Predatory Lending & Reverse Redlining

The ability to borrow money is fundamental to achieving the American Dream.

For many, going to college, buying a house, and starting a business would be impossible without a loan. As a result, lenders have developed ways to take advantage of vulnerable borrowers through deceptive and unfair practices that result in large profits for institutions.

Milberg’s Predatory Lending & Reverse Redlining Practice Group protects individuals, organizations, and municipalities against discriminatory and illegal lending practices by some of the world’s largest financial institutions. This includes borrowers who are harmed, fraudulently deceived, or discriminated against by their lenders.

Predatory Lending

When determining credit worthiness, lenders look at several factors including a borrower’s income, credit score, employment history, and consideration of the ability to repay a loan. While lenders typically have discretion in placing borrowers in specific loan products and negotiating the pricing on those loans, such flexibility and discretion has a downside, as it is ripe for abuse.

Predatory lending practices occur when lenders use fraudulent, unfair, or deceptive tactics to steer borrowers towards certain loan products without consideration of borrowers’ ability to repay such loans. For example, lenders may use aggressive sales tactics to induce borrowers into loans that are more profitable for the banks, including subprime loans, even though the borrower may qualify for loans with considerably more favorable terms.

Examples of loan features that are unfavorable to borrowers and may be signs of predatory lending include:

• Higher interest rates compared to similarly situated borrowers
• Adjustable-rate mortgages where interest rates significantly increase during the loan period
• Prepayment penalties imposed on borrowers that pay off a loan before its term ends
• Balloon payments requiring borrowers to make a much higher one-time payment at the end of the loan period compared to prior monthly payments
• Interest only loans that do not build equity for the borrower and result in balloon payments
• Inflated fees and costs that are hidden in the fine print of a loan agreement
• Loan flipping or refinancing an existing loan into a new loan with a higher rate and more fees
• Negative amortization, where monthly payments are lower than the minimum amount required to pay the loan’s interest, thereby causing the total loan amount owed by the borrower to increase despite monthly payments being made
• Inadequate or false disclosures such as misrepresenting or changing the loan’s terms
• Mandatory arbitration clauses that prevent the borrower from filing a lawsuit against a borrower over fraudulent loan terms

Redlining and Reverse Redlining

Redlining occurs when a lender denies credit to borrowers in a particular geographic area based upon race, national origin, ethnicity, religion, or any other protected status.

Reverse redlining, on the other hand, occurs when a particular geographic area consisting of a protected class of borrowers is specifically targeted by lenders for loans with predatory and unfair terms and conditions. These loans are designed to maximize profitability for the lender even though they increase the likelihood of default by the borrower and may result in a foreclosure.

Milberg’s Predatory Lending & Reverse Redlining Practice Group

Milberg has litigated high profile and landmark cases involving violations of federal housing and fair lending laws that prohibit discrimination on the basis of race, ethnicity and any other protected status (such as the Fair Housing Act, Equal Credit Opportunity Act, Community Reinvestment Act, and Home Mortgage Disclosure Act), as well as state and local anti-discrimination and consumer protection statutes.