Predatory Lending Practices

The Scheme

Most lenders are honest and closely follow federal and state lending guidelines.  But in recent years shady or unscrupulous lenders have turned home mortgages, auto loans, or emergency payday loans into traps for the unwary.

Predatory mortgage and auto lending are today the subjects of major consumer protection lawsuits brought by state and local prosecutors in California.  In this type of scheme, the fast-talking loan salesman makes attractive promises of easy loan terms for a new or refinanced home loan or auto purchase.  Often the victim is an elderly person with some home equity but modest fixed income.  But when the smoke clears, the borrower has been tricked into an adjustable loan instead of a fixed one, or faces huge undisclosed prepayment penalties or other unfavorable terms.   Elderly and low-income borrowers are particularly vulnerable, and sometimes even lose their homes as a result.

The payday loan industry has come under increasing scrutiny for the conduct of some industry members who prey on the vulnerable.  In this scheme, you work hard to make ends meet for your family, but can’t put enough aside for a rainy-day fund.  Your car breaks down and needs major repairs, so you turn to a “fast bucks” payday lender.  You give the lender a post-dated check and he gives you cash at 400% APR.  In two weeks, you start getting phone calls from the lender asking for repayment, but you still don’t have the cash on hand.  Now the lender shows up to your work and starts calling your friends and family to pressure you to repay.  The lender offers you the option of renewing the loan and paying the interest fee again, which you take.  But now you’ve got even more to pay back in two weeks, and you’re in a vicious cycle. 

In another scenario, the payday lender that you turned to cashes the check you post-dated, but you don’t have the funds to cover it and the check bounces.  The payday lender threatens to sue in small claims court and seek a penalty up to 300% of what the check is worth, but offers that if you settle with him out of court, he’ll only seek 200%.  You gladly take the offer, but what he hasn’t told you is that state law caps penalties for bad checks to payday lenders at $15.00. 

Help for Consumers

Consider other options besides payday loans, a list of which can be found here: http://www.responsiblelending.org/issues/payday/briefs/page.jsp?itemID=29573161

For assistance with payday lender problems, contact the Department of Corporations Consumer Service Center at 1-866-275-2677 or 1-866-ASK-CORP.