Tom Barkley has been writing about the global economy, financial markets and the environment for more than 20 years.
Updated August 15, 2023 Reviewed by Reviewed by Katie MillerKatie Miller is a consumer financial services expert. She worked for almost two decades as an executive, leading multi-billion dollar mortgage, credit card, and savings portfolios with operations worldwide and a unique focus on the consumer. Her mortgage expertise was honed post-2008 crisis as she implemented the significant changes resulting from Dodd-Frank required regulations.
Predatory lender laws are aimed at protecting borrowers from loan sharks and other predatory lenders. These laws cap interest rates, ban discriminatory practices, and even outlaw some types of lending. While Congress has passed some federal credit laws, many states have taken the initiative to rein in predatory lending. With the rules and credit products constantly evolving, it’s important to familiarize yourself with the latest practices and regulations.
Efforts to combat predatory lending have been going on almost as long as people have borrowed money, beginning centuries ago when various religions condemned the practice of usury—charging unreasonably high-interest rates. Some of the most common predatory lending practices today are subprime mortgages, payday loans, and car title loans.
Subprime mortgages, which are offered to borrowers with weak or subprime credit ratings, aren't always considered predatory. The higher interest rate is seen as compensation for subprime lenders, who are taking on more risk by lending to borrowers with a poor credit history.
But some lenders have aggressively promoted subprime loans to homeowners who can't afford them—or who sometimes qualify for more favorable loan terms but don't realize it. Such unscrupulous tactics occurred at a mass scale in the lead-up to the subprime mortgage crisis in 2008, which contributed to the Great Recession.
It’s normally very easy to get a payday loan. You can walk into a payday lender’s office and walk out with a loan. You will not have to give anything to the lender to secure the loan, as you would at a pawnshop. Instead, the lender will typically ask you for permission to electronically take money from your bank, credit union, or prepaid card account. Sometimes, the lender may ask you to write a check for the repayment amount, which the lender will cash when the loan is due.
Payday loans can be expensive. Payday lenders charge very high interest levels: as much as 780% in annual percentage rate (APR), with an average loan running at nearly 400%.
Payday lenders say their high interest rates are misleading because if you repay your payday loan on time, you will not be charged high interest rates. That might be true in some cases, but 80% of payday loans are renewed multiple times, according to the Consumer Financial Protection Bureau (CFPB), indicating that most of these loans are not paid off on time. Payday loans have also been linked to a doubling in bankruptcy rates.
Like an auto loan, a car title loan uses your car’s title as collateral. But while an auto loan is used to help purchase the vehicle, the money from a title loan can be used for any purpose. More important, short-term, high-interest title loans can be predatory. Lenders often target people who might have difficulty repaying the loan, which could force them to refinance at ballooning costs and potentially lose their car.
In the U.S., a patchwork of state and federal laws has been crafted to protect borrowers, but they sometimes struggle to keep pace with evolving predatory practices. Here are some of the specific laws and regulations relevant to each type of financing. Knowing the characteristics of these loans can help you recognize one if it's offered to you.
Over the past six decades, significant progress has been made in protecting homeowners from abuse and discrimination, despite the persistence of predatory practices. In 1968, two new laws took different approaches to strengthen homeowners' protections—and they continue to evolve. The Fair Housing Act (FHA) outlawed discrimination in real estate, including for mortgage borrowers. Initially banning discrimination based on race, religion, national origin, and sex, the law was later amended to cover disabilities and family status.
Another key law was passed in 1968. The Truth in Lending Act (TILA) required mortgage companies and other lenders to disclose the terms of their loans. The law was expanded several times to cover a range of real estate practices. In 1994, TILA was amended to include the Home Ownership and Equity Protection Act (HOEPA), which helped protect borrowers against predatory, high-cost mortgages.
The annual percentage rate (APR) that payday loans often approach—one reason these loans are considered predatory products.
The Equal Credit Opportunity Act (ECOA), another pillar of protection for borrowers, was enacted in 1974. While initially focused on banning credit discrimination against women, it has since been expanded to cover race, color, religion, national origin, age, or participation in public assistance programs.
