Illegal predatory lending involves imposing abusive loan terms on borrowers, taking advantage of a borrower's lack of understanding and outright deception. These unscrupulous actions that lenders use to entice a borrower into to taking a mortgage that carries high fees, interest rate and prevents them from equity.
Predatory lending is a crime when a lender extracts the maximum value without regard for the borrower's ability to repay the loan.
Illegal predatory lending schemes often involve the following:
- Target marketing based on race, ethnicity, age or gender
- Unreasonable loan terms that maximize the lender's earning capacity
Examples of abusive loan terms would be those that include unnecessary balloon payments, large prepayment penalties, deceptive promises about low interest rates, loan approvals that ignore the borrower's ability to repay the loan. A lender profits in these instances because the lender is able to collect excessive fees and is usually able to repossess or foreclose the property.
Laws that Prohibit Predatory Lending
There are several federal laws that defend homeowners against predatory lending, and these include the Truth in Lending Act, The Home Ownership and Equity Protection Act and The Real Estate Settlement Procedures Act. Additionally, California has several laws of its own that protect homeowners against predatory lending.
The California Financial Code §4970 prohibits the following:
- Failing to consider the financial ability of a borrow to repay the loan
- Financing specified types of credit insurance into a consumer loan transaction
- Recommending or encouraging a consumer to default on an existing consumer loan in order to solicit or make a covered loan that refinances the consumer loan
- Making a covered loan without providing the consumer specified disclosure
In order for a borrower to be protected by predatory lending laws, the loan must be a conforming loan which does not exceed a set amount. In 2008, the set amount was $417,000. If the loan is for more than this amount, a borrower can still receive protection under the Truth in Lending Act.
In California, all you have to show to prove that predatory lending took place is that your lender had reason to believe that you could not afford your loan amount. You can use a violation of predatory lending law as grounds to rescind your loan or as a formidable defense against foreclosure.
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