Examples of Unfair Practices: Loan Flipping and Loan Equity Stripping

AB

The guidelines against predatory and abusive lending aim to protect consumers from unfair lending practices that can lead to financial harm. Two of the practices mentioned in the guidelines are loan flipping and equity stripping.

Loan flipping is the practice of repeatedly refinancing a loan, often with high up-front fees, which increases the debt burden on the borrower and decreases their home equity. This practice can put the borrower at risk of foreclosure because the increased debt burden may become unmanageable, and the decreased equity may make it difficult to sell or refinance the home.

Equity stripping, on the other hand, is the practice of making loans that are secured by the consumer's home but with high, up-front fees that are financed and secured by the home. This practice can also lead to decreased home equity and an increased debt burden, putting the borrower at risk of foreclosure.

Answer A correctly identifies loan flipping as potentially unfair because it increases the chances of foreclosure by decreasing home equity and increasing debt burden. This is because loan flipping often involves adding high up-front fees to the loan amount, which increases the total debt and decreases the equity in the borrower's home. As a result, the borrower may be unable to make payments or refinance the loan, leading to foreclosure.

Answer B is incorrect because it mistakenly identifies equity stripping as a practice involving high up-front fees that are financed and secured by the home. This is actually the definition of loan flipping. Equity stripping is a separate practice that involves making loans secured by the consumer's home, but with terms that strip the borrower of their equity in the property.

Answer C is also incorrect because it incorrectly identifies loan flipping as a practice involving high up-front fees that are financed and secured by the home. This is actually the definition of loan flipping. Making loans secured by the consumer's home with high up-front fees is one of the key characteristics of loan flipping, but it is not the definition of the practice.

Answer D is incorrect because it mistakenly identifies equity stripping as a practice that increases the chances of foreclosure by decreasing home equity and increasing debt burden. This is actually a correct statement about loan flipping. While equity stripping can also lead to decreased home equity and increased debt burden, it is not necessarily a practice that increases the chances of foreclosure.