Predatory Lending
When the loan was designed to fail — excessive fees, equity stripping, steering, and abusive terms that make the entire loan unenforceable.
Overview
Predatory lending refers to a pattern of unfair, deceptive, or abusive lending practices that strip wealth from borrowers and set loans up to fail. In foreclosure, predatory lending is an affirmative defense that attacks the validity of the loan itself — the argument is that the loan was so predatory that it is unconscionable, violated HOEPA, or constitutes a UDAAP violation, and should not be enforced. Common predatory lending practices: loan flipping (repeated refinancing generating fees with no borrower benefit), equity stripping (lending based on home equity, not repayment ability), steering (qualifying borrower to a higher-cost loan when they qualified for a lower-cost one), packing (adding unnecessary products — credit insurance, warranties), balloon payments on high-cost loans, and negative amortization.
Legal Definition
Predatory lending is not a single statute but a category of conduct that violates multiple laws: HOEPA (Home Ownership and Equity Protection Act, 15 U.S.C. § 1639) for high-cost loans, TILA for disclosure violations, RESPA for fee-splitting/kickbacks, UDAAP (unfair, deceptive, or abusive acts or practices) under the Dodd-Frank Act, and state predatory lending laws (many states have mini-HOEPA statutes with stricter protections). A loan qualifies as a HOEPA 'high-cost mortgage' if: the APR exceeds the Average Prime Offer Rate by 6.5% (first lien) or 8.5% (junior lien), or the points and fees exceed 5% of the total loan amount (adjusted annually).
When This Defense Applies
Asserted when the loan: qualifies as a HOEPA high-cost mortgage with prohibited terms (balloon payment within 5 years, prepayment penalty beyond 3 years, negative amortization, no consideration of repayment ability), includes excessive points and fees (8%+ of loan amount), was the product of repeated refinancing (loan flipping) with no tangible benefit to the borrower, was steered to a higher-cost product when the borrower qualified for prime terms, or includes credit insurance or other products the borrower didn't need or want (packing).
Common Foreclosure Scenarios
The borrower had a 680 FICO score and qualified for a prime 30-year fixed at 5% — the broker steered them to a subprime 2/28 ARM at 9% because it paid a higher yield spread premium
The borrower's original $80,000 mortgage was refinanced 4 times over 5 years, each time with $5,000-$8,000 in fees rolled into the new principal — the loan balance grew from $80,000 to $115,000 with no improvement to the property
The borrower, a 72-year-old on fixed income, was sold a $200,000 cash-out refinance with a 5-year balloon and monthly payments exceeding their income — clear asset-based lending ignoring repayment ability
The $95,000 refinance included $12,500 in points and fees — exceeding the 5% HOEPA threshold; the loan also includes a 3-year prepayment penalty (prohibited under HOEPA)
Burden of Proof
The BORROWER must prove: (1) the loan meets the legal definition of a predatory loan (HOEPA high-cost, UDAAP violation, state law violation), (2) the lender engaged in predatory practices (excessive fees, steering, packing, lending without regard to repayment ability), and (3) the loan is unenforceable (or the lender should be limited in the relief it can obtain). Under HOEPA, violations entitle the borrower to: rescission (3-year extended right), actual damages, statutory damages (up to $4,000), enhanced damages, and attorney fees. The lender has the burden of proving the loan was NOT predatory in some respects.
Court Considerations
Predatory lending defenses can be very effective — courts are increasingly skeptical of loans that were clearly designed to fail. Key issues: (1) whether HOEPA applies (threshold calculation — APR and points/fees must exceed specific thresholds), (2) whether the loan includes prohibited terms (balloon payments, prepayment penalties, negative amortization), (3) whether the lender considered the borrower's ability to repay (ATR rule under Dodd-Frank — a loan made without regard to repayment ability is a defense to foreclosure), and (4) whether the predatory lending was by the original lender (who may no longer be the plaintiff — assignee liability varies).
Homeowner Strategies
Request the complete origination file — the Loan Application (1003), Good Faith Estimate, HUD-1, underwriting notes, and broker compensation agreement
Calculate the HOEPA thresholds: what was the APR? The APOR at the time? The total points and fees as a percentage of the loan amount?
Compare your stated income on the application to your actual tax returns — if the lender inflated your income, this supports both predatory lending and fraud
Document the loan history: how many times were you refinanced? Did each refinance provide a tangible benefit (lower rate, lower payment) or just generate fees?
Assert predatory lending as both a defense (the loan is unenforceable) and a counterclaim (HOEPA damages, TILA rescission, state law claims)
Related Court Documents
Related Court Procedures
Frequently Asked Questions
What makes a loan 'predatory' vs. just expensive?+
An expensive loan is not necessarily predatory. Predatory lending involves: (1) DECEPTION — the lender concealed or misrepresented terms, (2) ABUSIVE TERMS — terms designed to cause default (balloon payments, negative amortization, prepayment penalties that trap the borrower), (3) STRIPPING of equity/fees — charging fees with no corresponding benefit, and (4) LACK of regard for repayment — lending based on the property value, not the borrower's ability to pay. A 12% APR loan is expensive but not necessarily predatory if the terms are clear, there's no balloon, the borrower can afford it, and they understood the terms.
Can I assert predatory lending against the current holder if the original lender was the predator?+
Under HOEPA: YES — assignees of high-cost mortgages are liable for HOEPA violations (with certain exceptions for government entities and certain securitization trusts). Under TILA: assignees are generally liable for TILA violations that are apparent on the face of the documents. Under UDAAP: the CFPB can pursue assignees. Under common law: the holder in due course doctrine may protect assignees who took the note without notice of the fraud — but this is limited. The general rule: assignees step into the shoes of the assignor and take subject to defenses.
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