Free Essay

Predatory Lending

In: Business and Management

Submitted By aphuppman
Words 2802
Pages 12
Predatory Lending: The Sub-Prime Mortgage and Payday Industry
Andrew Huppman
Bloomsburg University

Author Note
This paper was prepared for Markets and Institutions, Finance 323, taught by Professor Geyfman
Abstract
Predatory lenders are growing at an alarming rate; in this paper I will provide an examination of predatory lending patterns and the effects on the markets and consumers. Predatory lending is defined as the practice in which a loan is made to a borrower in the hope or expectation that the borrower will default. (Predatory, N.D.) The market for short-term loans have only been around for the past twenty years, however, has expanded at such a rate that there are now more short-term lenders in America than there are Starbucks and McDonald’s. (Center, 2011) Borrowers of this financial service lack necessary information to choose financial products, do not see themselves as having any other financial options, and are enticed by the ease of approval. Predatory lenders are not concerned with the risk. A subprime loan can be approved with as little as proof of a pay stub and requires no credit checks. Most loans are short term which tricks consumers into believing their costs will be minimal. In reality, these short-term rates force borrowers to pay annual percentage rates (APR) exponentially larger than anticipated. In today’s market there is a wide variety of predatory lending practices. The main culprits are predatory mortgage lending practices and payday loans.
Predatory Mortgage Lending
Predatory mortgage lending was first seen in the 1990’s after deregulation of the banking industry in the 1980’s and the creation of sub-prime loans. This allowed banks to sell loans with interest rates above the state’s interest limit. (Reed, 2014) Sub-prime loans were offered to borrowers with low income and poor credit as a chance to enter the real estate market. Before sub-prime mortgage lending, borrowers would often get turned down from companies and banks for mortgages because they simply did not earn enough income to afford the house in question. A sub-prime loan allowed borrowers to have the ability to buy the house of their dreams.
The danger in these loans is it tricks consumers into believing they can afford a house that is far out of their price range. The loans are made to be attractive and easy enough for anyone to be preapproved. Sub-prime mortgages are so attractive that in Atlanta, Georgia, the amount of sub-prime loans increased 500% from 1993 to 1998. (History, N.D.) The graph in the appendix shows across the nation the total monthly balance of sub-prime loans grew from $111.6 billion in 2000 to $840.8 billion at its peak in 2007 before the recession. (Fun, N.D.)
They accomplish this by offering what lenders call “affordability products.” (Reed, 2014) For example, a negative amortization loan allows a borrower to only pay the interest due on the loan each month then upon maturity, the full principal is due at once. These tactics use teaser costs that are low in the beginning but towards the end, are much higher than originally thought possible. Another tactic used by lenders is called “fee packing.” (Negative, 2011) This refers to hidden and often unnecessary fees tacked onto loans to make more profit for the lender.
A lender is able to hold onto mortgages to collect the interest payments and fees. They will continue to do this or they can drop all of their risk and bundle loans to sell to third parties. Most will decide to bundle and sell the loans because they know how risky these loans are and expect the borrowers to default upon the payments at some point. When the lender has sold your loan, the lender has no risk and simply accepts fees from the third party for collecting the borrowers payments and transferring the funds to the third party. This allows the lenders the freedom to create as many mortgages as possible while not having to consider the borrower’s credit risk. (Diaz, 2008) As I pointed out earlier in the graph in the appendix, the peak of the sub-prime mortgage industry was right before the recession in 2007. This is because when borrowers began defaulting on their payments, payments stopped being made which caused third parties to not receive their payments and the sub-prime lenders then were not receiving their fees. In order for borrowers to pay off their mortgages their houses would forced to be foreclosed and sold. Foreclosure is relevant even with prime mortgages, however, the rate at which properties bought with sub-prime mortgages were being foreclosed made the values of the properties drastically drop and made it near impossible for the houses to be sold. At the height of the recession in late 2008, the total monthly balance of foreclosures due to sub-prime mortgages hit $91.6 billion. This dwarfs the amount in 2000 when foreclosures were only at $4.7 billion. (Fun, N.D.)
How to protect yourself
In this paper so far I have gone through the history and practices of predatory mortgage lending, however, just like there are an abundance of predatory lenders there are also many lenders out there who will treat you fairly. It is still possible to qualify for a fair loan or mortgage; you just need to be a savvy shopper. In this next section I will provide you with advice for avoiding a predatory lender and finding an appropriate lender. Before beginning the process of visiting lenders, talk to people in your life like family, friends, or coworkers who have had good experiences with their lenders. A quality referral from a trustable source could save you some time when searching and prevent you from being sold on some wild spam mail or advertisement offer. Steer clear of lenders who promise your loan will be approved no matter how bad your credit score is. Next, it would be wise to collect offers from multiple lenders; you should have at least two to three offers before you begin to compare loans.
When comparing offers be sure to look at the costs, interest rates, and fees. When you talk to lenders, be sure to ask for a list of the fees that are involved with the loan. Quality lenders should be able to clearly explain to you all costs included and provide you with a good faith estimate. It is crucial to carefully read through all the paperwork; predatory lenders will charge inflated fees that are much higher than normal and will attempt to hide them in the fine text. When reading the contracts, be aware of hidden clauses that force mandatory arbitration. This clause makes it illegal for victims of predatory lending to seek legal action for fraud or misrepresentation and forces the victim to only have a choice of arbitration, which immediately gives the lender the advantage.
