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Predatory Lending Laws The Laws of Predatory Lending: What You Must Be aware of

These rules help to safeguard borrowers from fraud

By Tom Barkley

Updated August 25 2022

Read by Katie Miller

When you’re in need of credit, it can be easy to fall prey to scams involving lending that are predatory. Whether demanding an exorbitant interest rate on a payday loan, taking your car title as collateral or offering a higher loan than you’re able to afford There are a myriad of ways that unscrupulous lenders attempt to profit from customers.

Predatory lenders often target the most vulnerable, like someone who recently lost a job, has poor credit, or doesn’t know what to watch for. Black as well as Latinx communities, specifically have been a victim to predatory lending practices.1

Fortunately, there are laws designed to protect the borrower from loan sharks as well as other lenders who are predatory. The laws limit interest rates, prohibit discriminatory practices, and ban certain types of lending. While Congress has passed some federal credit laws, numerous states have taken the initiative to rein in predatory lending. With rules and credit products constantly evolving, it’s essential to familiarize yourself with the latest regulations.

Important Takeaways

Predatory lenders can employ aggressive tactics as well as unfair loan conditions–like high interest rates and fees–to take advantage of unsuspecting borrowers.

These lenders tend to go after the most vulnerable and least educated borrowers usually targeting Black and Latinx communities.

A patchwork of laws has been put in place to protect the borrowers from setting limitations on interest rates, to banning discrimination as well as other unethical practices.

Loan Shark Definition

Predatory loans and how they’re Regulated

Efforts to combat predatory lending have been going since the time the people who have borrowed money, starting hundreds of years ago when various religions condemned the practice of usury or charging unreasonably high-interest rates.

In the U.S., a patchwork of laws at both the state and federal levels have been designed to protect the those who borrow, yet they often have to adapt to new predatory practices. Here are some instances of predatory loans and the specific laws and regulations relevant to each type of financing. Knowing the specifics of these loans can help you spot the one you’re offered you and prevent you from being taken in. It’s often difficult to recognize.

Subprime Mortgages and Housing Discrimination

Subprime mortgages, provided to those who have subprime or weak credit ratings, aren’t always considered predatory.2 The greater interest rate is viewed as a compensation to subprime lenders who take on more risk by lending to borrowers with poor credit score.

But some lenders have been aggressively promoting subprime loans for homeowners who cannot afford them–or sometimes qualify for more favorable loan terms but don’t realize it. These shady tactics were seen on large scale during the lead-up into the mortgage subprime crisis in 2008, which led to the Great Recession.3

The fallout from the financial crisis struck Black and Latinx homeowners the hardest.4 A lot of these neighborhoods that had for decades had to contend with racial discrimination when it came to getting mortgage loans which is called redlining, were the targets of what is known as “reverse redlining” by predatory lenders charging high interest rates.5

Black and Latinx homeowners were more likely to be targeted by subprime lending as one study revealed that was true even considering factors such as credit scores and how much money is spent on the housing and debt costs.6

Discrimination is still a problem according to another recent study that found racial gaps in mortgage costs have persisted over the past four decades.7

Additionally the discriminatory practices in mortgage lending have increased the gap in wealth between racial groups according to the Urban Institute, with Black homeowners accumulating just less than a quarter the housing wealth of White homeowners.8

Housing Laws that Help Borrowers

Over the last 60 years substantial progress has been made to protect homeowners from discrimination and abuse despite the persistance of predatory practices. Two new laws used different strategies to enhance homeowner protections, and they are constantly evolving. It was the Fair Housing Act (FHA) outlawed discrimination in real estate, including for mortgage borrowers.9 Initially banning discrimination due to race religious belief, national origin, religion or gender, the legislation was amended later to include families with disabilities as well.10

Another important law that was adopted in 1968, known as the Truth in Lending Act (TILA) was a law that required mortgage lenders and other lenders to provide the conditions for the loans.11 It was expanded numerous times to include the full range of real property practices. It was in 1994 that TILA included an additional provision, the Home Ownership and Equity Protection Act (HOEPA), which protected borrowers from the risk of predatory, high-cost mortgages.1213

The Equal Credit Opportunity Act (ECOA) is another important pillar of protection for borrowers, was passed in 1974. Although initially geared towards preventing discrimination in credit against women, it was later expanded to cover race or color, religion, national origin, age, or the participation of public assistance programs.14

The ECOA and FHA were used in a number of the biggest enforcement actions against discriminatory practices that occurred during the 2008 financial crisis. Settlements were reached that included penalties that totaled $335 million with Countrywide Financial and $175 million from Wells Fargo, the Justice Department ordered banks to be compensated Black and Latinx clients who were unfairly steered into subprime loans.1516

In 2010 The Dodd-Frank Act, enacted in response to the crisis, established the new Consumer Financial Protection Bureau (CFPB) with the responsibility of ensuring oversight over ECOA along with TILA. The CFPB established new, detailed and clear disclosure requirements under TILA and with each new presidential administration, revisits prioritization as well as disclosures and rules within its purview.17

Payday Loans

It’s normally very easy to obtain an payday loan. You can go to the office of a payday lender, and leave with a loan. It is not necessary to give anything to the lender to secure the loan like you would in the in a pawnshop. Instead, the lender will normally ask you for permission to electronically transfer cash from your credit union or prepaid card. Sometimes, the lender will ask you to write a

Make sure you check the amount due for repayment that the lender will cash when the loan is due.18

Payday loans can be expensive. Payday lenders charge very high levels of interest: up to 780% as an annual percentage rate (APR) as well as an average loan that is close to 400 percent.

