Negative Amortization and Predatory Lending

The term predatory lending certainly does sound slimy and underhanded. The practice known as predatory lending can be defined as a financial transaction where the borrower pays a high price that is not reflected in the risk assumed by the lender. Predatory lending can be accomplished through unfairly high interest rates, unnecessary or fraudulent fees, and failure to discuss the true costs of a loan with the borrower.

It is this last category, failure to disclose, that has the potential to involve negative amortization in the discussion of predatory lending. While loans with negative amortization are not, in and of themselves, predatory, they can be under certain circumstances. When lenders do not disclose the possible bad effects and disadvantages of negative amortization with their borrowers, they are engaging in predatory lending.

It is certainly true that many people choose mortgages that allow negative amortization with full awareness of the consequences of their decision. They know that these mortgages begin with very low payments, and often have payment caps that may apply for years. However, they also know that negative amortization caps and periodic recasts allow for the possibility of drastic increases in monthly payments in the future.

However, there are some borrowers who are unaware of these facts. Often, these borrowers have a low income and are attracted to a mortgage with negative amortization because the low monthly payments allow them to purchase a home they could not otherwise afford. These borrowers may sometimes be so anxious to find a loan with low payments that they fail to ask the important questions about the loan they are choosing.

As always, information is the key to combating these unfair practices. Borrowers should be informed going in, and should be ready to ask the tough questions about a loan before agreeing to one that might not be in their best overall interests.