...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 loans...
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...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 borrower...
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...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...
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...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...
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...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...
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...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 the...
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...three important implications for strategy: 1. When planning for the future, the managers must account for entry. 2. Managers should expect most new ventures to fail quickly. 3. Managers should know the entry and exit conditions of their industry. Entry and Exit Decisions: Basic Concepts The entrant must sink some capital that cannot be fully recovered upon exit – it is this element of risk that makes the entry decision difficult. The entrant hopes that postentry profits exceed the sunk entry costs. There are many potential sunk costs to enter the market such as specialized capital equipment to government licenses. The potential entrant may use many different types of information about incumbents, including pricing practices, costs and capacity to assess why postentry competition may be like. Barriers to Entry Structural entry barriers exists when the incumbent has natural cost of marketing advantages, or when the incumbent benefits from favorable regulations. Strategic entry barriers result when the incumbent takes aggressive actions to deter entry. Bain’s Typology of Entry Conditions * Blockaded Entry Entry is blockaded if structural barriers are so high that the incumbent need do nothing to deter entry. For example, production may require large fixed investments relative to the size of the market (high sunk entry costs), or the entrant may sell an undifferentiated product for which it cannot raise price above marginal cost (low postentry profitability)...
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...companies (Thibodeaux, n.d.). There is a need for them but care must be taken not to take advantage of those individuals that get them. The moral concerns are the fact that predatory lenders seem to target those groups that are vulnerable and in need of housing and money to make ends meet. Let me make this perfectly clear that there is a place for subprime loans, they give the person that had some issues earlier on in their life to be able to acquire money for bills and buy a home for their family however, using immoral acts as forcing insurance that they may not want and charging very high interest rates are not call for. The moral concerns are based on utilitarian, which chooses the action that yields the greatest good (Baron, 2010). Moral good should be judged on consequences (is harm done by forcing single premium insurance and very high interest) the consequences are evaluated by human well-being (is customer better off before or after the loan) evaluation of individual preference (did the consumer have a choice) the action was aggregate and yielded good (was the customer gaining more from the loan or in the end losing more) the morally justified maximizes aggregate well-being (giving the customer a choice to take insurance and charging a reasonable interest rate). 2. CitiFinancial should stop the practice that the Associates were doing in charging the lender single premium life insurance and not fully making sure the customer knows the policy. The company has an ethical obligation...
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...Payday Loans: Helpful or Hurtful Joseph Santini Monmouth University I. Introduction There is a new trend in lower income communities in the United States called payday loans. The popularity of getting payday loans to help to pay off utilities and short term debts. These loans have become controversial and brought on speculation of the ethics of the loans and their practices. There has been legislation brought through state senates on this issue but with heavy lobbying have not be able to see the light of day. The tactics of these lobbyists have also come into question. The overall question to be answered is if payday loans are good for this country. II. What are Payday Loans? Payday loans are defined on Investopedia as a short-term loan with a small borrowing amount and a high rate of interest. The way it works is the borrower writes a post-dated check for the borrowing amount plus a fee for immediate cash. The lender keeps the check until the agreed date which is normally the borrower’s next payday. These loans are also commonly called cash advance loans or check advance loans. (Investopedia) These are attractive to lower income community because the loans offer them money right away before they earn it. The feeling of having physical cash in their hands makes them confident in themselves. This system is great if you can pay the debt off quickly but if you take just a small amount of time to pay the loan the debt can pile up. This is because these loans have...
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...Citigroup and Subprime Lending Unit 7 Case Study Pg 714 -716 1. Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Before we discuss the first question let’s get a working description of what subprime leaning is. A subprime lender is financial entity that has an inclination to lend to consumers that are not qualified for traditional loans due to their poor credit status and history of repayment difficulties. Lending to subprime candidates helped lead to secondary mortgage market issue sin 2008 (“Subprime lender,” 2011). A subprime loan is a loan with elevated fees and interest, given to someone with a lower credit score (“Subprime loan,” 2011). A major profit source for CitiFinancial and the Associates was subprime lending, this is lending to people who did not meet the customary credit requirements of banks. In the 90’s this lending had provided access to credit to many people who would not have qualified for prime loans because of their credit history. In one study the researchers found that 35 percent of the subprime borrowers were over 55 years and African Americans were twice as likely to borrow in the subprime market as in the prime market (Baron, 2010). There were a few forms of subprime lending that CitiFinancial and the Associates dealt with. One of those forms was home equity loans marketed to borrowers to consolidate their bills. Another aspect of subprime...
