Defining Subprime Lending
The problem to be investigated is the effect of subprime mortgage loans on the economy. According to Merriam Webster subprime is defined as having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers; extending or obtaining a subprime loan (Webster, 2012). Subprime mortgage loans are loans given to people with a low credit score. Subprime borrowers normally don’t qualify for prime loans or prime lending. According to Jennings, the subprime mortgage market is defined to include those borrowers with a FICO (Fair Isaac Co.) score below 570 (Jennings, 2012, p. 434).
The American Dream
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According to Jennings, during its period of expansion, the subprime market was a source of great wealth for many lenders. “We made so much money, you couldn’t believe it. And you didn’t have to do anything. You just had to show up,” commented Kal Elsayed, a former executive at New Central Financial (Jennings, 2012, p. 434).
When I first moved to Georgia, I worked for a company called Valued Services. Valued Services was the parent company for our “payday lending” operations. I remember seeing the words predatory lender in an article written about the company. Hindsight 20/20, predatory lending is exactly what we were doing. All of our stores were in low income neighborhoods. It was well know they were in “bad” areas because we had bars on the windows of every store we owned. Several of our stores required security during the day, and a police escort at night when the managers would leave with the daily deposit. Instead of the loan assisting the borrower, before it was over with they were in even deeper debt. The interest was at a rate of about 85%, and we would run the postdated check through the borrower’s checking account up to five times. Not only were they accruing large interest rates from the loan with Valued Services, but they were also getting insufficient fund fees. You have to ask the question how ethical was Valued Services. It’s like asking an alcoholic to work in a liquor store. We placed stores in low income areas, and gave consumers loans knowing they were not in positions to pay them back. This is exactly what subprime lenders do. Allow consumers to get loans so they can have a piece of the American dream knowing they won’t be able to pay the loans back. It seems, throughout my professional career, predatory lending has followed me. When I started working for Veolia Transportation I received court ordered bankruptcies every day. When I called the employees’ in, almost all of them had the same story….”I lost my house.” Each employee talked about how they had no problem paying the mortgage for the first few years; then their payments ballooned and they couldn’t make them.
The vast majority of subprime loans are now securitized; leading to claims that securitization facilitates predatory lending and should actively police lenders. New standards to protect borrowers against unfair practices were launched 1 July including requirements to ensure they are not lured into credit contracts they cannot afford to repay. The standards include provisions to stop predatory lenders from exploitative practices such as using household items as security for cash loans (Engel, K. & McCoy, 2007).
Lender and Incentives
One has to wonder, why were subprime loans pitched to consumers? They weren’t pushed for altruistic purposes; not from the kindness of the heart. The results were inevitable. According to the readings, subprime loans ended with the same result. They were a risk for the consumer...