What is Predatory Lending?

An attorney at the Law Offices Of John Anastasio, John Anastasio has been in practice since 1981. He specializes in the areas of foreclosure defense and bankruptcy law, and received his J.D. from Seton Hall University School of Law. In this article, he shares his expertise in the area of predatory lending.

To break it down to the simplest terms, predatory lending is when a bank or mortgage company takes people with poor credit and low incomes and offers them a loan that there is no way they could logically pay back. Then, the mortgage company turns around and defaults on the borrower as soon as he misses a payment.

During the height of the market, lenders were giving people who should have been considered bad credit risks, people with a poor credit history who clearly didn’t have enough income to pay back any type of big loan, massive mortgages. On paper, it may have looked like they could pay the mortgages back, but that was only because they were offered loans with a 0% interest rate or loans where homeowners didn’t start paying back the principle right away.

The lenders and mortgage companies targeted people who didn’t have the ability to pay back loans to begin with, and then charged them ridiculous fees and costs that were not fair. Now what has happened is the lenders have gone back and foreclosed on them, and that’s just not fair. That’s just a complicated matter in its simplest terms.

If you were given a loan with an extremely high interest rate, then you could theoretically be paying back the interest only on the loan forever and not even touching the principle. The lenders knew this, which is why what they did in targeting people who they knew could not afford these loans was wrong.

Getting into the nuances and technicalities of what specifically qualifies as predatory lending is something that I could go on about forever. But at its most basic, predatory lending is when a company loans people money and gets those people in a jam—people who should not have been offered that money to begin with. So they give people an offer or a deal that they might not have even understood, and then step right up to collect when those people can’t pay it back.

What we are talking about now are people who were given adjustable rate mortgages, mostly. I have seen plenty of these mortgages where interest rates were even adjusted monthly—not annually, but monthly. So a person’s payment would fluctuate that frequently. And then you have balloon mortgages, where lenders said they would give people money but that the money could be due in full in anywhere from one to five years.

How could the lenders have ever expected a borrower to be able to pay this off? They didn’t expect that, really. The only option for a lot of homeowners was to try and refinance immediately after getting these ridiculous mortgages. It’s all part of the nonsense.

Mortgage companies told people that if they agreed with these terms then they could just refinance for a better rate. But what they didn’t realize is what the economy would end up looking like in a year, and that it might end up being impossible to refinance at that later date in time. None of us realized it, really.

So these lenders encouraged people to take out loans knowing that the only way they could pay them back was going to be to refinance. And then, by the time they went to refinance, the economy had fallen apart and that option was no longer available. Now what has happened is these people can’t refinance and they are stuck with mortgages that are nearly impossible to pay off. These mortgages have high interest rates, and oftentimes people are not even paying off the principle.

Mortgage companies took advantage of people who should not have been extended this amount of credit to begin with. And now that these people are in a jam, the mortgage companies are the first in line to foreclosure on them.

That is the essence of predatory lending. There are a lot of legal definitions in terms of high interest rates on loans and the terms, and so forth. But this is just a broad overview meant to give you an idea of what predatory lending is all about.

You can bore people with talk of high percentage rates or legal specifics, but when you start looking at people getting mortgages with 9%, 10%, or 12% interest rates, then you start looking at a mortgage that is legally classified as predatory lending. In layperson’s terms, the question is really just “Could the person have afforded this loan, really?”

The same thing applies to these adjustable rate mortgages. Borrowers may have gotten a low rate when they first signed up, but the lenders never thought to explain to people what would happen if the interest rates went up. This is just wrong, and it’s part of the reason we got involved in this massive problem to begin with.