Predatory lending is defined by inequitable market practices that result in charging inflated fees and interest rates for loans that borrowers might not be capable of repaying. Refinancing loans over a short time period results in the borrower’s inability to improve his/her financial situation in the long run. Borrowers are also misinformed about the terms of the loan, which forces them into a financial contract that devalues their credit history and jeopardizes their financial future. [1]
Predatory lending is disproportionately common in populations with low-incomes or those with poor or no credit histories. The Center for the Study of Social Policy identified two forms of predatory lending that are significantly common in these populations: predatory mortgage lending and “payday” lending.
- Predatory mortgage lending occurs when lenders offer loans using dishonest lending practices such as prepayment penalties and negative amortization, which significantly reduces a family’s home equity and could potentially lead to foreclosure. It has been estimated that each year, predatory mortgage lending results in a loss of $1.9 billion for American families. [2]
- “Payday” lending is defined as the practice of offering short-term, high-interest loans on the condition that the lender obtains authorization to obtain payment from the borrower. The majority of “payday” borrowers end up incurring greater debt and are unable relieve themselves from the high-interest payments. In turn, this has a serious impact on their ability to apply for conventional loans in the future. [2]
Predatory lending is predominant in many states and will continue to affect vulnerable populations such as low-income families if state legislatures do not take an active stance against it. Policymakers should introduce state policy to regulate lending practices and protect low-income families from falling into a financial trap.
[1] United States General Accounting Office. January 2004. Consumer Protection Federal & State Agencies Face Challenges in Combating Predatory Lending. GAO Report 04-280. Accessed December 14, 2006 from http://www.gao.gov/new.items/d04280.pdf.
[2][ Center for the Study of Social Policy. 2006. Policy Matters. Twenty State Policies to Enhance States’ Prosperity and Create Bright Futures for America’s Children, Families and Communities.
Related Legislation
Perspectives of a State Policymaker
Representative Patricia “Patti” Bellock (IL) first became interested in the issue of predatory lending while attending a Women In Government Conference in Washington D.C. After watching a video produced by the Annie E. Casey Foundation she felt that by attacking unfair predatory lending practices she could help break the cycle of poverty among low income persons. Her next step was to help facilitate the passage of HB 4050 of the 94th Illinois General Assembly. After hours of meetings and negotiations with agency representatives, lending companies, and constituents from Illinois and nationwide, Representative Bellock along with other legislators were able to pass the first step in comprehensive predatory lending reform. Since then, Representative Bellock continues tirelessly fighting to strengthen Illinois predatory lending laws, including the closure of loopholes found within existing law. Representative Bellock has spoken nationally on the issue of predatory lending; and continues to inspire her colleagues of further reforms both as co-President of the Illinois Conference of Women Legislators (COWL) and Vice-Chairperson of Human Services Committee.
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