The Cumulative Costs of Predatory Practices

Lending Abuses and Their Costs
Consumer loans help families make large purchases and manage the cost of regular expenditures.
Consumers and lenders work together under a specified set of terms and conditions, which can be
responsible or abusive. Responsible lending provides fair, affordable, and transparent loans. Abusive
loans, on the other hand, carry a host of deceptive and abusive loan features. Consumer loans are
not inherently helpful or harmful. Just as a hammer can be used to build a house or take it down,
lending can help families build wealth or strip it away.
The State of Lending in America series has explored many consumer credit products: mortgages, auto
loans, credit cards, student loans, car-title loans, overdrafts, bank payday loans, payday loans, debt
settlement, and debt collection. This chapter draws from each of these markets in explaining how
lending affects households and how lending abuses harm families.1
Responsible loans—such as properly-underwritten, fully amortizing loans—help borrowers gain
access to opportunities. A car loan allows a worker to buy an essential asset for commuting to and
from a job. A student loan pays for tuition and the job prospects that come with a college degree.
A mortgage not only enables a family to purchase shelter, but also allows it to build equity over time.
Saving enough cash to send a child to college or to purchase a house outright is impossible for most
working families. Access to responsible lending products puts these goals—and the benefits they
provide—within reach for families of modest means.
Abusive loans, on the other hand, carry significant costs and lead to consumer harm. Payday and
car-title loans, for example, lure borrowers in with the prospect of short-term cash but ultimately
saddle borrowers in long-term, high-cost debt. Receiving a predatory loan can trap a borrower in a
cycle of debt and prevent wealth-building opportunities for years to come.
Figure 1: Common Features of Harmful Consumer Lending
Signs of Abusive Loans
• Deceptive and misleading marketing that presents an incomplete picture of the risks and benefits of
the product.
• Misleading documentation and a lack of transparency that make it hard for borrowers to understand the
cost and terms of credit.
• Incomplete underwriting that ignores a borrower’s ability to repay the loan and afford other essential
living expenses.
• Misaligned incentives that drive lenders and other parties (mortgage brokers, automobile dealers) to
push loan terms that are not in the best interest of the borrower.
• Unnecessary costs and hidden fees that inappropriately increase the overall cost of credit.
• A loan structure that encourages consumers to take out new loans shortly after repaying an initial loan,
trapping the borrower in a cycle of debt.
• Collection and servicing practices or limitations on legal recourse (mandatory arbitration, harsh
bankruptcy rules, other abuses and scams) that exacerbate financial damage to borrowers.
• Racial and other targeting (such as targeting neighborhoods of color, military bases, or low-income
borrowers), which leads to discriminatory pricing.
1 For a summary of issues related to the products, please see the Appendix to this paper or the other chapters in this series.
The costs of lending abuses are wide-ranging and challenging to estimate. Our attempts here represent
a first step at conceiving and quantifying the broad ranging costs of lending abuses. We lay out
a framework describing how lending abuses engender costs and, when possible, provide estimates
within each type of the scale of costs borne by current consumers.
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The State of Lending in America & its Impact on U.S. Households