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Predatory lending: What it is and what to watch out for

Predatory lending occurs when a bank or financial institution takes advantage of you by charging higher than normal interest rates, unreasonable fees, and certain other charges.

Predatory lending can occur on many different kinds of loans and financial products, including mortgage, car, payday, tax refund, car title and home equity loans; credit cards; bank accounts; and debit cards.

Payday lending alone, just one aspect of predatory lending, costs Americans $9 billion in fees each year, while markups on interest rates for car loans add $26 billion in interest costs every year for families.

Signs of predatory lending

There are many signs to beware of that can be helpful in avoiding a predatory lending situation before you take out a loan. By reading the fine print in any loan and asking questions before finalizing the loan, you can protect yourself and your family and save money.

The signs of predatory lending include:

  • Pre-payment penalties: Loans that charge high fees for paying the loan off early.

  • Excessive fees: Fees that can be financed into a loan that exceed 5 percent or more.

  • Higher-than-average interest rates: Rates that significantly exceed competitive interest rates where brokers, finance companies and banks pocket the difference between the competitive rate and the higher rate.

  • Exploding adjustable interest rates: An interest rate on an adjustable rate loan that spikes higher.

  • Repeated refinancing: Encouraging consumers to repeatedly refinance a home with high fees and points for each refinance that drain a home of equity.

  • Hidden balloon payments: A large payment at the end of a loan period that may run into tens of thousands of dollars and that isn't revealed up front.

  • Bait-and-switch loans: A loan with a high interest rate and fee that is sold in place of a loan with lower rates and fees.

  • High fees on tax refund loans: Interest rates on these short-term loans can exceed 500 percent and come loaded with administrative fees.

SAN FRANCISCO, CA - MAY 03:  Protestors hold signs during a demonstration outside of the Wells Fargo shareholders meeting on May 3, 2011 in San Francisco, California. Over 100 housing activists staged a demonstration outside of the Wells Fargo shareholders meeting accusing the banking giant of predatory lending and foreclosing on homes by using fradulent paperwork.  (Photo by Justin Sullivan/Getty Images)
Protestors hold signs during a demonstration outside of the Wells Fargo shareholders meeting in 2011 in San Francisco, California. Over 100 housing activists staged a demonstration outside of the Wells Fargo shareholders meeting accusing the banking giant of predatory lending and foreclosing on homes by using fradulent paperwork. (Photo: Justin Sullivan/Getty Images)

Laws against predatory lending

There are numerous state and federal laws designed to curb predatory lending. Fifteen states have banned payday loans with high interest rates, while others limit the number of payday loans that can be taken out by a consumer in a year.

Congress passed the Military Lending Act in 2007, which is designed to protect military families against predatory lending. It caps annual interest rates for most consumer loans to military borrowers at 36 percent, outlaws car title loans to military personnel, and requires disclosures of interest rates and payment obligations before a loan is made.

The federal government also put in place new rules designed to protect homebuyers from predatory lending in mortgage lending. Lenders must make a mortgage loan based on the buyer's ability to repay as determined by their credit history, current income, and other factors. In addition, mortgage originators must be licensed, qualified and registered, and appraisers must be independent.

Help for predatory lending victims

If you believe you've been a victim of predatory lending, the federal Department of Housing and Urban Development has assembled an online resource that can help. Mortgage News Daily also offers a comprehensive list of resources for victims, which can be found online here.

The Consumer Federation of America provides an online booklet on how to resolve a variety of consumer complaints. If you need help from a lawyer but can't afford to pay for one, you can locate legal help through www.lawhelp.org or www.probono.net.

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This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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