predatory lending

Predatory lending is a broad, nontechnical term for lending practices that exploit borrowers through unfair, deceptive, abusive, or fraudulent conduct. It is not a singular federal cause of action with one universal definition. A practice described as “predatory” may instead violate one or more federal or state statutes, regulations, or common-law rules. For example, subprime lending is not, by itself, predatory, and a high interest rate may be lawful or unlawful depending on the governing usury and consumer-protection law.

In mortgage lending, the Federal Deposit Insurance Corporation (FDIC) identified three recurring patterns of predatory lending prior to the 2008 financial crisis: making a loan mainly on the foreclosure or liquidation value of the borrower's collateral rather than the borrower's ability to repay; inducing repeated refinancing to collect new points and fees (often called loan flipping); and using fraud or deception to conceal the loan's true obligations or ancillary products. Conduct involving discriminatory availability, pricing, or terms of credit may also violate federal or state law.

Federal law addresses these practices through several overlapping regimes. The Truth in Lending Act (TILA) also known as Regulation Z, requires meaningful disclosure of credit terms so that consumers are able to compare costs. 12 C.F.R. § 1026.32 limits certain loan terms, including specified balloon payments, negative amortization, default-rate increases, prepayment penalties, and due-on-demand clauses. 12 C.F.R. § 1026.34 separately prohibits specified acts or practices in connection with high-cost mortgages. Section 129C of TILA and 12 C.F.R. § 1026.43 generally require a creditor making a covered residential mortgage loan to make a reasonable and good faith determination, using verified and documented information, that the consumer will be able to repay the loan according to its terms. The Home Ownership and Equity Protection Act imposes additional disclosures, counseling requirements, and restrictions on high-cost mortgages.

The Consumer Financial Protection Act defines standards for unfair and abusive conduct, and 12 U.S.C. § 5536 prohibits covered persons and service providers from engaging in unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services. The Equal Credit Opportunity Act prohibits discrimination in any aspect of a credit transaction on specified grounds, and the Fair Housing Act prohibits discrimination in residential real-estate-related transactions. The Federal Trade Commission Act may also reach unfair or deceptive lending practices within the FTC's jurisdiction.

State law is also central. States may regulate interest rates, licensing, disclosures, mortgage brokering, servicing, debt collection, foreclosure, and unfair or deceptive practices. Because predatory lending is descriptive rather than a single offense, the applicable claim or defense depends on the context such as the particular conduct, loan type, and jurisdiction.

[Last reviewed in August of 2026 by the Wex Definitions Team]

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