Predatory v. Good Lending: Comparing What's Wrong with What's Right

The Wrong Practice The Right Way to Lend Solicitations, both mail and telephone, and other high pressure sales techniques - pushing a product at a customer without giving them time to evaluate the product and their need for or interest in it. Use a helpful and educational sales approach. Explain products thoroughly, including the risks and costs as well as the benefits. Use disclosures to inform customers. Give them time to think about the product. Misleading or deceptive marketing. Adhere to regulatory requirements and guidance in advertising. Test all advertisements for clarity and information value. Provide customers with disclosures. Excessive origination fees and excessively priced products. Compare your fees with the rest of the market. If a lender charges less than you, know it and understand why. Make sure it isn't because you are charging too much. Irresponsible underwriting by making loans that the customer is not actually able to afford or repay. Follow underwriting policies and procedures. Maintain clear and complete documentation of all loan decisions, including calculation of ratios and the cash flow analysis. Imposing large pre-payment penalties. Don't use pre-payment penalties to feed your profits. Build costs into the rate and terms of the loan. Don't play roulette with pre-payments. alloon payments with unrealistic repayment terms. Design balloon loan products carefully. Compare the terms with those that would apply to a fully amortized loan. Loan "flipping" - refinancing at great expense. Evaluate refinancings to determine whether there is consumer benefit - such as a reduced interest rate or a more beneficial payment plan. Compare the consumer's cost to the consumer's benefit. Steering to expensive products and high-rate lenders. Maintain procedures for identifying the most favorably priced products for the applicant. Financing fees, points, and other pre-paids. As a general practice, avoid financing points and other loan fees. Use APR calculations to assess the fairness and affordability of your loans. Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 6, 6/00