by JD Koontz

Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower to the benefit of the lender.[1] It is a practice that convinces a borrower to accept unfavorable or unreasonable terms. Predatory lending uses deceitful, unethical, exploitative, or questionable actions regarding a loan that a borrower doesn’t need or can’t afford to repay. Such loans can lead to litigation which will often require the services of an unfair and abusive loan/predatory lending expert witness.

A lender offering any loan could be considered a predatory lender if they use deceptive and unethical practices. Residential mortgage loans and other types of consumer loans such as automobile loans may have predatory terms.

The following are often the target of predatory lending:

  • individuals with credit problems;
  • low-income individuals, and;
  • the elderly.

All too often a potential borrower will receive a mortgage loan offer that in some cases seems too good to be true. An example of an offer that seems too good to be true would be a loan with an unusually low loan payment. Predatory lenders will often emphasize the loan payment to conceal other components of the loan, such as excessive fees or unnecessary insurance products. However, given the borrower’s current financial situation, poor credit history, or fear that no other lenders would loan them the money, they take the bait.  These loan types include stated income loans (no written verification of income required), no credit check loans (a credit report is not obtained during the underwriting process), and loans with balloon payments (balloon feature not properly disclosed). Also, hefty loan origination and processing fees are often added to the loan. In the event a loan has matured or needs to be renewed, additional costs are incurred and usually rolled into the loan. If the borrower has poor credit that prevents them from seeking other lenders to pay off the loan, they generally become at the mercy of the originating lender.

Some examples of predatory lending might include, but are not limited to:

  • Deceptive advertising – A print ad promising an incredibly low rate which may turn out in the fine print to be in place for a short time before repricing.
  • Improper late fees – Late fees that are more than the applicable state banking law allow.
  • Pyramiding of late fees – Late fees accessed even though a regular payment was made in the grace period after the due date.
  • Inflated fees and costs – Examples include excessive mortgage broker fees and unnecessary insurance products.
  • Lack of proper preliminary loan disclosures – Costs and features such as a balloon not disclosed.
  • Failing to disclose a balloon payment – Balloons drive down the payment amount but can surprise the borrower when it comes due, and they are unable to refinance the loan amount.
  • Booking a consumer purpose loan as a commercial loan – The lender fails to provide the proper disclosures that inform a borrower about the costs and features of the loan.

The occurrence of one of the above items is not in and of itself conclusive of predatory lending: it could merely be an unintentional error. Incidences of predatory lending may be revealed through a thorough investigation, which would include a review of the borrower’s loan documents, loan repayment history, correspondence, and any call or note logs that reveal a pattern that incorporates the above examples.

Some other signs of predatory lending could include:

  • The borrower was encouraged to put false information on the credit or loan application.
  • The borrower was instructed to leave signature lines blank.
  • Terms or other promises were not included in the loan documents.
  • The borrower was pressured to sign immediately before the offer to loan money is withdrawn.

Predatory lending should not be confused with predatory mortgage loan servicing.  Predatory loan servicing practices can occur after the loan closing.

There are steps that borrowers should take to avoid becoming the victim of predatory lending. Borrowers should resist pressure to sign papers they have not had a chance to read thoroughly or understand. Borrowers should be aware of the amount they can realistically repay and not exceed this amount when borrowing. Borrowers should ask questions and make sure the answers make sense to them. If they are still unsure, they should seek the help of a trusted advisor, such as an accountant or an attorney.

Victims of predatory lending may seek redress through the courts.  These cases often utilize an expert witness in abusive, unfair, and deceptive loan practices.  A predatory lending expert witness can be retained to conduct an investigation and offer opinions as to whether or not the alleged conduct was predatory.

[1] Predatory Lending: Laws & Unfair Credit Practices.

Jason D. Koontz is a former banking Senior Vice President with over 20 years of lending, cash management, and bank operations experience. He has vast hands-on experience in bank lending practices, deposit accounts, and matters involving residential real estate. Mr. Koontz has extensive, coast-to-coast, experience as an expert witness (retained in over 150 matters).  He has served as an expert witness in cases involving commercial loans, residential mortgages, predatory lending, debt collection, underwriting, consumer protection, fraud, truth in lending, lender liability, loan servicing, deposit accounts, residential property valuation, and USPAP compliance. He has been engaged in multiple matters where predatory and abusive loan practices were alleged.  Mr. Koontz has extensive testifying experience at deposition and trial.

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