Predatory Lending

One powerful way to help people save money and build wealth is to help them protect the money and investments they already have. Recent changes in the financial services industry has given rise to practices that are often questionable at best, and too frequently predatory in nature. These practices often directly target communities and individuals who are least able to avoid them and afford it.
Defining predatory practices is difficult because of the complexity of determining the appropriate level of fees for taking on certain financial risk levels. There must be a balance between ensuring people have adequate access to credit and protecting people from being preyed upon unfairly.
However, detecting predatory practices can be difficult. Predatory lenders are trained to win people’s trust and to convince them that their product is in the consumer’s best interest.  Three features, alone or in combination, typically describe predatory lending practices:
  1. Target marketing to households on the basis of their race, ethnicity, age, gender or other personal characteristics unrelated to creditworthiness;
  2. Unreasonable and unjustifiable loan terms; and/or
  3. Outright fraudulent behavior that maximizes the destructive financial impact on consumers of inappropriate marketing strategies or loan provision.
While predatory lending is typically associated with subprime mortgage lending, there are plenty of examples in the field of consumer lending, such as payday loans and vehicle loans.  For example, there are predatory indicators when subprime auto financing includes aggressive interest rates, balloon payments, and the practice of rolling upside-down vehicle loans into new loans with longer terms (i.e. 7 years).
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