Predatory Lending Prevention and Fair Lending

Predatory lending practices include: loan flipping (repeatedly refinancing a loan to generate fees without borrower benefit), equity stripping (lending based on property equity rather than ability to repay, designed to capture the property through foreclosure), balloon payments without adequate disclosure (large final payments that the borrower cannot afford), excessive fees (points and fees exceeding reasonable compensation for the loan), prepayment penalties that trap borrowers in unfavorable terms, and negative amortization without borrower understanding (payments that do not cover interest, causing the loan balance to increase). For real estate investors offering seller financing or becoming private lenders, these practices must be scrupulously avoided—even unintentional violations create legal liability.

Fair lending compliance requires two levels of adherence. Disparate Treatment: intentionally treating applicants differently based on protected characteristics is always illegal. Even if the intent is benign (e.g., offering a minority borrower a "special rate"), differential treatment based on demographics violates ECOA. Disparate Impact: facially neutral policies or practices that disproportionately disadvantage protected groups are also prohibited unless the lender can demonstrate a legitimate business necessity. For example, a policy of lending only in certain zip codes might create disparate impact if those zip codes correlate with racial demographics. Compliance requires regular analysis of lending patterns, fair lending training for all staff, and proactive monitoring of policies for potential disparate impact.

Investors who offer seller financing are subject to lending regulations in many circumstances. The Dodd-Frank Act exempts sellers from ATR/QM requirements only if they: sell no more than 3 properties per year using seller financing, do not construct the property, and the financing does not include negative amortization, balloon payments under certain conditions, or terms exceeding 30 years. If the seller financing exceeds these limits, the seller is considered a loan originator subject to TILA, ATR/QM, licensing requirements, and all other lending regulations. This is a critical compliance consideration for investors who frequently use seller financing as a disposition strategy. Exceeding the exemption triggers a cascade of regulatory obligations.