s important to familiarize yourself with the latest regulations.
The most important takeaways
The predatory lender may employ aggressive tactics as well as unfair loan conditions–like high interest rates and fees–to make money off of borrowers who aren’t aware.
These lenders tend to go after the most vulnerable and uninformed borrowers, usually targeting Black and Latinx communities.
A plethora of laws have been created to protect the borrowers from establishing limitations on interest rates, to prohibiting discrimination and other unsavory methods.
Definition of a Loan Shark
Predatory loans and how they’re Regulated
Efforts to combat predatory lending have been going since the time the people who have borrowed money, starting centuries ago when various religions condemned the practice of usury or charging unreasonably high-interest rates.
The U.S., a patchwork of laws at both the state and federal levels have been designed to protect the borrowers, but they sometimes struggle to keep pace with evolving predatory practices. Here are a few examples of predatory loans and the specific laws and regulations that pertain to each kind of loan. Knowing the characteristics of these loans can help you recognize one if it’s offered to you and prevent you from being found guilty. It’s often difficult to recognize.
Home Discrimination and Subprime Mortgages
Subprime mortgages that are available to borrowers with weak or subprime credit ratings, aren’t always considered predatory.2 The greater interest rate is viewed as compensation for subprime lenders, who are taking greater risk when they lend to borrowers with a poor credit score.
However, some lenders have aggressively promoted subprime loans to homeowners who can’t afford them–or sometimes qualify for more favorable loan terms , but don’t even realize that they qualify. These shady tactics were seen on an alarming rate in the lead-up into the mortgage subprime crisis that occurred in 2008, which led to the Great Recession.3
The fallout from the financial crisis struck Black as well as Latinx homeowners hardest.4 Many of the same neighborhoods that for decades had to contend with racial discrimination when it came to getting access to mortgages, a practice known as redlining, became the targets of what is known as “reverse redlining” by lenders that were predatory, charging the highest interest rates.5
Black and Latinx homeowners were more likely to be targeted by subprime lending as one study revealed that was true even taking into account things like credit scores as well as how much income is used to pay for the housing and debt costs.6
Discrimination remains a problem, according to a different study, which revealed that the racial disparities in mortgage rates have persisted over the past four decades.7
Additionally the discriminatory practices in mortgage lending have increased the gap in wealth between racial groups, according to the Urban Institute, with Black homeowners accumulating just more than a quarter the property wealth of White homeowners.8
Housing Laws That Help Borrowers
Over the last 60 years significant advancements have been made in protecting homeowners from discrimination and abuse despite the persistence of illegal practices. Two laws used different strategies to protect homeowners from abuse, and they continue to evolve. In 1968, the Fair Housing Act (FHA) outlawed discrimination in real estate and mortgage borrowers.9 In the beginning, it prohibited discrimination in the context of race, religion, national origin or gender The legislation was amended later to cover the status of family members and disabilities as well.10
The other key law adopted in 1968, known as the Truth in Lending Act (TILA), required mortgage companies and other lenders to provide the conditions they offer in the loans.11 This law has been extended multiple times to encompass various real property practices. The law was amended in 1994. TILA was amended to include the Home Ownership and Equity Protection Act (HOEPA), which helped protect borrowers against the risk of predatory, high-cost mortgages.1213
The Equal Credit Opportunity Act (ECOA) is a different safeguard for borrowers, was passed in 1974. Although it was initially designed to ban discrimination in credit against women, it was later expanded to cover race and color and religion, as well as national origin or age, as well as the participation of public assistance programs.14
The ECOA and FHA were applied in some of the biggest legal actions to stop discrimination that occurred during the 2008 financial crisis. Reaching settlements with penalties in the amount of $335million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department demanded that banks compensate Black and Latinx clients who were unfairly steered into subprime loans.1516
In 2010 The Dodd-Frank Act, enacted in response to the financial crisis, placed the newly created Consumer Financial Protection Bureau (CFPB) in charge of the oversight of ECOA and TILA. The CFPB introduced new, specific and clarified, information requirements for TILA and with each new presidential administration, revisits priorities in terms of disclosures, rules, and other requirements that fall within its purview.17
Payday loans
It’s generally very easy to obtain a payday loan. You can go to the office of a payday lender and walk out with an loan. There is no requirement to pay any money to the lender to get the loan, as you would at a in a pawnshop. Instead the lender will usually require your permission to electronically transfer cash from your credit union or prepaid card account. Sometimes, the lender may request that you sign an
check for the repayment amount to the lender, which they will cash at the time you pay the loan is due.18
Payday loans aren’t cheap. Payday lenders charge very high rates of interest, up to 780% as an annual percentage rates (APR) and an average loan that is close to 400 percent.
