Definition of Predatory Lenders (Ethics and Tactics)

Predatory Lenders is a term to describe so-called banks, private lenders, or lending institutions that take part in shady lending.

These predatory lenders take advantage of “low information” borrowers (which is actually the majority of borrowers) who don’t understand the contents of a loan agreement which has hidden clauses in it. These clauses set up the borrower for failure in a myriad of ways. We try to identify all of these sneaky tactics that these predators use and who they target.

Targets of Predatory Lenders

Predatory lenders target particular demographics that usually include the elderly, minorities, low income homeowners, or “low information homeowners” (people who are uneducated or ignorant to financial matters), and those borrowers who are in an desperate financial situation such as health crisis, or layoff status.

This does not mean that white 35 year old couples in upper-end neighborhoods don’t get taken by sneaky lending practices.

All statistics on these loans confirm that close to 50% of sub prime loans given to homeowners from these demographics should have been prime APR loans.

It is important to note that these horrid lenders actually look for homeowners that could be susceptible to their sneaky methods, and target them for their aggressive sales tactics.

Predatory Lending Tactics

These sub prime loan rates are much higher than typical prime rates and fleece the unsuspecting homeowner of their money. These ethically bankrupt and soulless lenders prey upon depressed neighborhoods by offering broke homeowners mortgage refinancing, or second mortgages that carry high APRs, inflating payments (aka. balloon payments) with no rate caps, and no consumer protection whatsoever.

In a typical conventional mortgage from a reputable lender will usually carry servicing fees of .5 – 1.5 percent of the principal amount borrowed, whereas a predatory lender will run these fees up as high as 5-7% of the principal lent. Of course these exorbitant fees are hidden in the loan agreement throughout the term in an attempt to dupe the borrower.

Many times the sub prime loan agreement will not only have extremely high fees, but carry brutally high penalties for delinquency (missed payments) that often result in premature “foreclosures” whereby the lender is given legal ownership of the distressed property as per the foul refinancing agreement.

Predatory lenders will advertise very aggressively in financially distressed neighborhoods flashing them with incentives such as free vacations, and other goods or services.

Another Dirty Loan Officer Tactic - Tied Selling

There is another tactic that sneaky loan officers used to use allot in the early days of banking, lending, and borrowing – it’s called Tied-Selling. I won’t go into allot of detail on this bad banking practice, because we have an article on the definition of Tied Selling here. If you don’t have time to read the post, you just need to know that Tied Selling is illegal almost everywhere.

When a bank or loan officer tell you that you may get approved for financing (a loan) IF you transfer all your financial interests to their bank, such as your mortgage, car loan, truck loan, 401K,(RSSP in Canada), and/or insurance policy – this is called Tied Selling and if this ever happens to you, you should report the bank or loan officer to the authorities right away.