Whenever I write about predatory lending, there are always lots of questions. But the question people ask most is always the same. "Exactly what is predatory lending, and how can it occur?"

Before we begin, remember that these illegal lending practices are almost always directed at those most vulnerable, so you may be surprised that anyone might fall victim. Also remember that the criminals who engage in these practices are constantly changing their tactics, so the scams I describe here may not be what you might see in the marketplace tomorrow.

Predatory lending is best described as victimization of consumers through the aggressive marketing of fraudulent, unfair, and/or deceptive loan programs. Most often targeted are those who are attempting to refinance their house or consolidate debt into a new home loan. Also targeted are first time buyers who may have less-than-perfect credit, and who may need to seek home financing from sub-prime lenders.

Predatory lending typically occurs in one of two settings:

In the first scenario, an unethical lender may charge extremely high interest rates and excessive costs and fees well outside the mainstream for similar risk mortgages.

Because the borrower is inexperienced in financial matters and has limited resources, he may accept such an offer, believing it to be typical of loans being offered to other borrowers in similar situations. Because this borrower will not qualify for a "conforming Fannie Mae" loan, he is often forced to seek financing in the sub-prime marketplace, where higher rates appropriately reflect a higher level of risk.

But once in this arena, borrowers can easily be misled into believing that they have no option other than to accept predatory terms and conditions. Although comparison shopping would likely reveal the scam, such inexperienced borrowers are typically not aware of consumer "best practices," and simply take what is offered.

Georgia legislators have attempted to describe what constitutes excessive fees and costs, but their success in this area has been limited. Keep in mind those legitimate lenders are entitled to a higher rate of return when they take on a loan that realistically bears a greater risk of default. And when government tries to tell its citizens what a "fair" interest rate is, the law may be preventing those with weak credit from owning a home of their own.

In the second scenario, the crook’s goal is not to generate fees. Instead, the criminal hopes to steal equity that an existing owner may have. In its extreme form, the predator may hope even to force the owner into a position of default, thus forcing the sale or surrender of the house to the criminal.

In this case, the victim is often a single senior citizen who has lived in their home for many years. The house may need a major repair, such as a roof replacement. Or perhaps the owner owns her home free and clear, but has run up credit card debt on several accounts and wants to consolidate them.

Because the owner has substantial equity in her home, she is attractive as a borrower. But because the house needs substantial repair or because her use of credit has been unwise, the owner may not qualify for a conventional loan program. Additionally, the owner may be retired and on a very limited income. These conditions can force the owner to seek financing from unconventional lenders.

Predatory lenders seek out victims in exactly these situations. Their aggressive marketing techniques promise "easy financing" and "quick approvals," and may involve phone solicitation, direct mail marketing, and even unsolicited personal visitations.

In its most aggressive form, con men who describe themselves as contractors drive up and down streets in low income neighborhoods. They look for homes in need of repair, then knock on doors offering to solve the repair issue and provide financing as well. Their hope is that the homeowner will agree to a loan that would be almost impossible for the owner to repay.

The loan offered by the scammers may start at a reasonable rate of interest, but adjust to much higher levels or even feature a "balloon" clause calling for payment in full after a relatively short period of time.

By making a loan to a borrower who has no realistic expectation of repayment, the lender has broken the law in Georgia. But unless the home owner knows his or her rights and brings the loan to the attention of authorities, they may eventually be forced to surrender the house to the criminals in lieu of foreclosure, or lose the house at auction. Either way, the owner loses their home and their credit rating to a criminal enterprise.

As long as we have uneducated consumers, there will be criminals trying to defraud them out of their money or their equity, or even try to steal their homes. Education is the key, and we should all encourage our friends and relatives to shop and compare whenever they enter the financial market.