Payday lenders say that their high rates of interest are false since if you pay back your payday loan on time, you won’t be charged high rates of interest. In certain instances, this may be the case, however the majority of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB) which indicates an overwhelming majority the loans are not paid off on time.19
There are still issues concerning the fairness of these loans. A study has found it was Black wages earners were three times as likely than White workers–and Latinx workers are two times as likely get payday loan.20 The usage for payday loans has also been linked to a doubling in bankruptcy rates.21
400%
Annual percentage rates (APR) that payday loans often approach–one reason that these loans are viewed as a predatory product
Payday Loan Regulations
Control on payday loans has largely been given to states, but federal laws offer some protections for the borrowers. TILA For instance, TILA makes payday lenders – just like other financial institutions to disclose the costs of loans to borrowers, including finance charges and the APR.22
Many states have usury laws that limit interest charges to a range of 5 to 30 percent. But payday lenders fall under exemptions which allow their high interest rates. Sixteen states: Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and the District of Columbia, either bans on high-cost payday loans or have implemented restrictions that limit interest rates.23
Seven states–Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia and Washington — have implemented some kind of measure that include time limits, fee limits, or the number of loans per borrower, which provide some level of protection to consumers.
In 2017 the CFPB implemented measures to enhance payday loan user protections, obligating payday lenders to decide when they underwrite whether a borrower can repay the loan and restricting the use of aggressive collection methods from lenders who are unable to collect payments.24 However, in July, 2020 the organization removed the mandatory “ability to repay” requirement. The CFPB has set a date for the final implementation for their full and updated “Payday Rule” for June 2022.25
Car Title Credit
A car title loan similar to an auto loan is one that uses your vehicle’s name as collateral. While an auto loan is used to buy the car, the money from a title loan can be used for any reason. In addition, short-term, high-interest title loans are often predatory. Lenders often target people who might have difficulty repaying the loan and could cause the borrower to refinance with a soaring costs and potentially lose their car.
One in five title loan customers end up with their vehicle confiscated as per the Consumer Financial Protection Bureau.26
Car Title Loan Regulations
As with payday loans, car title loans are controlled by states. Overall, about half of all states allow car title loans.27 Some states combine these along with payday loans and regulate them by using usury laws. They also limit the rate that lenders can charge.
Some treat them the same way as they are pawnshops, hence the alternative term “title the pawn.” For instance, in Georgia, for example there’s a bill proposed to make title pawns legal. They could carry an APR of up to 300% under Georgia’s pawnshop regulations — under the state’s laws on usury which limit interest rates at 36%.28
Can Regulations Keep Up With the advancements in technology?
The explosive growth of loans via apps and online poses new challenges to consumer security. Fintech’s share of personal loan originations doubled over four years and now accounts for around half of the market as of September of 2019, according to credit reporting firm Experian.29 The majority of profits from payday loans are generated by online players according to the CFPB.30
Since online lenders often use the “rent-a-bank” method of operation, in which they partner with a bank can help them get around state-specific usury laws and other laws, the practice of predatory lending are difficult to enforce, some consumer advocates argue. States have seen some success in clamping down on lenders who use predatory tactics in court. However, rules related to fintechs are always changing as the technology and regulatory environment innovates, adjusts and evolves.
What Is an Example of Predatory Lending?
Whenever a lender seeks to profit from a borrower and tie them into unfair or unmanageable loan terms, it can be considered an act of predatory lending. Signs that you’re being targeted include aggressive offers as well as excessive fees for borrowing and high prepayment penalties. big balloon payments, and being constantly urged to switch loans.
Does Predatory Lending Constitute a Crime?
In the theory of things it is possible to say yes. If you are enticed and conned into taking out the loan with higher fees than your risk profile warrants or you’re not likely to be able to repay the loan, you could be the victim of an offense. There are laws to protect consumers against predatory lending, though plenty of lenders still be able to get away with it due to the fact that consumers don’t know their rights.
Can I sue on behalf of Predatory Lending?
If you can prove that your lender broke the laws of your state or federal, including federal laws, including the Truth in Lending Act (TILA) If you believe that your lender violated federal or local laws, you might be interested in making a claim. It’s not easy to go up against the financial institution that is wealthy. However, if you can show proof that this lender broke the law, you stand a reasonable chance of being compensated. First to contact your state’s Consumer Protection Agency.
The Bottom Line
Despite decades of progress in protecting borrowersfrom predatory lending, it is still a constant and growing risk. If you’re in need of cash, you should do your homework by exploring other options for funding, taking a look at the small print of credit terms, and learning about the rights of consumers and their protections as well as the range of rates for the type of loan you are looking for.
The Federal Deposit Insurance Corporation (FDIC) provides suggestions on how mortgage holders are protected and the CFPB provides tips on payday loans and how to stay clear of scams.3132
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Related Terms
Predatory Lending
Predatory lending imposes unfair, deceptive, or unjust loan terms on a lender. There are many states with law against predatory lending.
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What is a payday loan? What is it, how to obtain One, and Legality
A payday loan is a type of borrowing that’s short-term and where a lender can provide high-interest credit based on your earnings.
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Usury Rate
The term”usury” refers to a rate of interest considered to be excessive as compared to prevailing market interest rates.
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Truth in Lending Act (TILA): Consumer Protections and Disclosures
The Truth in Lending Act (TILA) is a law of the federal government that was passed in 1968 to protect consumers when they deal with creditors and lenders.
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What Is Usury? Definition, How It Works, Legality, and Example
Usury is the act lending money with an interest rate which is thought to be unreasonably excessive or higher than the rates permitted by law.
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Unlawful Loan
An illegal loan is one that is a loan that fails to comply with lending regulations like loans that have illegally high interest rates or those which exceed the size limit.
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