Law and Ethics of Predatory Lending Practices

By Elizabeth Pelish

Drawing on both legal analysis and ethical frameworks, the article argues that predatory lending is not only a regulatory failure but also a moral issue that deepens systemic inequality. It calls for comprehensive reforms including stricter interest rate caps, standardized federal guidelines, increased enforcement powers, and expanded access to ethical, alternative credit sources. Ultimately, it contends that confronting predatory lending requires dual commitment to legal justice and financial ethics to protect at-risk populations and promote fair lending practices. This article explores the legal and ethical dimensions of predatory lending practices, which exploit vulnerable borrowers through deceptive, high-cost loan structures.

Predatory lending refers to the unethical and often illegal practices by lenders that impose unfair or abusive loan terms on borrowers; it lacks a singular legal definition, which allows some exploitative practices to persist in gray areas of financial regulation. However, common characteristics include excessively high interest rates not justified by borrower risk, balloon payments or large final payments that borrowers are unlikely to afford, loan flipping, or encouraging borrowers to refinance repeatedly, accruing fees each time, misrepresentation of loan terms or failure to disclose key information, and targeting vulnerable groups with limited financial literacy or access to credit.

These practices exploit vulnerable populations—typically low-income individuals, minorities, or the financially uneducated—by charging excessive interest rates, hidden fees, and structuring loans in ways that are likely to lead to default or foreclosure. As a deeply rooted issue in both the financial and legal arenas, predatory lending raises significant questions about the intersection of law, ethics, and social responsibility.

In the United States, several federal laws aim to protect consumers from abusive lending include: Truth in Lending Act (TILA) which requires clear disclosure of loan terms, APRs, and costs, Home Ownership and Equity Protection Act (HOEPA) that addresses high-cost loans and prohibits certain terms like balloon payments and prepayment penalties, and Equal Credit Opportunity Act (ECOA) which prohibits discrimination in lending based on race, gender, or other protected characteristics. Despite these regulations, enforcement varies significantly. State laws also differ, with some imposing stricter interest rate caps and licensing requirements for payday and installment lenders.

From an ethical standpoint, predatory lending contradicts the fundamental principles of fairness, transparency, and respect for human dignity. While lenders are entitled to earn profit and manage risk, predatory practices take advantage of borrowers’ lack of alternatives or financial knowledge, often trapping them in cycles of debt. Utilitarian ethics, which prioritize outcomes that promote the greatest good, would likely condemn predatory lending due to its long-term harm to borrowers and communities. Similarly, deontological ethics, which emphasize duties and moral rules, would view deception and exploitation as inherently wrong—regardless of financial outcomes.Moreover, predatory lending contributes to systemic inequality by disproportionately affecting marginalized populations, reinforcing cycles of poverty and disenfranchisement.

Predatory lending is not merely a matter of poor financial decision-making—it is a symptom of broader structural inequalities and regulatory shortcomings. Addressing it requires dual commitment to legal reform and ethical responsibility. By tightening legal definitions, enforcing existing protections, and promoting equitable lending practices, society can work toward a financial system that serves without exploiting the most vulnerable.

Bibliography

Consumer Financial Protection Bureau. Truth in Lending Act (TILA). March 2015.

https://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf.

Consumer Financial Protection Bureau. “Enforcement Actions.”

https://www.consumerfinance.gov/enforcement/actions/.

Seven Pillars Institute. “Financial Ethics 101: Predatory Lending.” https://www.7pillarsinstitute.org/financial-ethics-101-predatory-lending/.

Biddle, Jeff. “Predatory Lending’s Prey of Color.” The American Prospect, June 5, 2023. https://prospect.org/economy/2023-06-05-predatory-lendings-prey-of-color/.