The economic crisis of 2008 left the housing market in a critical state. According to National Association of Realtors, houses prices fell dramatically, going from a house median price of $ 222.000 in 2006 to $ 181,000 in November 2008 (Richardson, 2009). Many real state companies, banks, financial institutions and families found themselves in serious economic trouble, where many properties became “under water” with no clear end in sight. At the epicenter of this economic earthquake, predatory lending was point out as one of the main reasons. According to Twomey and Jennings (2011), predatory lending happens when lenders take advantage of less sophisticated or desperate costumers using their superior bargaining power and sign contracts with terms that go well beyond compensating them for their risk. This paper describes predatory lending practices, examples and analyses of debtor responsibilities.
Predatory lending practices happen in many forms and affect anyone who accepts the lender conditions in the loan contract. However, as described by Webster dictionary, predatory lending is “an unscrupulous lending practice that targets low-income or otherwise vulnerable people. Predatory lending involves making high-cost loans to borrowers based on their level of assets and not on their ability to repay the debt.” Therefore, predatory lending hurt the most vulnerable parts of population. It affects families that may already be having financial trouble, making it worse and causing greater distress.
One of these practices is the Loan Flipping. It happens when a lender calls and offers an refinancing option that includes extra cash, as it a house loan was a ATM machine, where you can take money and spend somewhere else. A few months after had accepted the first offer, homeowner would receive another call and be offered a bigger loan. In this process, interest rates would be increased and if the loan had a prepayment penalty there would be penalty charges each time one takes out a new loan. This process could continue to the point where interest and debt amount were so high that homeowner would not afford to make loan payments and lose its house.
Another way of predatory lending is when lenders charges excessive fees or adding fees that have no justification. Lenders includes these fees in their loan contracts using vague terms that disguise payments that will be charged later. As an example, one can cites the Balloon Payment. It happens when a home owner fell behind paying his/her mortgage and is heading toward foreclosure when another lender calls and offers a refinancing option, lowering payments and avoiding foreclosure. This new loan payment may be lower, but homeowner will be paying only the interest rates and he/she will have to pay entire amount at the end, as one big sum called a balloon payment.
If a lender calls a homeowner and offers a loan and knows that he/she will not be able to pay and encourages home owner to mislead and inflate income in order to get loan approval, it is called Equity Stripping. As soon as loan fell behind, lender will foreclose and strip the equity built in many years. As an example, one can cite a case involving real-estate agent Hendry C Grant and two of his companies Holding and Cutler Mortgage Co. Grant and his companies were placed under restraining order by Attorney General Mike Hatch, who accused him of fraud in at least 300 cases of equity stripping. Grant targeted homeowners with substantial equity in their homes who had fallen behind on their loans and faced foreclosures. According to Hatch, homeowner couldn’t afford mortgage payments that were set up to lead to eviction and leave Grant with the value of the the home’s equity (Brandt 2003).
A form of lending that could become a predatory lending is “Home Improvement Loan.” This involves a Contractor, a Homeowner and Lender. A Contractor calls or visit homeowner and offer renovation services, homeowner explains that he/she can’t