Predatory Lending: definition

Predatory lending is the practice of making exploitative high-cost loans to naive borrowers.

The academics below have defined predatory lending as a syndrome of abusive loan practices that involve one or more of the following five problems:

  1. loans structured to result in seriously disproportionately net harm to borrowers,
  2. harmful rent seeking,
  3. loans involving fraud or deceptive practices,
  4. other forms of lack of transparency that are not actionable as fraud, and
  5. loans that require borrowers to waive meaningful legal redress.
    (p. 1260)

How does this relate to residential homes?

The solution requires understanding the incentives in the home mortgage market that have fueled predatory lending.

Recent changes in the credit market have created new possibilities for lenders to profit by exploiting information asymmetries to the detriment of unsophisticated borrowers.

What is the role of government?

Neither market forces nor existing legal remedies are sufficient to correct predatory lending. Instead, government intervention is needed. [my emphasis]

Anyone who wants to really understand the problems facing the world’s markets and the New Zealand market in particular, are encouraged to study this academic work:

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