Disentangling the Differences between Abusive and Predatory Lending: Professionals' Perspectives
Delgadillo, Lucy M., Erickson, Luke V., Piercy, Kathleen W., The Journal of Consumer Affairs
This study describes how mortgage professionals differentiate abusive from predatory lending. Data were analyzed qualitatively. The results indicate that some users of this term do not always adhere to a strict definition of predatory lending but rather use it as a term for any general mortgage abuse and mortgage fraud. Existing laws at the federal- and state-level curtail abusive lending and promote fairness in the market place and they are highly enforced among depository financial institutions. However, unregulated nonfinancial institutions, mortgage brokers, and originators are still a primary source of predatory lending.
As a vocabulary term in the mortgage market, predatory lending frequently is misunderstood because it carries stigmas, and slightly different meanings and connotations, depending on the context in which it is used. It has long been noted that the term is so elusive that it may, itself, contribute to regulatory difficulties (Cart and Kolluri 2001; Goldstein 1999). Loans with hidden prepayment penalties, for example, could fit the description of predatory lending. But loans that simply offer higher interest rates cannot be said to be predatory. Researchers have defined predatory lending as consumer loans with any or all of the following characteristics: aggressive and deceptive marketing, lack of concern for the borrower's ability to pay, high interest rates and excessive fees, unnecessary provisions that do not benefit the borrower, large prepayment penalties, or faulty underwriting (Hill and Kozup 2007).
Lack of a common definition of predatory lending impedes efforts to quantify its true prevalence. The Center for Responsible Lending (CRL) estimates that predatory lending of all kinds costs U.S. borrowers $25 billion annually. The problem has worsened as the subprime lending market expanded (Bailey 2005). One approach that has been used to measure the magnitude of the problem is the examination of the number (at least 20) and amount of settlements over the past fifteen years. From 1991 to the present, approximately $1,651 million have been paid by companies involved in lawsuits over accusations of predatory lending (Erickson 2006). Despite the large total sum of the settlements, compensation to individual victims is still inadequate to cover the losses they incurred from lending abuses, and are far from inflicting any punitive or disciplinary cost to the companies (ACORN 2003).
In order to address predatory lending adequately, there needs to be a differentiation between what constitutes abusive lending, predatory lending, and mortgage fraud. Descriptions of predatory lending are plentiful, but a precise definition that would inform regulators and consumer advocates is nonexistent. To date, a mix of abusive, illegal, and unethical practices, or characteristics of the victims have been given as definitions by stakeholders dealing with the issue. Only by disentangling the differences among these terms can efforts be concentrated on remediating current practices. The lack of agreement as to what constitutes predatory lending contributes to deadlock at the legislative level, facilitates grounds for unsound lending practices, and diminishes accountability among major players in the mortgage lending industry.
To address the issue of conceptual and definitional clarity, a study of professionals and consumer specialists in the field of housing and mortgage lending was conducted. The research was guided by two assumptions: (1) there is not a universally accepted definition of predatory lending and (2) abusive lending is usually equated to predatory lending. Just as it is known that a legitimate subprime market is different from a predatory market, we argue that not all abusive lending is predatory. Predatory loans are abusive, but not all abusive loans are predatory.
This study takes concrete steps to disentangle the terms by reporting on how mortgage lending professionals differentiate abusive from predatory lending, and whether or not both terms are used interchangeably. …