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equity stripping

Equity stripping is a type of home equity loan in which a disproportionate percentage of minority and elderly homeowners were saddled with loans requiring high fees and high interest rates.

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Such loans, which were common from 2003 to 2008, effectively reduced borrowers' home equity positions to zero and were clearly unaffordable, given these borrowers' relatively limited incomes. In response to the widespread use of such loans, a number of consumer organizations, in conjunction with various state attorneys general, brought lawsuits against the major banks and their directors and officers who had perpetrated equity stripping. The suits were based on the theory that banks, along with their directors and officers, encouraged and assisted lenders in what amounted to predatory lending schemes, knowing they could package and sell these loans in the form of mortgage-backed bonds and, at the same time, remove such loans from their own financial statements. A number of these suits have been settled, with payments made to affected homeowners. Other suits are ongoing.

Related Terms

A mortgage-backed security is a security, typically a bond, that produces periodic cash flows,...