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Predatory lending - Essay Example
Predatory lending is the practice whereby a person in need of a loan is convinced by a lender to accept the terms of the loan based on misinformation (Luhby 2009). To achieve this, the lenders conceal important details which could be helpful to the person applying for the loan…
ose borrowers with little knowledge on money matters especially those owning expensive assets that can be repossessed in case the borrower fails to fulfill the terms of the loan (Frank 2009). For example, a borrower may be required to read and sign a lot of documents which would bind him to the loan agreement. As a result of lack of skills and trusting the lender, he may assume that all the details in the documents are correct and thus sign them without interpreting the whole information. As such, the unscrupulous lender may take advantage of the situation to add more terms on the signed documents so as to gain more from the borrower. If this happens, the borrower may not have the ability to challenge the discrepancies. If it occurs that the borrower cannot pay the loan, his assets may be seized by the lenders whose main interest would be to sell them at a profit.
The recent mortgage debt crises can be attributed to predatory lending. People with high hopes of owning homes found themselves in a situation which was caused by malpractices of brokers whose intension was to benefit from the deals (Frank 2009). To achieve their objectives, the brokers issued loans with high interest rates to unsuspecting borrowers who later became unable to pay the loans. In order to qualify for a loan, a person is supposed to have the ability to repay either in cash or in kind. These brokers managed to benefit from the mortgage lending due to the government’s failure to regulate their activities (Frank 2009). If proper regulation was done, the unfair deals made to the borrowers would have been noted thus avoiding the consequences that arose later which had a negative effect on the economy.
The mortgage crises can also be attributed to the fact that mortgage lenders failed to acknowledge this policy and went ahead to give loans to people who were not qualified (Luhby 2009). This resulted to bad debts which could only be solved by reacquiring the houses leaving the borrowers without ...