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Predatory Loans and How They're Regulated
The Subprime Mortgage and the Housing Discrimination
Payday loans
Car Title Credit
Are regulations up to date with Technology?
Predatory Lending FAQs
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Personal Finance Lending

Predatory Lending Laws How to Know

These rules help to protect borrowers from scams
By Tom Barkley
Updated August 25, 2022
Review by Katie Miller

When you're in need of credit, it's easy to fall victim to scams involving lending that are predatory. It doesn't matter if they demand a high-interest rate on the payday loan, taking your car title as collateral, or attempting to get a larger loan than you're able to afford There are numerous ways unscrupulous lenders try to take advantage of customers.

The most targeted by predatory lenders are the most vulnerable, for instance, someone who recently lost a job, has bad credit, or doesn't know what to watch out for. Black as well as Latinx communities, in particular, have long fallen prey to abusive lending practices.1

There are laws that protect the borrowers from loan sharks and other predatory lenders. These laws cap interest rates, prohibit discriminatory practices, and prohibit certain kinds of lending. While Congress has passed several federal credit laws, many states have taken the initiative to rein in predatory lending. With both the rules and credit products continuously changing, it's vital to be aware of the latest rules and regulations.
Key Takeaways

The predatory lender may employ aggressive tactics and unjust loan conditions, such as excessive interest rates and fees to take advantage of unsuspecting borrowers.
These lenders tend to go after the most vulnerable and least educated borrowers usually targeting Black and Latinx communities.
A patchwork of laws has been put in place to protect borrowers, from establishing limitations on interest rates, to prohibiting discrimination and other unsavory methods.

Loan Shark Definition
Predatory loans and how they're Regulated

The fight against lenders who are predatory have been in place for as long as the people who have borrowed money, beginning centuries ago , when different religions condemned the use of usury and charging excessive interest rates.

In 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 new predatory practices. Here are a few illustrations of predatory loans, as well as the specific regulations and laws that apply to each kind of financing. Knowing the specifics of these loans can help you spot one if it's offered to you, and help avoid being taken in. It's often difficult to discern.
Home Discrimination and Subprime Mortgages

Subprime mortgages, which are provided to those with weak or subprime credit ratings, aren't always considered predatory.2 The higher interest rates are seen as compensation for subprime lenders who take more risk when lending to borrowers with poor credit history.

However, some lenders have aggressively promoted subprime loans for homeowners who cannot afford them--or sometimes qualify for better loan conditions, but they don't know that they qualify. These shady tactics were seen on an alarming rate in the period leading up to the subprime mortgage crisis in 2008, which resulted in the Great Recession.3

The fallout from the financial crisis slammed Black as well as Latinx homeowners the hardest.4 A lot of these neighborhoods that had for decades faced racial discrimination in getting access to mortgages, a practice known as redlining, became the targets of what is known as "reverse redlining" by predatory lenders charging excessive interest rates.5

Black and Latinx home owners were more at risk to being targeted by subprime lending according to a study regardless of taking into consideration things like credit scores and the amount of income is used to pay for the housing and debt costs.6

Discrimination continues to be a major issue, according to a different study, which revealed that differences in mortgage costs between racial groups persist over the last four decades.7

In turn, discriminatory mortgage practices have exacerbated the racial wealth gap according to the Urban Institute, with Black homeowners having built up little more than a quarter of the housing wealth of White homeowners.8
The Housing Laws Guard Borrowers

In the last six decades, significant progress has been made to safeguard homeowners from abuse and discrimination, despite the persistence of predatory practices. The year 1968 saw two laws took different approaches to enhance homeowner protections, and they are constantly evolving. It was the Fair Housing Act (FHA) banned discrimination in the real estate market and mortgage borrowers.9 The first law banned discrimination in the context of race religious belief, national origin, religion, and sex The law was later amended to include disabilities and family status as well.10

The other key law passed in 1968, the Truth in Lending Act (TILA) mandated mortgage companies as well as other lenders to reveal the terms they offer in their loans.11 It was amended several times to cover various real estate practices. The law was amended in 1994. TILA changed to incorporate it with the Home Ownership and Equity Protection Act (HOEPA), which was designed to protect borrowers from predatory, high-cost mortgages.1213

The Equal Credit Opportunity Act (ECOA), another safeguard for borrowers, became law in 1974. Although initially geared towards preventing discrimination in credit against women, the law was later expanded to include race, color, religion, national origin and age as well as participation in public assistance programs.14

The ECOA and FHA were utilized in a few of the biggest enforcement actions against discriminatory practices that occurred in the 2008 economic crisis. Reaching settlements that included penalties of $335 million from Countrywide Financial and $175 million from Wells Fargo, the Justice Department required the banks to pay Black and Latinx borrowers who were improperly guided into subprime loans.1516

In 2010, The Dodd-Frank Act, enacted in response to the crisis, established the new Consumer Financial Protection Bureau (CFPB) with the responsibility of ensuring the oversight of ECOA along with TILA. The CFPB created new, precise and clear disclosure requirements under TILA and with each new presidential administration, reexamines the priorities as well as disclosures and rules under its purview.17
Payday Loans

It's usually very simple to get a payday loan. You can walk into the office of a payday lender, and walk out with an loan. You will not have to pay anything to the lender to get the loan, as you would in the pawnshop. Instead the lender will typically require your permission to electronically transfer money from your bank, credit union or prepaid card. Sometimes, the lender may request that you sign an
Make sure you check the amount due for repayment, which the lender will pay when you pay the loan is due.18

Payday loans can be costly. The payday lenders charge very large amounts of interest: as much as 780% as an annual percentage rate (APR) and an average loan running at nearly 400 percent.