Do not allow yourself to be rushed into signing anything. A predatory lender will attempt to encourage you to sign so you may overlook fees or restrictions. Two red flags of predatory loans are large prepayment penalties and blank spaces in the contracts. Up to 80% of sub-prime mortgages have unusually high prepayment penalties. This charges the borrower a hefty fee for attempting to pay off their loan early. If you find any blank spaces in the documents, you should immediately refuse the loan until they are removed. This is an easy and deceitful way lenders will add fees or clauses after borrowers have signed. Another way around this is to put “N/A” in the blank spaces. This can prevent the lender from being able to fill in the blanks later and prevent you from being held liable for any adjustments made after you sign.
The last step is if you are looking for a mortgage, you should hire an independent appraiser. Reputable lenders want to set you up with a loan that you will be able to repay in the future. Predatory lenders on the other hand, make their profit from your inability to pay your debt. A sub-prime mortgage lender will often times influence appraisers to value the price of homes above what they are actually worth so they are able to sell you a larger loan. This over valuing will cause your repayment to be much larger than originally expected. An over valuation will prevent you from being able to refinance your mortgage and make it nearly impossible for a borrower to sell the house in the near future without taking a significant loss.
Payday Loans
Payday loans are a rather small amount of money ranging from $100 to $1,000 that is lent to borrowers with exceptionally high interest rates. These loans are meant to fill monetary gaps in between a borrowers pay period and are in theory to be paid back when the borrower receives their next paycheck. (Center, N.D.) 69% of first time borrowers of payday loans use it to cover a reoccurring living expense such as rent or utility bills. (Campaign, 2011) Borrowers who do take out a payday loan have 98% likelihood to have to be reoccurring customers, often in order to pay off the original loan. Payday loan companies, such as Ace Cash Express, are aware of this trend and actually train their employees to sell customers, who can’t afford their original loan payments, another payday loan. This puts the customer into a never-ending pit of debt that they are unable to escape, a tactic known as a “debt trap” (CFPB, N.D.) and is the reason why the average customer will have to take out nine payday loans every year.
Payday loans are offered by stores, these stores are considered “non-bank financial entities.” This minute difference allows payday stores to not be regulated by banking agencies and their borrowers are not protected the same as bank customers. Since banking agencies does not regulate the stores, lenders in some states are able to charge any interest rate they want. Three commonly known high interest rates are credit cards typically at 16%, installment car loans at 18%, and sub-prime mortgage loans at 10%. The average annual percentage rate on a payday loan is 443%.(Bertrand, 2011)
Consumers often feel forced into using payday loans because they feel as though they have no other option. Most users are not able to open credit cards because of their poor credit history. Lenders trick consumers into borrowing money by advertising their fees in terms of two weeks, even though lenders rarely are able to pay back the amount in two weeks. Advertisements will usually quote prices as “$15 for every $100” for a loan with an interest rate of 15%. What they don’t advertise is an interest rate of 15% on a two-week loan would end up equaling an annual percentage rate of 390%. In 2000, the Federal Reserve board made it a legal requirement, under the Truth In Lending Act, for payday lenders to disclose annual percentage rates on their loans. (Center, 2009) It is important for borrowers to understand the annual percentage rate of the loans they take out even if they do not plan on having the loan for a long time because it allows them to compare financial options. When interest of payday loans are shown next to those of credit cards, typically 18%, it becomes clear to borrowers how unacceptable these rates are.
Parties in defense of payday lenders argue that their product provides relief to their customers. Lenders feel good about their business because they can help those in between paychecks afford basic necessities such as rent and groceries. Even those who are opposed to payday lending, admit that the service is a necessary evil because it does keep individuals from having their utilities being shut off, being evicted, or going hungry. In situations like these, the borrowers do not need advice on how to improve their credit score or more efficient ways of handling their finances, they simply need cash at that moment. Lenders also testify that their prices are competitive with other options, such as banks that charge a $4 overdraft fee for every day an account is overdrawn. Also, even with the outrageous annual percentage rates and fees, payday stores are still only making average returns for a business. Average profits for a payday store only come out to 10% after accounting for maintenance costs and writing off bad loans. (Epstein, 2010)
Payday lending has been a heated topic recently in legal debates. So far, the federal government has made it illegal to charge military service members more than 36% for a loan. This now has average citizens asking where their protection is. Many states are hearing the complaints and are becoming aware of the harmful effects the payday loan industry has on their citizens. An estimated 12 million Americans every year are caught in an endless loop of paying over 400% on payday loans. (Center, N.D.) So far, 17 states and the District of Columbia now prohibit interest rates above 36%. Washington State was able to set an amazing interest rate cap of 15% and in just a year, since the law was enacted, the state has been able to save consumers more than $122 million in fees. There are still 33 states to pass legislation on payday lenders or interest caps but with the creation of Dodd-Frank that number may be dwindling soon. The Dodd-Frank Reform has given the Consumer Financial Protection Bureau the ability to go after deceptive, unfair, and abusive acts in the financial markets. So far the agency has been able to root out a large payday lender that they found guilty of all three. Ace Cash Express, the company responsible for the debt trap diagram discussed earlier, has agreed to pay $10 million to resolve concerns from the Consumer Financial Protection Bureau. The company was claimed to have participated in illegal debt collection tactics consisting of harassment and false threats. (CFPB, 2014)
No matter what laws are enacted, predatory lenders will always find a way to make a quick buck off of unsuspecting borrowers. The best offense to keep your finances safe is a solid defense. Always read the fine print in loan contracts and remember that annual percentage rates are important even for two-week loans. Also, when considering a loan, only borrow what is absolutely needed and pay it off as soon as possible. Limiting the amount of your loans and the duration will end up saving a lot of money in the future.

