Credit Risk Management Practice Exam

What is the key characteristic of predatory borrowing?

1. Always leads to favorable loan terms

2. Misrepresentation of financial information

3. Strict compliance with loan regulations

4. Reliance on government backing

The correct answer is: Misrepresentation of financial information

The key characteristic of predatory borrowing is misrepresentation of financial information. This behavior is often aimed at exploiting borrowers, typically individuals who may not fully understand the terms and consequences of the loans they are taking on. Predatory lenders may provide misleading information about the loan requirements, fees, and terms, or may offer loans under false pretenses regarding the borrower's ability to repay. This manipulation can result in borrowers entering into agreements that they cannot realistically afford, leading to a cycle of debt. In this context, the other choices are not characteristic of predatory borrowing. Favorable loan terms are contrary to the nature of predatory lending, which typically involves unfavorable terms for the borrower. Strict compliance with loan regulations would imply ethical lending practices, which is not characteristic of predatory lending. Lastly, reliance on government backing does not align with the practices of predatory lenders, as they often prey on vulnerable populations outside any conventional regulatory oversight.