Predatory lending - Essay Example

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Predatory lending is the practice whereby a person in need of a loan is convinced by a lender to accept the terms of the loan based on misinformation (Luhby 2009). To achieve this, the lenders conceal important details which could be helpful to the person applying for the loan…
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Topic: Predatory Lending Lecturer: Presentation: Introduction Predatory lending is the practice whereby a person in need of a loan is convinced by a lender to accept the terms of the loan based on misinformation (Luhby 2009). To achieve this, the lenders conceal important details which could be helpful to the person applying for the loan so as to make them believe that they are at an advantage. As a result, the borrower is forced to pay loans with larger interest rates than is fair. This essay is an evaluation of predatory lending and its influence on the recent mortgage debt crisis.
How Predatory Lending Relate to the Recent Mortgage Debt Crisis
These lenders mostly target those borrowers with little knowledge on money matters especially those owning expensive assets that can be repossessed in case the borrower fails to fulfill the terms of the loan (Frank 2009). For example, a borrower may be required to read and sign a lot of documents which would bind him to the loan agreement. As a result of lack of skills and trusting the lender, he may assume that all the details in the documents are correct and thus sign them without interpreting the whole information. As such, the unscrupulous lender may take advantage of the situation to add more terms on the signed documents so as to gain more from the borrower. If this happens, the borrower may not have the ability to challenge the discrepancies. If it occurs that the borrower cannot pay the loan, his assets may be seized by the lenders whose main interest would be to sell them at a profit.
The recent mortgage debt crises can be attributed to predatory lending. People with high hopes of owning homes found themselves in a situation which was caused by malpractices of brokers whose intension was to benefit from the deals (Frank 2009). To achieve their objectives, the brokers issued loans with high interest rates to unsuspecting borrowers who later became unable to pay the loans. In order to qualify for a loan, a person is supposed to have the ability to repay either in cash or in kind. These brokers managed to benefit from the mortgage lending due to the government’s failure to regulate their activities (Frank 2009). If proper regulation was done, the unfair deals made to the borrowers would have been noted thus avoiding the consequences that arose later which had a negative effect on the economy.
The mortgage crises can also be attributed to the fact that mortgage lenders failed to acknowledge this policy and went ahead to give loans to people who were not qualified (Luhby 2009). This resulted to bad debts which could only be solved by reacquiring the houses leaving the borrowers without any other option but to struggle for their rights in courts (Luhby 2009). This is one of the characteristics of predatory lenders, who encourage borrowers who do not have the ability to pay back so that they can benefit from the sale of their assets, in this case houses. An Illinois Attorney General, Lisa Madigan, attributed the current economic crises to predatory lending which according to her involved, “deceptively putting borrowers into loans they didnt understand, couldnt afford and couldnt get out of (Luhby 2009).” In addition, the government’s policy of availing homes to citizens regardless of their economic status and the binding principles also encouraged rogue mortgage lenders who took advantage of the policy to enrich themselves in the light of providing houses.
Predatory lending is the practice that involves issuing of loans to borrowers without providing full details of the terms or encouraging borrowers to apply for the loans with the intension of enriching themselves using illegal methods. Most of the targeted borrowers are those who are semiliterate since it is difficult for them to negotiate the terms due to lack of knowledge. This resulted to a debt crisis in the mortgaging sector that can be attributed to the government’s lack of regulation on mortgage brokers.
1. Frank .B. Predatory Lender, October 15, 2009.01November, 2009
2. Luhby T. Predatory-lending lawsuits on the rise, October 9, 2009.01 November, 2009
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