Predatory Lending Tactics: Loan Flipping, Liar Loans and Lost Notes

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A loan shark works outside the law; a predatory lender works through it. A 2006 FDIC audit report defined predatory lending as imposing unfair, deceptive or fraudulent terms during loan origination, usually on loans secured by a house or car. The Office of the Comptroller of the Currency catalogued the tactics: loan flipping through repeated refinancing, packing loans with fees and single premium credit insurance, balloon payments, and negative amortization, where a payment too small to cover interest makes the balance grow. In 2004, 69 percent of borrowers used some form of subprime loan, with fees often above 5 percent versus about 1 percent for prime loans.

Lenders targeted the elderly, minorities, the poor and the less educated, and research by Anita F. Hill pointed to first-time female buyers. Most courts treat lending under caveat emptor rather than as a fiduciary relationship. Economist Tyler Cowen argued predatory borrowing was a larger problem: one study found up to 70 percent of early payment defaults involved fraudulent misrepresentations, often coached by brokers chasing yield spread premiums on stated income loans. Securitization then separated borrowers from the owners of their notes, and state anti-predatory laws produced mixed, sometimes paradoxical results.

• Lenders referred internally to certain heavily minority neighborhoods as Never Never Land.
• Even controlling for income, minority buyers were more likely to be steered to subprime lenders.
• The New York attorney general found appraisal firm eAppraiseIt bowed to pressure from Washington Mutual loan officers, leading to a $7.8 million settlement.
• An Illinois rule requiring HUD-certified counseling led some borrowers to pick safer loans simply to avoid the sessions.
• When the original promissory note cannot be found, courts often accept a sworn statement of ownership and let foreclosure proceed.