Question

ABC Mortgages makes a loan with consumer even though he is unlikely to repay it, anticipating that they'll eventually foreclose and get the borrower's equity in the property. This is an example of________.

(A) Predatory lending
(B) Subprime lending
(C) Loan flipping
(D) Steering

Answer 1

ABC Mortgages' practice of making a high-risk loan to a consumer they expect will default is an example of predatory lending. Such practices include the issuance of subprime loans, and in the mid-2000s, this was exemplified by NINJA loans.

Step-by-step explanation:

When ABC Mortgages makes a loan to a consumer that is unlikely to repay it, anticipating they'll eventually foreclose and get the borrower's equity in the property, this would typically be considered an example of predatory lending.

Predatory lending involves unethical practices where lenders take advantage of borrowers. For instance, by issuing subprime loans that carry a higher risk of default due to the borrower's poor credit history or inability to repay, banks can benefit from high initial loan payments and may profit more from eventual foreclosure.

In the mid-2000s, financial institutions were known to issue NINJA loans, a type of subprime loan, to consumers without proper verification of income, job stability, or assets, expecting that these risky financial products could be securitized and sold off, thus transferring the risk of default to others.