“Predatory lending” has no settled definition, and it sometimes just used very loosely to, in effect, mean lending to subprime borrowers. In some cases, entire industries have been labeled “predatory”: car title loans, payday loans. Certainly there are few lenders who would agree to having the label applied to them. This article focuses on the use of term as applied to mortgage loans.

Rather than define “predatory”, regulators typically list a number of practices that can be considered predatory. But as the Department of Housing an Human Development points out, a simple list has its limitations:
[A] list does not consider the context in which the alleged abuse has occurred. Some practices may be considered abusive in the context of high-cost subprime loans; other practices may be deemed unacceptable in all contexts; and others – while not necessarily abusive for all high cost borrowers – are abusive in the borrower’s situation or because the borrower was misled or deceived

 

With that caveat, the following practices are commonly associated with the term “predatory lending”:

• Very high fees that, as HUD puts it “far exceed[] what would be expected or justified based on economic grounds.
• Loan Flipping-repeatedly refinancing to strip the borrower’s equity and receive new points and fees
• “Packing” fees and single premium credit insurance premiums into the amount financed, rather than having them paid up-front, so that their true cost is harder for the customer to see.
• Lending without regard to the borrower’s ability to repay

Home Ownership and Equity Protection Act of 1994 (HOEPA)

In 1994, Congress enacted the Home Ownership and Equity Protection Act of 1994 (HOEPA) to address the predatory lending practices of certain sub-prime lenders. HOEPA amends the Truth-in-Lending Act, adding a new section 129, 15 U.S.C. § 1639. The pertinent regulations are found in §§ 226.31 and 226.32 of Regulation Z. 12 C.F.R. §§ 226.31 and 226.32.

HOEPA requires special disclosures for any “High Cost Loan” – a loan that exceeds certain thresholds for APR and fees. A High Cost Loan is one for which either:

• the APR exceeds the applicable Treasury index by 8 pts (first mortgages) or 10 pts (second mortgages), or

• the total points and fees paid by the consumer at or prior to closing exceed 8%

A special disclosure for High Cost Loans must be delivered to the borrower at least three business days prior to the closing. 15 U.S.C. § 1639(b); 12 C.F.R. 226.31(c).

Many states have passed predatory lending laws that are more stringent than HOEPA. Some, for example, reduce the disclosure threshholds, some regulate loan “flipping”, some regulate prepayment penalties or require that the loan have a “tangible net benefit” for the borrower.