Predatory Lending
Predatory lending refers to abusive lending practices that generally take place in the subprime lending market. Subprime lending refers to the extension of loans or credit to persons with less than perfect credit histories. Persons who comprise the subprime market are considered to be slightly higher credit risks and do not meet the strict underwriting standards required to qualify for prime, or “A” credit. Financing provided to persons in the subprime market is commonly referred to as “B/C” or “nonconforming” credit.
Subprime lending, in and of itself, is not a bad thing and, to the contrary, has allowed many persons the opportunity to obtain mortgage financing and credit when they might have been denied such by traditional lenders. Subprime lending is an acceptable practice when it is risk-based lending. That is, a lender should receive a slightly better rate of return if taking on more risk with a borrower. Subprime lending crosses the line and becomes predatory lending when the lender charges exorbitant or usurious rates, assesses excessive or unearned fees and charges, or packs a loan with unnecessary and expensive add-on products.
In 1999, the North Carolina legislature passed North Carolina’s Predatory Lending Law. The primary components of the law are to:
- Prohibit prepayment penalties for home loans of $100,000 or less;
- Prohibit “flipping” where a lender repeatedly refinances an existing home loan with no tangible benefit flowing to the borrower; and
- Prohibit financing of single-premium credit insurance.
Persons victimized by predatory lenders could be entitled to treble damages (three times the actual out-of-pocket damages) upon proof of a violation of the Act. The North Carolina Predatory Lending Law has served as a model for numerous other states and communities battling the problem of predatory lending.
