So You've Been Preempted-What Are You Going to Do Now?: Solutions for States Following Federal Preemption of State Predatory Lending Statutes

Brigham Young University Law Review, 2004 by Childs, Christopher R

In spite of the difficulty in definitively and objectively defining predatory lending, some practices are definitely considered predatory in certain circumstances. Such practices include aggressive sales techniques, deceit, fraud, manipulation, or any number of the foregoing, "often combined with loan terms that, alone or in combination, are abusive or make the borrower more vulnerable to abusive practices."23 Loan terms and practices that are often considered abusive when offered in a "predatory" context include: (1) loan "flipping,"24 (2) making loans without considering the borrower's ability to repay and primarily for the purpose of obtaining the collateral,25 (3) negative amortization loans,26 (4) the use of excessive prepayment penalties,27 (5) balloon payments,28 (6) the use of mandatory arbitration clauses,29 (7) fee "packing,"30 and (8) steering individuals that would otherwise qualify for low-cost prime loans into high-cost subprime loans.31

B. Why Is Predatory Lending a, Problem?

Predatory lending is problematic because predatory lenders often seek out those who are least able to deal with the burdens that onerous loans impose, such as the elderly and minorities (due to economic constraints).32 Additionally, predatory lending, and regulatory responses to it, cause disruptions in the secondary market for home loans, which disruptions may decrease the availability of credit.

Unscrupulous lenders often target the elderly because they typically have substantial equity in their homes.33 According to the AARP, "[n]early 80 percent of older Americans are homeowners, and 80 percent of these older homeowners own their homes free and clear [of any liens]. . . . [O]ver 60 percent of homeowners age 65 and older had at least $50,000 in home equity."34 Elderly homeowners are often cash poor, live on fixed incomes, and have substantial medical problems, as well as "diminished faculties, and isolation that impair their ability to understand loan terms and/or make them especially vulnerable to aggressive sales tactics."35 These unique circumstances and vulnerabilities place the elderly in a particularly precarious position and often make them easier targets for predatory lenders.

Increased levels of subprime lending in minority communities suggest that such communities may be subject to increased lending abuses. The United States Department of Housing and Urban Development ("HUD") reported that five times more subprime loans are originated in predominantly African-American neighborhoods than white neighborhoods.36 While not all subprime lending is predatory, and "subprime lending is an important element of our financial systemf ] because it delivers credit to those that may otherwise be unable to obtain credit," the subprime market "appears more susceptible to abusive lending practices than is the prime market. A subprime borrower may have few financial options available or less information on loan terms and conditions and less opportunity to shop for the best terms and conditions available."37