(Fun, N.D.)
(CFPB, N.D.)
Sources
Bertrand, M. (2011). Information Disclosure, Cognitive Biases, and Payday
Borrowing. The Journal of Finance, LXVI(6). Retrieved November 2, 2014.
Campaigns | Predatory Lending. (2012, January 1). Retrieved October 1, 2014, from http://www.illinoispeoplesaction.org/predatory-lending.html Center for Responsible Lending. (n.d.). Retrieved November 2, 2014, from http://www.responsiblelending.org/payday-lending/ Center for Responsible Lending. (2009, June 23). Retrieved November 3, 2014, from http://www.responsiblelending.org/payday-lending/research-analysis/apr-matters-on-payday-loans.html CFPB: ACE Cash Express Must Pay $10M For Pushing Borrowers Into Payday Loan Cycle Of Debt. (n.d.). Retrieved November 2, 2014, from http://consumerist.com/2014/07/10/cfpb-ace-cash-express-must-pay-10m-for-pushing-borrowers-into-payday-loan-cycle-of-debt/ CFPB alleges UDAAP trifecta in payday lending enforcement action. (2014, July 1).
Retrieved October 4, 2014, from http://www.doddfrankupdate.com/DFU/ArticlesDFU/CFPB-alleges-UDAAP-trifecta-in-payday-lending-enfo-61402.aspx
Diaz, F. (2008, March 18). Financial Institutions’ Responsibility in the Subprime
Mortgage Crisis. Retrieved October 18, 2014, from http://www.ethicalquote.com/docs/SubprimeMortgageCrisis.pdf
Diaz, F. (2008, March 18). Financial Institutions’ Responsibility in the Subprime
Mortgage Crisis. Retrieved October 18, 2014, from http://www.ethicalquote.com/docs/SubprimeMortgageCrisis.pdf
Epstein, J. (2010, November 3). Reason.tv: In Defense of Payday Lending. Retrieved
October 10, 2014, from http://reason.com/blog/2010/11/10/reasontv-in-defense-of-payday
Fun With Predatory Lending | The Big Picture. (n.d.). Retrieved October 8, 2014, from http://www.ritholtz.com/blog/2012/06/fun-with-predatory-lending/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: TheBigPicture (The Big Picture)
History of Preditory Lending. (n.d.). Retrieved October 8, 2014, from http://mortgage-home-loan-bank-fraud.com/articles/history_of_predatory_lending. Negative Amortization and Predatory Lending. (2011, January 1). Retrieved October
5, 2014, from http://www.mortgage-trader.com/mortgage-amortization/predatory-lending.html
Campaigns | Predatory Lending. (n.d.). Retrieved December 4, 2014, from http://www.illinoispeoplesaction.org/predatory-lending.html Reed, M., & Konczal, E. (2014). Point: The Greed of Big Businesses Caused the
Subprime Mortgage Crisis. Points Of View: Sub-Prime Mortgage Crisis, 2.

