United States
Hong KongPredatory lending red flags
The four named patterns are equity stripping, loan flipping, packing and lending without regard to ability to repay. Questions typically describe one and ask you to name it.
Four patterns with names. Learn the names and what each looks like in practice, because that is the shape of the question.
Equity stripping
Lending based on the equity in the property rather than the borrower's ability to repay, with the expectation of taking the property.
The lender is not making a loan they expect to be repaid. They are acquiring a house at a discount through foreclosure.
Loan flipping
Repeatedly refinancing a borrower with no net benefit to them, generating fees on each transaction.
The tell is the absence of benefit. A refinance that lowers the rate meaningfully is not flipping; three refinances in two years that each add fees and extend the term is. Benefit is the test.
Packing
Adding products or fees the borrower did not ask for and often does not know about. Single-premium credit insurance financed into the loan is the classic.
The product may be legitimate. What makes it packing is that it was added without the borrower understanding it, financed into the balance where it accrues interest for the life of the loan.
Lending without regard to ability to repay
Now directly prohibited by the ability-to-repay rule, which is the regulatory answer to this pattern.
It is the pattern that produced the crisis, and the eight-factor requirement at 12 CFR 1026.43(c)(2) exists because of it.
Other markers
- Steering a qualified borrower to a subprime product
- Excessive fees relative to the loan amount
- Balloon payments the borrower cannot meet
- Prepayment penalties that trap a borrower in a bad rate
- Pressure and urgency in the sales process
HOEPA exists to catch the most expensive of these, which is why high-cost mortgages carry mandatory counseling.
Common questions
What are the predatory lending patterns?
Equity stripping, loan flipping, packing, and lending without regard to ability to repay.
What is equity stripping?
Lending based on property equity rather than repayment ability, with the expectation of taking the property.
What is loan flipping?
Repeatedly refinancing a borrower with no net benefit, generating fees each time.
What is packing?
Adding products or fees the borrower did not request and does not understand, often financed into the loan.
How does regulation address these?
Through the ability-to-repay rule, HOEPA high-cost protections, the anti-steering rule and the compensation restrictions.