Not even members of Congress know quite how to define predatory lending, but it generally refers to consumer loans with high rates of interest and/or high fees, and/or the use of underwriting policies that enable consumers to obtain loans they have little likelihood of being able to repay.
The Mortgage Bankers Association identifies the following practices as predatory: “(1) steering borrowers to high-rate loans; (2) intentionally structuring high-cost loans with payments that the borrower cannot afford; (3) falsifying loan documents; (4) making loans to mentally incapacitated homeowners; (5) forging signatures on loan documents; (6) changing the loan terms at closing; (7) requiring credit insurance; (8) falsely identifying loans as lines of credit or open-end loans; (9) increasing interest rates when payments are late; (10) charging excessive prepayment penalties; (11) failing to report good payment histories to credit bureaus; and (12) failing to provide accurate loan balance and payoff amounts.”
These practices are widespread among some of the biggest players in the banking arena, particularly credit card issuers. For example, the FTC went after Citigroup (parent of Citibank) for deceptive lending practices, and Citigroup agreed to pay a $215 million settlement in September 2002.
Jodie Bernstein, director of FTC’s Bureau of Consumer Protection, said, “They hid essential information from consumers, misrepresented loan terms, flipped loans, and packed in optional fees to raise the costs of the loans.”
One area where predatory lending is rampant is in preapproved college student credit offers. Creditors extend lines of credit to students without requiring any type of income or credit track record, knowing full well that the students probably can’t repay, yet hoping that parents will step in and pay the balance-along with exorbitant late fees and interest.
More examples of predatory lending can be found in the fine print of cardmember agreements issued by creditors such as Discover Card. Discover has an arbitration clause in its terms of service credit card contract that bars consumers from taking part in class action lawsuits. In my opinion this is a predatory practice, and the California Supreme Court agrees: it has ruled such clauses unenforceable and unconscionable. However, other courts have found the practice acceptable, as in the case of Jenkins v. First American Cash Advance of Georgia, which upheld the class action waiver.