Similar Documents

Free Essay

Subprime Lending

...Defining Subprime Lending The problem to be investigated is the effect of subprime mortgage loans on the economy. According to Merriam Webster subprime is defined as having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers; extending or obtaining a subprime loan (Webster, 2012). Subprime mortgage loans are loans given to people with a low credit score. Subprime borrowers normally don’t qualify for prime loans or prime lending. According to Jennings, the subprime mortgage market is defined to include those borrowers with a FICO (Fair Isaac Co.) score below 570 (Jennings, 2012, p. 434). The American Dream Home ownership has always been a big part of the “American Dream.” It allows you to have your piece of “the rock.” It gives one the ability to invest in your community. This need to have a piece of the American dream not only drives the average American to capitalize, it also drives mortgage lenders to take their portion of your dream as well. Initially, this relationship tends to have win/win connotations; however, true colors eventually prevail when dealing in subprime mortgage loans. Subprime Lenders It seems subprime lenders never call themselves just that. You have to be aware of the enormously high prices; prices much higher than your prime lenders. Subprime lenders based their rates and fees on the same factors as prime lenders. For example, rates were higher the lower the credit score and......

Words: 1289 - Pages: 6

Premium Essay

The Effect of Cost Structure on Predatory Pricing

...COST ACCOUNTING FALL 2012 PROJECT The Effect of Cost Structure on Predatory Pricing To win a predatory pricing case, law enforcement officials traditionally have had to prove that a company sold products or services for less than their average variable cost. Companies with relatively high fixed costs and low variable costs are less likely to be accused of predatory pricing than companies with high variable and low fixed costs. A court case in which the U.S. Department of Justice alleged that American Airlines committed predatory pricing against smaller airlines demonstrates this point. The airline industry has relatively high fixed costs and low variable costs, at least in the short run. If one defines a “unit” as a passenger flying an already scheduled flight, the additional cost of a passenger is small—charges for credit cards, a small amount of fuel because of extra weight, a beverage or two, and not much else. If one defines a “unit” as a flight, then more costs are variable—flight crew costs, fuel, and the cost of baggage handling. Even if the unit is a flight, a large portion of the total costs are fixed. American Airlines dropped its fares when smaller airlines scheduled competing flights from the Dallas–Fort Worth airport to Kansas City, Wichita, and other cities, arguing that this was simply business competition in the marketplace. The judge in the case acknowledged that American had been a tough competitor but ruled that American had priced its tickets above their......