Payday lenders claim that their high rates of interest are false since if you pay off their payday loan on time, you won’t be charged high rates of interest. In some cases, that may be the case, however 80% of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB) which indicates most of payday loans aren’t paid back on time.19

There are ongoing concerns with the fairness of payday loans. A study has found it was Black wage earners are three times as likely than White wage earners–and Latinx payees are more than twice likely to borrow payday loan.20 The use for payday loans has also been linked to a doubling in bankruptcy rates.21

400%

Annual percentage rates (APR) that payday loans often approach–one reason that these loans are often deemed to be a scam product

Payday Loan Regulations

Oversight on payday loans has largely been given to states, but federal laws provide certain protections to borrowers. TILA, for example, makes payday lenders – just like other financial institutions to disclose the costs of loans to the borrowers, which includes interest charges as well as the APR.22

Most states have usury laws that limit interest charges between 5 – 30 percent. Payday lenders are under exemptions that permit their high interest. Sixteen states–Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and the District of Columbia, either bans on high-cost payday loans or have implemented restrictions that limit interest rates.23

Seven states–Maine, New Mexico, Ohio, Oklahoma, Oregon, Virginia, and Washington–have implemented some kind of measure like time limits, fee limits, or number of loans per borrower which offer some level of protection to consumers.

In 2017, the CFPB took steps to strengthen payday loan user protections, making payday lenders decide in the underwriting process if the borrower will be able to pay back the loan and limiting the use of aggressive collection methods from lenders who are unable to collect payments.24 However, in July 2020, the agency lifted the mandatory “ability to repay” requirement. The CFPB has set a date for the final implementation for their updated and complete “Payday Rule” for June 2022.25

Car Title Credit

A title loan, like an auto loan makes use of your car’s title as collateral. However, while an auto loan can be used to buy a car, the cash from a title loan can be used for any reason. More important, short-term, high-interest title loans can be predatory. They typically target those who may have difficulty paying back the loan, which could force the borrower to refinance with a soaring costs and potentially lose their vehicle.

About one in five car title loan customers ends up having their vehicle confiscated as per the Consumer Financial Protection Bureau.26

Car Title Loan Regulations

Similar to payday loans, car title loans are controlled by states. The majority of all states allow car title loans.27 Certain states classify the loans with payday loans and regulate them with usury laws, capping the amount that lenders are allowed to charge.

They are also referred to as are pawnshops, hence they are referred to as “title the pawn.” The state of Georgia, for example there’s a bill proposed to make title pawns legal. They could carry an APR as high as 300% under the state’s pawnshop regulations – under the laws governing usury in Georgia, which cap interest rates at 36%.28

Are regulations up to date with Technology?

The rapid growth in mobile and online lending presents new challenges for consumer protection. Fintech’s share of personal loan originations doubled over four years, and was around half of the market as of September 2019, according to credit reporting firm Experian.29 Half of the revenue in payday lending is made by online lenders, according to the CFPB.30

Since online lenders often use a “rent-a-bank” method of operation, which involves partnering with a bank to stay out of state laws on usury and other laws, the practice of predatory lending can be difficult to regulate as some consumer advocates claim. States have seen some success in clamping down on online lenders’ predatory strategies in courts, however the rules governing fintechs are changing constantly as technology and the regulatory environment evolves, adapts and evolves.

What is an example Of Predatory Lending?

If a lender tries to gain a profit from the borrower by tying them to unreasonable or inflexible loan terms, it can be classified as an act of predatory lending. The indicators that you’re a victim include aggressive solicitations as well as excessive fees for borrowing, high prepayment penalties, big balloon payments, and being constantly urged to flip loans.

Does Predatory Lending Constitute a Crime?

In theory, it is. If you’re lured to take out an loan that carries higher fees than your risk profile warrants or is unlikely to be able to pay back it, you may have been the victim of an offense. There are laws to protect consumers against predatory lending, though plenty of lenders continue to get away with it in part because the consumers don’t understand their rights.

Can I sue for Predatory Lending?

If you can show that your lender broke local or federal laws such as federal laws, including the Truth in Lending Act (TILA) You may want to consider filing a lawsuit. It’s not an easy task to take on the financial institution that is wealthy. If you can provide evidence that the lender violated the law, you stand the chance of being compensated. First, contact your state consumer protection agency.

The Bottom Line

Despite decades of progress in safeguarding borrowers, predatory lending is still a constant and growing risk. If you’re in need cash, you should research your options by researching alternative funding options, reading the fine text of credit terms and becoming aware of consumer rights and protections and the rates available for the type of loan you seek.

The Federal Deposit Insurance Corporation (FDIC) has suggestions on how mortgage holders are protected and the CFPB has information regarding payday loans and how to beware of scams.3132

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Related Terms

Predatory Lending

Predatory lending imposes unfair, misleading, or abusive loan terms to a borrower. A number of states have Anti-predatory loan laws.

What Is a Payday Loan? What is it, how to Get One, and Legality

The term payday loan is a type of borrowing that’s short-term and where a lender will extend high-interest credit according to your income.

Usury Rate

The term”usury rate” is a term used to describe a rate of interest that is deemed to be high compared to prevailing market interest rates.

Truth in Lending Act (TILA): Consumer Protections and Disclosures

The Truth in Lending Act (TILA) is a federal law promulgated in 1968 to protect consumers when they deal with lenders and creditors.

What Is Usury? Definition, How It Works Legality, and an Example

Usury is the act lending money at an interest rate which is thought to be unreasonably excessive or is greater than the maximum rate allowed by law.

Unlawful Loan

An unlawful loan is a loan that fails to comply with lending regulations for example, loans that have illegally high interest rates or those which exceed the size limit.

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