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Predatory Lending

In: Business and Management

Submitted By mjrensch
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Home ownership has been the cornerstone to the middle class for generations. With the aspiration to own their own home, the American people have also been the target of unscrupulous lenders and their practices. The primary goal of these practices is to maximize profits for the lenders while burdening the borrowers with interest rates and loan terms that are virtually unsustainable. According to Freddie Mac, “There is no simple definition of predatory lending. Predatory practices are not defined in federal law, and states differ in the way they define predatory lending practices.” However, there are some key indicators that are considered predatory. Some of these indicators include excessive interest rates, equity stripping, and credit insurance products that are financed upfront. One of the most commonly used predatory loan practices is loan flipping. Loan flipping occurs when a loan is frequently refinanced with new loan fees, continually adding to the loan amount despite a borrower’s payments on the loan. (Eggert, 2002) Financing companies use this technique to charge pre-payment penalties, along with new origination fees. It is advantageous to financing companies to use this technique when a borrower becomes delinquent on a home loan because they offer borrowers the opportunity to bring their loan current. (Eggert, 2002) However, they not only add a significant amount to the original loan amount, but also to the borrower’s currently monthly payment. This form of predatory lending may coincide with equity stripping, as every time a loan is “flipped” it continually strips borrowers of their equity, making it more difficult for them to pay their loan off, and essentially leading to inevitable foreclosure. With equity stripping and loan flipping, the practice of “packing” is coincidentally complementary in terms of predatory lending. Packing is…...

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