Predatory lending is an abusive practice among some lenders that consists of

Predatory lending is an abusive practice among some

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Predatory lending is an abusive practice among some lenders that consists of making loans to weak borrowers and then charging them excessive fees and interest rates, thereby increasing the risk of default. In 1994 Congress passed the Home Ownership and Equity Protection Act which was aimed to protect home owners from loan agreements they could not afford. Loans whose annual percentage rates (APR) is 10 percentage points or more above the yield on comparable maturity U.S. Treasury securities and closing fees above 8 percent of the loan amount are defined as “abusive” and consumers have 6 days in which to decide whether to proceed with the loan. Credit granting institutions must fully disclose all fees and risks. If these are not disclosed, then the borrower has up to 3 years to rescind the transaction and lenders might be liable for all damages that occur. 18-11. In your opinion, are any additional laws needed in these areas? This question does not have a right or wrong answer. Depending on one's point of view, more or less regulation in these areas can be supported. Most, if not all, bankers and bank trade associations, as well as many of the regulatory agencies, tend to agree that there are already more
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than enough laws and regulations in these areas. Consumer groups and some elected officials would argue that consumers, particularly in certain economic groups or communities, need more legislation and/or regulation to protect their interests. 18-12. In what ways is a real estate loan unique compared to other kinds of bank loans? Real estate loans are longer-term than most other loans and usually involve above-average amounts of funds at risk. Moreover, they depend more heavily on the value and maintenance of collateral than most other types of loans. 18-13. What factors should a lender consider in evaluating real estate loan applications? Among the factors to be considered in evaluating a real estate loan applications are: 1. What is the borrower's monthly income and monthly debt repayments ? The bank must be assured there is adequate cushion to comfortably absorb the home loan repayments. 2. Does the borrower have good prospects for continued employment ? Because the loan is long term the bank must have reasonable assurance the borrower can service a long-term loan. 3. Is the current market value of the home to be purchased sufficiently larger than the amount of the loan to give the bank adequate cushion if local real estate values decline? 18-14. What is home equity lending, and what are its advantages and disadvantages for banks and other consumer lending institutions? Home-equity loans use the residual market value of a home (over and above the amount of any outstanding liens against the home) as a borrowing base. Financial institutions often lend a fraction of this residual value, which subjects them to the risk that the market value of a home will fall, significantly eroding the cushion of protection for a loan of this type. If the customer fails to make any promised loan payments, the bank or other lender could foreclose and take over the home to sell it and recover at least a portion of loaned funds.
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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