Legislation and Predatory Lending in the Mortgage Industry Essay

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Legislation and Predatory Lending in the Mortgage Industry

The American Dream has been one of this nation's most enduring ideals of the past half-century. Presumably, every young couple, low-income family, and incoming immigrant hopes to one day produce 1.7 kids, obtain 1.3 cars, and of course purchase the house with the white picket fence. But fulfilling these goals costs money; and the aforementioned groups are among the least financially stable in the country. These people's need for extra funding has led to the extension of credit to large segments of the population who were previously deemed unqualified. However, some lenders have tried to take advantage of these people by granting mortgages to them at terms that are
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Treasury Notes and attaching balloon payments to mortgages that are longer than five years are now rare (Connor). However, newer forms of this practice still abound. These include: Compelling borrowers to refinance unnecessarily, upselling loans at terms so high that refinancing is impossible, adding up ITont points, fees, or credit insurance without disclosure to the borrower, splitting loans in two so that interest can be charged twice, and colluding with brokers and insurers to limit the choices of prospective homebuyers (Connor).

Many of the problems with predatory lending can be traced to the historic practices of redlining. Redlining was the practice by financial institutions of pinpointing an area with a certain racial makeup and refusing to do business there. Many municipalities ignored this practice for a long time and some even supported it (Wyly and
Holloway). In the latter part of the last century, both the federal government and successive local governments have taken steps to eradicate this. However, the banks which had previously refused to do business in these areas are now the same ones that are responsible for extending credit there. They soon realized that it is more profitable to lend to them at high interest rates than not lend to them at all. For these reasons, many of the loans made to individuals in minority neighborhoods were made at sub-prime rates regardless of the person's economic status or credit
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