In today’s fast-paced, technological society, personal loans are easy to come by. Many borrowers don’t realize that despite their creditworthiness, there are a number of predatory lending practices they remain blissfully unaware of. Whether you’re a potential college student assessing various student loan options, or a single mother trying to get a little extra cash before payday, it’s important to follow certain guidelines when assessing the numerous loan options available. While no one is immune, predatory lenders typically tend to target minorities, the poor, and the less educated. Having a good understanding of predatory lending laws will ensure the next time you borrow money; you won’t be saddled with unusually high interest rates and inadequate or false disclosure guidelines. Sometimes this information is difficult to come by, that’s why I’ve thrown together 5 helpful tips any busy mom or dad can follow to ensure they get the best possible terms on their next personal loan.
Defining Predatory Lending
Before being able to understand how to avoid it, it’s important to first define it. Predatory lending is defined as something which benefits the lender and ignores or hinders the borrower’s ability to repay. Oftentimes, these practices will be in place to take advantage of a borrower’s ignorance. The Federal Equal Credit Opportunity Act, otherwise known as ECOA, makes it illegal for a lender to impose higher interest rates or fees based upon a person’s sex, marital status, race, color, age, or religion. In addition to this, we also have the Home Ownership and Equity Protection Act, known as HOEPA, which attempts to protect consumers from excessive interest rates and fees when it comes to getting a mortgage loan. In addition to Federal law, 25 states in the United States have anti predatory lending laws while 35 limit the maximum prepayment penalty homeowners are required to pay. It goes without saying that borrowers should be leery of loan offers received through solicitation by mail or telephone as reputable lenders don’t operate in this fashion. Ensuring you work with a licensed lender in your state offers you some degree of security as they must follow certain regulations in order to be licensed.
We’re all familiar with the turmoil experienced during the 2008 financial crisis. At that time, many borrowers were being urged by lenders to refinance their homes with the promise of a lower interest rate. Unfortunately, this was far from true. Many borrowers were duped into signing mortgages contracts for higher interest rates and paying enormous upfront fees. As a general rule of thumb, a mortgage lender requesting upfront fees before delivering results is illegal according to the Federal Trading Commissions mortgage assistance service requirements. These requirements state that a company can’t collect any fees for a loan until the homeowner has received a written offer of relief from their lender and, after reading it, have accepted it of sound mind.
Keep An Eye Out For Higher Than Allotted Interest Rates
Another common scam borrowers should lookout for is lending companies charging higher then legally allotted interest rates on payback terms. Many don’t realize that every state has usury laws. Financial institutions offering loans must adhere to the specific guidelines of each of the states in which they operate. A great resource which lists each state’s allotted interest rates and provides a general guide to their usury laws can be found by clicking here. A well-known example of someone who clearly violated these laws through an unsavory chain of payday loan businesses is the professional race car driver Scott Tucker. Tucker built a massive financial empire offering payday loans, charging borrowers well above the generally allotted interest rates set forth by the state in which they operated. In order to escape justice and continue to perpetuate this fraud, when legal inquiries were made as to the unlawful repayment terms on these payday loans, Tucker’s lawyer claimed that the businesses were not owned by him but were operated by North American Indian tribes. Therefore, due to the fact that they have their own autonomy, these companies were not subject to the same laws other traditional, residential businesses were. Unfortunately for Tucker and his team, the courts weren’t buying it and sentenced him to a little over 16 years in federal prison for breaking these usury laws among other things.
Mandatory Arbitration Clauses
Arbitration is a legal word which typically means you will settle any disputes with the lender outside of court. This puts the borrower at a disadvantage as they are at the financial institutions mercy when it comes to redressing any grievances. Few realize that this common practice, according to the Federal Arbitration Act, is illegal. When viewing a contract in which the lender has added certain language making it illegal for you, the borrower, to take any future legal action for fraud or misrepresentation against them, demand it be removed on legal grounds, refusing to sign the contract otherwise. For those interested in learning more about the Federal Arbitration Act, click here to view the entire piece of legislation.
Familiarize Yourself With The Equal Credit And Opportunity Act (ECOA)
Borrowers will find a lot of useful information by taking the time to scan through the Equal Credit Opportunity Act, otherwise known as ECOA. This piece of legislation makes it illegal for lenders to impose higher interest rates or fees based on people’s race, sex, or religious affiliation. For example, let’s say you apply for a loan to receive Social Security disability benefits and the lender refuses to loan you the money unless you provide a doctor’s note detailing the likely duration of your disability. This could be illegal. Equipping yourself with a thorough understanding of the law by reading through these pieces of legislation will ensure you don’t get taken advantage of by lenders the next time you’re in the market for a personal loan. The sad truth is, much of the illegal activity discussed in this article is taking place every day throughout the United States and will continue to as long as borrowers remain ignorant of their legal rights.
Beware Of Loan Churning
A common practice among many predatory lenders is known as loan churning. What loan churning means is that borrowers are forced into a never ending cycle where they are constantly paying fees and interest on their original debt, without ever making a substantial payment on the principle. Typically, the process works like this, a lender makes a loan which the borrower can’t afford. The likely outcome happens and the borrower fails to repay the loan, so the lender offers to “help” the borrower out by offering a new loan which includes an additional set of fees and interest rates. Already under pressure for not repaying their first loan, the borrower, however reluctantly, agrees to a second loan and the vicious cycle has begun. According to the Consumer Financial Protection Bureau, 94% of repeat payday loans happen within one month of the first loan, with consumers borrowing an average of 10 payday loans a year, amounting in interest and fees of over 2.1 billion dollars. It just so happens that in many of these payday loan scandals, borrowers end up paying $450 and interest on a $350.00 principle because they were ignorant to the predatory lending practices at work behind the scenes.
Putting It All Together
As the old Bible verse in the book of Hosea states, “my people perish for lack of knowledge.” This verse is just as true now as it was when first written. Ultimately, in today’s information age, ignorance is a choice. For your own benefit , it is important to stay up to date on current lending laws and become aware of your rights when it comes to usury and arbitration .