Words: 687 - Pages: 3

Premium Essay

Retail Lending Schemes of Pnb

...Punjab National Bank Zonal Training Centre Ludhiana RETAIL LENDING SCHEMES Updated up to 31.05.2013 INDEX 1. HOUSING LOAN 2. CAR LOAN 3. PNB SARTHI (Two Wheeler loan) 4. EDUCATION LOAN 5. MORTGAGE LOAN AGAINST IP 6. PERSONAL LOANS 7. LOAN FOR PENSIONERS 8. ADVANCE AGAINST GOLD JEWELLERY/ORNAMENT 9. PNB BAGHBAN SCHEME 10. FUTURE LEASE RENTALS 11. SCHEME FOR FINANCING PROFESSIONALLY QUALIFIED MEDICAL PRACTITIONERS 12. PNB GRAMIN CHIKITSAK 13. SCHEME FOR FINANCING TRADERS (MODIFIED SCHEME) 14. SUPER TRADE 15. ADVANCES AGAINST FUTURE CARD RECEIVABLES 16. GENERAL GUIDELINES OF RETAIL ADVANCES 17. PNB SCORE – Rating model for Retail Loans - --------compiled by Kanwal Kumar, Senior Faculty, Zonal Training Centre, Ludhiana HOUSING LOAN Eligibility Purpose & Extent Individual & Joint Owners HUF is not considered as Joint owner. Purchase of Plot Rs.50 lac. However, RM & above may consider Loan up-to 100 lac in Metro and State Capital. Further, it be ensured that the loan amount for purchase of Land/Plot under any circumstance is not more than 60% of the eligible loan amount as per the repayment capacity. Construction of House Need based Purchase of Built House Need based Repair & Renovation Rs. 20 lac Cost of furnishing Max. 10% of the loan for repair up-to maximum of Rs. 2.00 lac Pari pasu Charge CH powers up to 20 lac to Govt. Employees Loan limit up to 30 lac Risk Weight is 50% Loan limit above 30 lac Risk Weight is 75% LTV Ratio more than 75% Risk Weight is 100%......

Words: 14606 - Pages: 59

Free Essay

Subprime Lending

...Subprime Lending Discuss in detail the event, the people involved, and its background and impact of America. Before 1930, features of Housing loans presented significant challenges. To obtain a home loan a down payment of half the value the house was required. Further issues with these loans were large balloon payments and short maturities. The pricing for mortgage loans varied widely due to no nationwide housing market. The main funding for these loans was provided by life insurers, thrifts, and commercial banks. By 1932, a housing crisis was wreaking havoc on home loans. The estimated defaulted loans were rising to twenty –five percent. In response to this crisis, the FHL Bank System was designed to provide relief to lending institutions and homeowners. In 1933, President Roosevelt birthed two Acts regarding the housing market. The first was the Home Owners Loan Act. This act established the HOLC, which was designed to slow down the quickly rising foreclosure rate. Under this act, long-term self-amortizing fixed rate mortgages became the new norm. The second act in the New Deal was the National Housing Act. The FHA was created in this act. This protective measurement was used to help the lenders maintain foreclosed homes by adding automatic insurance payments to active loans. The FHA also expanded the use of a fixed rate long-term home loan. In 1938, the American government formed Fanny Mae to provide a secondary market for home mortgages. This secondary market gave...

