Predatory Practices in financial borrowing and lending contracts - Research Paper Example

? of Lecturer] Law Predatory Practices Introduction In financial borrowing and lending contracts, predatory practices are actions and omissions that target weak, ignorant, and vulnerable people such as women and men new or not knowledgeable in the field of money lending. Particularly targeted and exploited by predatory practices are vulnerable groups that do not meet the conditions for obtaining conventional loans. The less educated, racial minorities, the poor, and the elderly, represented across all demographics, are the common victims of predatory lending practices (Aleo and Svirsky 34). The following are some of the characteristics of predatory practices in money lending. First, those targeted are chiefly the low income people and the elderly in society. Second, the loans’ costs and terms often change at the closing and differ greatly from what they were at the beginning or what was agreed. Predatory practices are also often accompanied by aggressive sale approaches. There are also repeated re-financing options after a short time lapse so that lenders end up collecting addition fee or penalties, consequently denying borrowers such as home owners the equities from their security. Notably, in most of predatory lending practices, the lending is not often in line with the borrower’s capacity to repay since the lender’s center of attention is often the foreclosure. In addition, the vulnerable borrower is always unaware of the underlying truths of the truth, terms, conditions, and consequences of the deal (“Predatory Lending” 4). That is, there is always quite a lot of misunderstanding about the nature of loan and the amount to be repaid since such transactions has high but hidden fees that could be hidden from the borrower’s eyes. The borrowers are often tricked by the aggressive sales. Most affected in this regard are uninformed groups, which end up borrowing under unfair loan terms. Due to the harmful effects of such loans to society, the government has numerous remedies in form of laws and regulations. These remedies include the Equal Credit Opportunity Act (ECOA), the Real Estate Settlement Procedures Act (RESPA), the Home Ownership and Equity Protection Act (HOEPA), and the Truth in Lending Act (TILA). Others are the Fair Housing Act, and the Federal Trade Commission Act, and Special State Anti-predatory Lending Statutes, in State Unfair and Deceptive Trade Practices Acts, and common law fraud and unconscionability. This paper explores some of the predatory practices in lending, pointing out and explaining the parties’ responsibilities. Predatory Practices Predatory lending practices are not only unfair but also fraudulent and deceptive. In other terms, predatory lending entails the imposition of abusive and unfair terms on loans for borrowers. In fact, the phrase ‘predatory lending” generally refers to many specific illegal activities in the loan sector. Nonetheless, different states have various laws against each specific type of illegal loan activity. Notice should be taken about the distinction between predatory lending and predatory mortgage servicing. The latter refers to the deceptive, fraudulent, and unjust practices of lenders and servicing agents in loan or mortgage servicing processes. Unlike predatory lending, this latter activity takes place post loan origination. An example of a predatory practice is that of a lender deceptively convincing a potential borrower to accept an unfair and abusive loan term (Nasiripour 122). Second, a lender may methodically breach the terms so that the borrower finds it hard to defend against it (Aleo and Svirsky 119). These predatory practices may be done through certain types of credit cards, largely subprime, payday loans, and overdraft loans. In all these cases, the lender may set the interest rates at considerably and unreasonably high levels. Mostly targeted by predatory loan lenders are borrowers with some collateral to back their loan requests. This collateral could be a car or a house, which the lender repossesses if the borrower defaults on payment. In other situations, the lender may foreclose and obtain profit by selling the repossessed or foreclosed property (Aleo and Svirsky 132). The other predatory practice is when lenders trick borrowers to believe that their interest rates are lower than they actually are. Similarly, a borrower may be tricked that his/her ability to repay a given loan is greater than it actually is. The third scenario is when a lender or his/her agents seek to profit from repossession or foreclosure upon the collateral. The predatory and abusive lending practices can be categorized as unjustified risk-based pricing (charging higher interest rates and fees) and the more expensive single-premium credit insurance in which the purchased insurance pays off the loan if a borrower dies (Aleo and Svirsky 119). Others are lenders’ failure to present the prices of loans as negotiable, failure to clearly and accurately disclose all the terms and conditions, short-term loans with disproportionally high fees, and servicing agent and securitization abuses. Responsibilities and other Underlying Issues Responsibilities for predatory practices are some of the underlying issues that loaners, borrowers and regulatory authorities contend with every other day. In judicial practices, some believe that the court seem to favor lenders in their tendency to transfer burden of proof of compliance with the terms of a loan to the borrower (Holloway 66). Many feel that it is not the responsibility of a borrower to ensure the rates given by the lender are the current and fair rate. Rather, the lender should be fair in quoting the rate not only for ethical reasons but also for legal compliance. The responsibility of the borrower is just to ensure and have all evidence that all repayments have been effected to the last collection to avoid repossession, eviction, or foreclosure, depending on the type of loan and security (Holloway 73). Predatory lenders should be made to pay for the price for their predatory practices. In other words, lender liability should be instilled in common and statutory laws to encompass a wide range of issues and claims encountered in predatory lending and borrowing. By knowingly lending money to someone obviously not in a position to make reasonable and beneficial gains from the use of the said loan, the lender risks losing the loan without recourse (Liu 88). The lender should also be responsible for causing the borrower to take responsibilities beyond his/her capacity, In addition, the lender should also be held liable for the financial damages suffered by the borrower by acquiring such loans. For instance, by lending to a minor, an elderly, or a layman with no business knowledge or experience who intends to venture into a risky business that is likely to result in the loss of the loan and clients, the lender should be made by the court to compensate the client in whole. Conclusion That predatory lenders should be held responsible for their actions is supported by the many ill consequences of their actions. For instance, through debt securitization, predatory lending bankers have been able to pass the risks to global credit markets, thus socializing the possible damage after skimming off the privatized profits. Lenders should also be made liable for the housing bubble, which they have created chiefly by their predatory lending, which has often gone without any lender liability. Due to the lender’s role and liabilities in predatory practices, a borrower who defaults repayment of loan due to unfairness, fraudulence, and deception by a lender should be forgiven, especially the low- and moderate-income home mortgage borrowers. Works Cited Aleo, Michael, and Pablo Svirsky. “Foreclosure Fallout: The Banking Industry's Attack on Disparate Impact Race Discrimination Claims Under the Fair Housing Act and Equal Credit Opportunity Act”. Boston University Public Interest Law Journal, 2(1) 2008: 42. Print. Holloway, S. R. “Exploring the Neighborhood Contingency of Race Discrimination in Mortgage Lending in Columbus, Ohio”. Annals of the Association of American Geographers, 88(2) 1998: 252. Print. Liu, Henry. “Predatory Lending and Lender Liability”, 2013. Web. August 9, 2013 http://www.rooseveltinstitute.org/new-roosevelt/predatory-lending-and-lender-liability Nasiripour, Shahien. “Minorities More Likely to Be Denied Refinancing”. Huffington Post, 2009. Print. “Predatory Lending”. U.S. Department of Housing and Urban Development, 2013. Web. August 9, 2013 http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/pred/predlend Read More