Joint Center for Housing Studies, Harvard University
  
Understanding Predatory Lending: 
Moving Towards a Common Definition and Workable Solutions
by Deborah Goldstein.  September 1999. All rights reserved.
http://www.jchs.harvard.edu/publications/finance/goldstein_w99-11.pdf 

Executive Summary

To date, various parties have used the term "predatory lending" to describe a wide range of
abuses. Regulators, industry and advocates have not agreed to a single definition, but have used the
term individually to refer to different practices and loan terms. Predatory lending describes a set of
loan terms and practices that fall between appropriate risk-based pricing by subprime lenders and
blatant fraud. All subprime lending is not predatory, but typically relies on risk-based pricing to serve
borrowers who cannot obtain credit in the prime market. The higher degree of risk associated with
subprime borrowers requires a higher cost for a subprime loan. At the other end of the spectrum,
cases of blatant fraud are predatory, but less common and can generally be combated with current
criminal statutes. The most difficult cases are those in which loan terms seem out of line with
standard prices. In particular, high-cost loans coupled with unscrupulous practices that pressure a
borrower into a loan are predatory. The best determinates for whether a loan is predatory are:

• The form and context in which the lender provided or withheld information from prospective borrowers;
• Ability of the borrower to freely choose not to take the loan or to choose from competing products;
• Whether the lender targeted a vulnerable population or protected class;
• Intentional or systematic patterns of selling over-priced loans to populations whose mental, physical or intellectual status makes them vulnerable to the lenders sales tactics.

Continuum of Predatory Lending 

• Subprime Lending
• Obscured Information & Pressure
• Hidden Information
• Fraud

In order to address the problem of predatory lending, involved parties must combine a
number of approaches to both prevent predatory practices and better assist consumers as they make
financial choices. First, legislators can restrict the most obvious predatory practices. Because it is so
challenging to agree on what specific practices are predatory, it has been difficult to devise
restrictions at the federal level. Some states have passed limits on loan terms, but states power to
regulate lending is constrained by federal law. Nationally, the broader power of the Federal Trade
Commission Act, which prohibits unfair and deceptive trade practices, and the Equal Credit
Opportunity Act, which forbids discrimination on the basis of race or age, may be a more successful
response to predatory practices. 
 
In general, current federal legislation focuses on communicating information to borrowers,
in order to help them make informed choices about financial products. Unfortunately, consumers are
often not able to use the available information to their advantage. In many cases, they do not
understand financial transactions, or lack confidence about financial issues. Consumers are also likely
to underestimate the risks associated with mortgage loans, despite the information they receive from
the lender. Legislation could be improved to provide information about loan transactions in a more
clear, comprehensive and meaningful way to the consumer. In addition, consumer education should
be used to teach potential borrowers about financial issues and empower them to make sound
financial choices.
 
Finally, the subprime market needs to develop more standardized approaches and products
that efficiently assess and allocate credit. As more conventional lenders provide mortgage loans to
lower-quality- credit borrowers, and the government-sponsored secondary-market intermediaries
provide competitively priced options, subprime borrowers will be less likely to resort to the products promoted by predatory lenders. Borrowers often turn to high-cost loans because they have a narrow
set of products from which to choose. Current financial regulations should be refined to monitor
mortgage markets and highlight predatory practices. In addition, they can act to encourage
investment and involvement in underserved markets that are most vulnerable to predatory lenders.
 
In order to accomplish these goals, advocates, regulators and industry members should build
a support infrastructure that shares information and works toward helping consumers. Increased
communication between local groups and state or federal regulators can help monitor predatory
practices. Partnerships between industry and advocates can provide educational programs, counseling
services and financial products to borrowers. Finally, each group can share resources and knowledge
of the issue in order to better understand predatory lending and solutions to the needs of consumers.