Words: 1810 - Pages: 8

Premium Essay

Citigroup and Subprime Lending

...Unit VII Case Study Columbia Southern University Citigroup and Subprime Lending 1. Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Sub-prime lending is a process of giving loans to those who otherwise would not qualify for conditional loan because of poor credit history. There is high risk involved in such loans and therefore, it is offered at high interest rates. It is risky both for the lender and the borrower. There's certainly a private responsibility with regards to a person taking on commitments that will require repaying money borrowed from a person or from an institution. A significant requirement for the borrowers’ part to understand what he or she is getting into to. However, sub-prime lending does have moral concerns. The borrowers are not qualified for regular loans, but they may need it. They are ready to take loans at higher interest rate because they need it and sub-prime lending seems to be a better option to them. The mortgage crisis in the United States was viewed as having good intended utilitarian motives by the corporate world and public policy makers to provide mortgage loans to at risk customers. Utilitarianism is defined by Velasquez (2006) as that initiative that place goodwill the behalf as many people possible. It does well to both lender and the borrower and......

Words: 1032 - Pages: 5

Premium Essay

Predatory Lending Practices

...Predatory Lending Practices The American dream is often coupled with the idea that success is achieved through home ownership. However, with changing times and changing economic status, it has been a dream far from tangible to many American citizens. With many people striving for a taste of prosperity, it has become apparent what some people are willing to do to achieve such a dream. It is also apparent that some people are willing to facilitate such achievements even through dishonest means. Predatory lending practices have appeared, enticing borrowers with loans to fund home purchases with the attachment of detrimental consequences. While convenient in the short run, borrowers are often left with no equity or prosperity due to predatory lending practices such as equity stripping, loan flipping, packing, and balloon payments. Some lenders have no expectations in their borrowers to repay a loan approved to them in a form of predatory lending called “equity stripping.” In this form of predatory lending, foreclosure on a home is inevitable, yet financing companies will approve these loans. Equity stripping also occurs when lenders charge excessive fees that include money collected in cash up-front, amounts financed into the loan at closing, and fees paid later. (Stein, 2001) The components that facilitate this practice of predatory lending include: 1) financed credit insurance, 2) exorbitant fees, and 3) pre-payment penalties on subprime loans. (Stein, 2001) If the......

Words: 1383 - Pages: 6

Free Essay

Predatory Lending

...Predatory lending is directed at borrowers in the subprime sector, who do not qualify for conventional loans. These loans have high interest rates and fees due to the higher risk to the lender. Predatory lenders target the financially vulnerable, specifically the elderly, the poor or racial minorities. Many of their targets could have qualified for a regular prime loan at much lower interest rates. This difference in interest rates would mean thousands of dollars saved by the homeowner. Predatory lending practices can leave victims homeless while the lenders make profits. (Pridgen, 2005) The U.S. Government Accountability Office (GAO) defines predatory lending as transactions that contain terms and conditions that ultimately harm borrowers. (Bond, Musto, & Yilmaz, 2009) Determining who benefits in the financial transaction helps to determine whether or not a transaction can be labeled as predatory. When a borrower does not benefit, the mortgage is viewed as a predatory lending practice. Predatory lenders often use aggressive sales tactics to compel borrowers into refinancing when the financing terms are not in the borrower’s interest. They pack excessive fees into the transactions, such as insurances, prepayment penalties, and yield spread premiums. (Pridgen, 2005) A refinanced mortgage can be filled with excessive, unnecessary fees. A predatory lender typically adds them into the loan amount to disguise them. The most common extra charge is insurance, including mortgage...

Words: 1224 - Pages: 5

Premium Essay

Predatory Lending

...“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 when lenders induce......

Words: 1103 - Pages: 5

Free Essay

Predatory Lending Practices

...Predatory Lending Practices Predatory lending was once a major problem in the United States. This was one of the reasons for the credit crisis in 2008. Unfortunately there were a few companies that were involved in these illegal practices which will be discussed in further detail later. There are different tactics used in predatory lending and several laws were developed to help prevent future predatory lending issues. What is predatory lending? Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through coercive, deceptive, exploitative, or unscrupulous actions for a loan that a borrower can’t afford, doesn’t need, or doesn’t want. Predatory lending benefits the lender, not the borrower by ignoring or hindering the borrower’s ability to repay the debt. These lending tactics attempt to take advantage of a borrower’s lack of understanding about loans, terms, or finances in general (Krulick, 2014). Who can be targeted in these illegal practices? Predatory lenders typically target minorities, poor, elderly, and less educated people. People who need immediate cash are also targeted. For example people that need to pay medical bills, need to make a home repair, or someone that needs help making a car payment. People with credit issues or people who recently lost their jobs can be targets as well. The credit issues often disqualify borrowers from conventional......