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...Anthropology 001 Foreclosure Essay The Islamic View of the Foreclosure Crisis The foreclosure crisis that took place in the United States in 2010 has affected a great number of people because they had lost their homes due to inappropriate foreclosures that large banks and other lenders had created. In the online article, "Homes, Not Tents", a San Francisco neighborhood named Bernal Heights had occupants come together in solidarity to protest against the banks for lending predatory loans and subprime loans with high interests rates and high risk, which lead to the foreclosure homes in this area; this was known as the Occupy Bernal movement which took place in 2011. In the article, "Enginnering an Islamic Future" by Bill Maurer, we see an Islamic Banking system that differs from the U.S. capitalistic system. From an Islamic Banking perspective, the issues that would arise with this foreclosure crisis include unethical issues, issues of deregulation of the subprime loans, and the loss of the American dream and their identity to those who lost their homes in Bernal Heights. First, the groundwork of the Islamic Banking is that it is ethical, meaning that it takes the well being of their people into consideration. In Bernal Heights, the large banks, such as Well Fargo and Wachovia, became the primary lenders of money through subprime loans. Subprime loans are loans that are given to people who do not meet the requirements for a prime loans. These banks were constantly making loan...
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...Communities Creating OPPORTUNITY NOW Agenda—October 18th, 2011, 6:30pm to 8:15pm Yellow highlight=needs revision or update Magenta highlight=program team help cue the audience to participate through applause, sign waving, cheers, standing Red means this is a pin question—commitment question we are asking to those present in the audience or our elected officials or civic leaders. Green highlight means we will reinforce this point with a power point slide or graph. 6:00 pm God's Power Band will provide transition music. They will also perform one solo song midway during the program. 6:10 pm Come Together Choirs Start: 1. Congregation/Choir name: Our Lady of Peace Catholic Song selection: "Con Fe" (5min) Number of people in choir: 12-15 2. Congregation/Choir name: St. Peter CME - Song selection: "Let the Glory of the Lord Rise Among Us" (5min) Number of people in choir: 12-15 3. Congregation/Choir name: Ander's Choir Song selection: "STILL NEED SONG TITLE"? (5min) Number of people in choir: 6 6:30pm Logistics & Recognition of I AM exhibit: (Co-Chairs) * REV. JOHNSON: Welcome, as you are finding your seats, please make sure you have signed in, have an Opportunity Now sticker! Restrooms can be found in the main lobby to the right. Make sure to turn your cell phones off. Translation headsets are available. * ORLANDO GALLARD0: Tenemos equipos de traduccion en la mesa de registracion...
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...The Banker And The Campus Uproar Student’s Name Institutional Affiliation Discussion Questions * Why would a bank consider making a mortgage loan or home equity loan to a homeowner who could not make the scheduled loan payments--wouldn’t this end up hurting the bank? Answer: Before advancing loans to the potential customers the banks consider certain things with the help of documents and tools. The financial position to the best of knowledge is assessed. But there is always a risk of default at the debtor’s end. Therefore, the bank bears the risk. For the minimization of this risk, the banks secure themselves with the help of securities and collaterals. In term of house loans, the house which is for which loan is advanced is taken as the collateral. A charge of bank is created over that asset by the bank. In case of default in payments by the debtor, the bank acquires that house and recovers the money of loan and interest by selling the house in auction. Any residual value after paying the bank liabilities is returned to the debtor. Therefore, throughout the loan tenure, bank is secure and reduces its risk with the help of collaterals. * After considering Cristina’s likely motives, incentives and behavior, do you believe she had conflicts of interest that were so serious she would knowingly recommend loans that were harmful to her clients’ interests? Explain your answer. Answer: The motives of Cristina were own wealth maximization. She was offered benefits on selling...
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...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 make...
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...Alternative Financial Services The world of finance is a growing industry, which helps provide the needs for individuals and businesses alike. Within the field of finance, there are many different sectors such as commercial banking, insurance, investment banking, and most importantly, Alternative Financial Services. The term Alternative Financial Services is described on the Federal Deposit Corporations website as follows: Alternative Financial Services (AFS) is a term often used to describe the array of financial services offered by providers that operate outside of federally insured banks and thrifts (hereafter referred to as "banks"). Check-cashing outlets, money transmitters, car title lenders, payday loan stores, pawnshops, and rent-to-own stores are all considered AFS providers. To sum things up, Alternative Financial Services are basically ways to receive money without using a more traditional way, such as getting a loan from a commercial bank. The different [I would delete “different” – seems repetitive with “incredibly diverse”] types of Alternative Financial Services are incredibly diverse, often described as a melting pot of providers. These different services include car title lenders, pawnshops, rent-to-own stores, and last but not least, payday loan stores. Alternative Financial Services have become increasingly popular since the Great Recession, mainly due to the strict credit regulations among commercial banks. Due to its deep roots in Chattanooga...
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