Payday lenders claim they charge high interest rates are misleading since if you pay back the payday loan on time, you will not be charged a high rate of interest. In some instances, that might be true, but the majority of payday loans are renewed multiple times, as per the Consumer Financial Protection Bureau (CFPB), indicating most of the loans aren't paid back in time.19

There are ongoing concerns concerning the fairness of these loans. One study found the following: Black salaried workers are 3 times more likely as White workers--and Latinx workers are two times as likely--to borrow a payday loan.20 The usage for payday loans has also been associated with a doubled increase in bankruptcy rates.21
400%

Annual percentage rates (APR) that payday loans often approach--one reason they are loans are often deemed to be a scam product
Payday Loan Regulations

The oversight on payday loans has largely been handed over to states, though federal laws offer certain protections to borrowers. TILA, for example, makes payday lenders - just like other financial institutions--to reveal the costs of loans to borrowers, including fees for financing and the APR.22

Many states have usury laws which limit interest rates between 5 to 30 percent. Payday lenders are under exemptions which allow their high interest. 16 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, which either prohibits outright on payday loans that are extremely expensive or have implemented restrictions capping interest rates.23

Seven states -- Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia, and Washington--have implemented some kind of measure that include fees limits, term limitations, or the number of loans per borrower, which provide some protection for consumers.

In 2017, the CFPB made changes to strengthen payday loan user protections, requiring payday lenders to determine when they underwrite whether the borrower will be able to pay back the loan and also limiting the use of aggressive collection methods by lenders for late payments.24 However, in July, 2020 the organization removed the obligatory "ability to repay" requirement. The CFPB has set a final implementation date for their complete and updated "Payday Rule" for June 2022.25
Car Title Credit

A car title loan as with an auto loan makes use of your car'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. More important, short-term, high-interest title loans can be predatory. They typically target those who may have difficulty paying back the loan and could cause them to refinance at ballooning costs , and even lose their car.

About one in five title loan customers ends up having their vehicle seized as per the Consumer Financial Protection Bureau.26
Car Title Loan Regulations

Similar to payday loans, car title loans are regulated by states. In general, around half of states permit the use of car title loans.27 Some states group these together with payday loans and regulate them with usury laws, capping the amount that lenders are allowed to charge.

Some treat them the same way as they are pawnshops, hence they are referred to as "title the pawn." The state of Georgia, for example there is a bill proposed to make title pawns legal. They have an APR of as high as 300% in the state's pawnshop regulations - under the laws governing usury in Georgia, which cap the interest rate at 36%.28
Do regulations keep up with Technology?

The explosive growth of online and app-based lending also creates new challenges for consumers' security. Fintech's share of personal loan originations has increased by more than four years to account for approximately half of the market in September 2019, according to credit reporting firm Experian.29 The majority of profits from payday loans are driven by online companies as per the CFPB.30

Since online lenders often use a "rent-a-bank" method of operation, in which they partner with a bank to get around state-specific usury laws and other regulations, predatory lending tactics can be difficult to enforce as some consumer advocates claim. States have seen some success in cracking down on predatory online lenders' tactics in court. However, rules related to fintechs are always changing as technology and the regulatory environment develops, changes and expands.
What's the best example Of Predatory Lending?

Whenever a lender seeks to gain a profit from a borrower and tie them into unfair or unmanageable loan conditions, it may be considered preposterous lending. Signs that you're a victim include aggressive solicitations and excessive costs for borrowing and high prepayment penalties. huge balloon payments, as well as being urged to constantly flip loans.
Is Predatory Lending a Crime?

In theory the case, in theory. If you are enticed and misled into taking out an loan with higher fees than your risk-based profile would warrant or is unlikely in your ability to repay, you have potentially been the victim of a crime. There are laws in place to protect consumers from predatory lending, though plenty of lenders still be able to get away with it due to the fact that consumers aren't aware of their rights.
Can I sue to recover Predatory Lending?

If you can prove your lender broke local or federal laws such as the Truth in Lending Act (TILA) If you believe that your lender violated federal or local laws, you might be interested in the possibility of filing a lawsuit. It's not easy to go up against a wealthy financial institution. However, if you can show evidence that the lender violated regulations, you stand a reasonable chance of being paid. In the first instance to contact your state's department of consumer protection.
The Bottom Line

Despite decades of progress in protecting borrowersfrom predatory lending, it continues to be a recurring and ever-changing risk. If you're in the market for cash, you should do your homework by exploring alternative funding options, reading the fine details of the terms used in credit, and becoming aware of the rights of consumers and their protections as well as the range of rates for the kind of loan you are looking for.

The Federal Deposit Insurance Corporation (FDIC) offers suggestions on how mortgage holders are protected and the CFPB offers information regarding payday loans and how to beware of scams.3132
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Related Terms
Predatory Lending
Predatory lending imposes unfair, deceptive or unjust loan terms to a borrower. A number of states have Anti-predatory loan laws.
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What is a Payday Loan? How Does It Work, How to obtain One, and Legality
The term payday loan is a type of loan that is short-term in nature. A lender can extend credit with high interest according to your earnings.
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Usury Rate
The term"usury" refers to a rate of interest considered to be too high in comparison 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 federal law enacted in 1968 to help protect consumers in their dealings with creditors and lenders.
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What Is Usury? Definition, How It Works, Legality, and Example
Usury refers to the act of lending money at an interest rate that is considered unreasonably excessive or is greater than the rate permitted by law.
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Unlawful Lending
A wrongful loan is an illegal loan that is not in compliance with lending regulations for example, loans that have illegally high interest rates or that exceed size limits.
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