Words: 3339 - Pages: 14

Free Essay

Payday Lending: Perfunctory or Predatory?

...Journal of Business Case Studies – November/December 2009 Volume 5, Number 6 Payday Lending: Perfunctory Or Predatory? Annie Schafter, University of Minnesota, USA Shee Wong, University of Minnesota, USA Stephen B. Castleberry, University of Minnesota, USA ABSTRACT Payday lenders are becoming more common across America as they meet the unique needs of consumers unable or unwilling to use the services of more traditional lenders. But many have claimed that certain of their practices are unethical. Do payday lenders take advantage of those less fortunate in our society? Are their fees exorbitant, or are the fees merely a fair return given the risk the payday lenders are incurring? This case looks at these and other issues surrounding the payday lending industry. Keywords: payday lending, finance, interest rate, ethics INTRODUCTION I n the last 15 years, cities around America have seen a dramatic rise in the number of payday lending stores open for business. Today there are over 22,000 payday lenders operating in the 39 states where payday lending is legal. To put that number in perspective, there are 13,700 McDonald‟s and 7,300 Burger Kings in the U.S.—simply put, there are more payday lenders than McDonald‟s and Burger Kings combined (Weston). But why? As traditional financial institutions tighten up loan requirements and drop smaller, less profitable loans from their books, payday lenders feel they are filling a substantial need in the communities they serve. They......

Words: 5139 - Pages: 21

Premium Essay

Predatory Practices

...Predatory Practices in the Business World Carisue M. Clancy Southern New Hampshire University May 25, 2014 I like to believe that people are basically good, but there are those that like to prey on the less fortunate or the naïve. Predatory people or organizations are eager to gain something out of someone else’s weakness or suffering. In the business world, these “predators” can take the form of those that the general public is supposed to be able to trust. Banks, finance companies, contractors, and any others that enter into contracts with consumers are generally to blame for this type of behavior. This behavior can come in many different forms. A few examples are: predatory lending, subprime mortgages, and unsolicited credit cards. Because these practices tend to harm consumers, more legislation has been put into place in recent years. Unsolicited credit cards are an example of a predatory practice. In this case, credit card companies would send out credit cards to consumers who had not applied for them. This led to an increase in identity theft. It is now illegal to send unsolicited credit cards through the mail. Predatory lending is probably the most common type of predatory business practice against consumers. According to Wikipedia, “an audit report on predatory lending from the office of inspector general of the FDIC broadly defines predatory lending as imposing unfair and abusive loan terms......

Words: 1124 - Pages: 5

Premium Essay

Agricultural Lending

...risk and weather risk. Banks lending to agricultural clients know that agricultural and rural revenues easily drop below break-even levels due to extreme weather events and price falls, which result in defaults and higher loan loss provisions, thereby making lending to agribusiness unprofitable. The second major constraint in agricultural lending, high transaction and supervisory costs, is due to the particular risk, nature, and characteristics of the rural sector. In all financial markets, there is a trade-of between minimizing loan default and supervisory costs, but the nature of agricultural lending, especially through microfinance institutions, makes transaction costs and supervision costs disproportionately high relative to its urban counterpart. The small size of seasonal agricultural credit results in high due diligence costs per loan. The large geographical spread of customers, coupled with poor transportation and communication infrastructure, increase supervisory costs for financial institutions and compliance costs for customers. In addition, banks in rural areas find it difficult to attract qualified and trained loan officers. High levels of risk and transaction and supervisory costs contribute to the absence of functioning rural financial markets and institutions in many countries. This lack of adequate financial services can also be partially attributed to the rapid disengagement of government as the primary source of agricultural lending in many post......