The ECOA and FHA were applied in some of the biggest enforcement actions against discriminatory practices during the 2008 crisis. Reaching settlements with $335 million in penalties to Countrywide Financial and $175 million to Wells Fargo, the Justice Department required the banks to compensate borrowers improperly steered into subprime loans.
In 2010, the Dodd-Frank Act, enacted in response to the crisis, put the new Consumer Financial Protection Bureau (CFPB) in charge of overseeing ECOA and TILA. The CFPB established new, detailed, and clarified disclosure requirements under TILA. Each new presidential administration revisits priorities, disclosures, and rules under its purview.
Oversight of payday loans has primarily been left to the states, though federal laws provide some protections for borrowers. TILA, for example, requires payday lenders—just like other financial institutions—to disclose the cost of loans to borrowers, including finance charges and the APR.
Most states have usury laws that limit interest charges to anywhere from 5% to 30%. However, in some states, payday lenders fall under exemptions that allow for their high interest.
Seventeen states—Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and the District of Columbia—either outright ban extremely high-cost payday lending or have implemented restrictions capping interest rates.
Six states—Maine, Ohio, Oklahoma, Oregon, Virginia, and Washington—have imposed some measures that provide consumer protection, such as term limits, fee limits, or number of loans per borrower.
In 2017, the CFPB took steps to strengthen payday loan user protections. It requires payday lenders to determine—during the underwriting process—whether a borrower can repay the loan and restricts aggressive collection tactics by lenders for late payments. However, in July 2020, the agency revoked the mandatory "ability to repay" requirement. The CFPBs final implementation date for their full and updated "Payday Rule" was June 2022.
Like payday loans, car title loans are regulated by states. Overall, about half of all states allow car title loans. Some states group them with payday loans and regulate them with usury laws, capping the rate that lenders can charge.
The percentage of title loan borrowers who end up having their vehicle seized, according to the Consumer Financial Protection Bureau.
Others treat them as they do pawnshops, thus the alternative term “title pawn.” In Georgia, for example, a bill has been introduced to bring title pawns—which can carry an APR of up to 300% under the state’s pawnshop regulations—under the state’s usury laws, which cap interest rates at 36%.
The rapid growth in online and app-based lending also presents new challenges for consumer protection. The fintech sector's share of personal loan originations nearly doubled between the second quarters of 2017 and 2022 to more than one-third of the market.
Since online lenders often use a "rent-a-bank" business model, partnering with a bank to avoid state usury laws and other regulations, some consumer advocates argue that predatory lending tactics can be challenging to enforce. States have found some success in cracking down on online lenders' predatory tactics in court. However, rules related to fintech are constantly changing as the technology and regulatory environment innovates, adjusts, and grows.
Whenever a lender seeks to take advantage of a borrower and tie them into unfair or unmanageable loan terms, it can be considered predatory lending. Telling signs that you are a victim include aggressive solicitations, excessive borrowing costs, high prepayment penalties, big balloon payments, and being encouraged to consistently flip loans.
In theory, yes. If you are enticed and misled into taking out a loan that carries higher fees than your risk profile warrants or that you are unlikely to be able to pay back, you have potentially been the victim of a crime. There are laws in place to protect consumers against predatory lending, though plenty of lenders continue to get away with it, partly because consumers don’t know their rights.
If you can prove that your lender violated local or federal laws, including the Truth in Lending Act (TILA), you may want to consider filing a lawsuit. It’s never easy going against a wealthy financial institution. However, if you have proof that this lender broke the rules, you have a reasonable chance of being compensated. As a first step, contact your state consumer protection agency.
Despite decades of progress in protecting borrowers, predatory lending remains an ongoing and evolving risk. If you need money, it helps to do your homework by exploring alternative funding options, reading the small print of credit terms, and educating yourself about consumer rights and protections and the range of rates for the type of loan you seek.
The Federal Deposit Insurance Corporation (FDIC) has tips on how mortgage borrowers can protect themselves, and the CFPB has advice on payday loans and how to avoid scams.