Understanding Abusive Lending

ACD

Abusive lending is a term used to describe lending practices that are considered unfair, deceptive, or otherwise harmful to borrowers. The practice can take different forms, but it generally involves the lender taking advantage of the borrower's vulnerability or lack of knowledge to extract unfair terms, fees, or interest rates. The CRCM exam question asks which of the following usually comes under the heading of abusive lending, and the possible answers are:

A. Abusive lending usually is defined by a variety of lending practices B. It is the excessive and hidden fees in the amount financed C. A fundamental characteristic is aggressive marketing of credit to prospective borrowers who cannot repay it on the terms offered D. Typically, such loans are underwritten on the liquidation value of the collateral rather than the creditworthiness of the borrower

Answer A suggests that abusive lending can take various forms, which is true. However, it does not provide any specific examples or characteristics of abusive lending, so it is not the best answer.

Answer B highlights excessive and hidden fees in the amount financed, which can be a form of abusive lending. Lenders may add fees or charges that are not adequately disclosed or explained to the borrower, making it difficult for the borrower to understand the true cost of the loan. This can result in the borrower paying more than expected and being financially burdened.

Answer C states that aggressive marketing of credit to prospective borrowers who cannot repay it on the terms offered is a fundamental characteristic of abusive lending. This answer is also correct, as predatory lenders may target vulnerable consumers, such as low-income individuals, the elderly, or those with limited financial knowledge or resources, and encourage them to take out loans that they cannot realistically repay.

Answer D suggests that such loans are underwritten on the liquidation value of the collateral rather than the creditworthiness of the borrower. While this may be a common practice in some types of lending, such as secured loans, it is not necessarily abusive in itself. However, it can become abusive if the lender knowingly offers the borrower more credit than they can reasonably repay, leading to default and foreclosure.

In conclusion, answer B and C are both examples of lending practices that usually come under the heading of abusive lending. Answer D may be a characteristic of some types of lending but does not necessarily constitute abusive lending in and of itself. Answer A is too broad and does not provide specific examples or characteristics of abusive lending.