Words: 6593 - Pages: 27

Premium Essay

Is the Housing Market Crash of 2008 a Prime Example of Predatory Lending?

...mortgage underwriters, investment banks, rating agencies, investors, low mortgage interest rates, low short-term interest rates, and relaxed standards for mortgage loans. Predatory lending was just one of many factors along this transaction chain. Predatory lending consists of loaning money to consumers in the hope and expectation that they will default and the lender will be able to take the collateral (homes.) We will discuss if the government failed to protect its citizens thru public policy and what role (if any) investments in mortgage backed securities played in the market crash of 2008 as well. While economist continue to debate who or what is at fault. The market crash clearly devastated the U.S. economy. We will also discuss how such devastation is considered to be one of the worst market failures in history. The events leading up to the crash are easier to identify after a crash, the signs were in the forefront and ignored by most people, firms, banks, and the government. Together we will embark on a journey to discover what role predatory lending, mortgage backed securities, and relaxed regulations played in the housing market crash of 2008 and to clarify if one or more of these events or a combination of them all can be considered Market Failure. Keywords: Market Failure, Predatory Lending; Mortgage Backed Securities; Housing Crisis; Public Policy ABSTRACT Six years after the housing market crashed in 2008 the primary cause of the crash......

Words: 4574 - Pages: 19

Free Essay

The Lending Agreement

...Studies in Business and Economics THE LENDING ARRANGEMENTS OF THE IMF IN EUROPEAN UNION IN TIMES OF CRISIS – CHARACTERISTICS AND EVOLUTIONS ORĂȘTEAN Ramona Lucian Blaga University of Sibiu, Romania Abstract: This paper focuses on the lending arrangements of the IMF in EU countries during crisis period. First, we reviewed the literature regarding IMF-supported programs in times of crisis. On the other hand, we provided a description of the IMF arrangements in EU countries in 2008-2013. We found that these programs differ in type, duration, amount and conditionality, but not significantly in their key objectives (achieving sustainable public finances and ensuring financial sector stability). Key words: IMF lending arrangements, EU countries, crisis 1. IMF – supported programs in times of crisis – a literature review Some authors examine the role of the IMF as crisis manager and crisis lender (Boughton, 2000; Chandavarkar, 2002), the role played by the IMF as a creditor and as a monitor of economic reforms (Marchesi and Sabani, 2007) or the efficacy of IMF's finance in preventing financial crises (Brandes and Schule, 2008). Many articles have been written on the role of the IMF in financing and designing economic reform programs for developing countries and in dealing with crisis periods, thus: - the IMF's role in dealing with the Asian crisis in Thailand, Indonesia and South Korea in 1997-1998 (Jonas, 1999; Ito, 2007); - the......

Words: 2902 - Pages: 12

Premium Essay

Lending Decisions - Credit Paper

...AFF3841 ASSIGNMENT – LENDING DECISIONS EXECUTIVE SUMMARY: This analysis seeks to look at the organisation of Wridgways and determine whether Monash Bank should take over their debts, and incorporate them into the loan portfolio. Wridgways is a removalist company that deals in the logistics and transport industry. They are the only listed removalist company in the world and have had vast growth since their breakaway from their previous parent company TNT. The company itself has been in existence since the 1892, and its management team appears dedicated and committed to succeed. Wridgways has recently attracted large companies for business relationships, such as Rio Tinto and Coles Myer. This will add to their corporate prestige and experience. There are some issues outstanding that must be addressed with management before the loan takes place, such as the use of the funds and the reasons for undertaking expansion at a point where a more guarded policy should perhaps be taken in the light of global economic events. The company also has some publicity issues that could be rectified through a simple marketing plan – thus gaining many small, but important clients. The analysis is broken down into 4 major components: 1. Introduction (pages 2-4) 2. Broad Business Analysis (pages 5-10) 3. Credit Risk Profile (pages 11-15) 4. Financial Statement Analysis and Comparison (pages 16-19) Overall, Wridgways appears to be a very promising company with......

Words: 5531 - Pages: 23