Q. What is a subprime
loan?
A. The
word "subprime" describes the borrower's supposed credit
quality. Subprime means that, according to the lender, the borrower's
credit rating is impaired to the extent the borrower cannot get
a conventional loan. Subprime loans typically have slightly higher
interest rate & closing costs.
Q. What is a predatory
loan and how is that different than subprime?
A. Predatory
loans are a subset of subprime loans with features that significantly
increase the likelihood of borrower failure. Moreover, they are
specifically marketed to those who are vulnerable. While the distinction
is not always clear because of the lack of reporting requirements,
the recent explosive growth in the subprime market suggests that
the growth is due to the predatory-type loans that first appeared
in the mid-90's.
Q. What features
do the predatory loans contain?
A. Extraordinarily
high interest rates; excessive origination and other loan fees;
loan amounts exceeding the value of the home; single premium credit
life, disability or unemployment insurance added to the loan principal;
credit insurance that expires well before the loan does; needless
refinancing or loan flipping; balloon payments; negative amortization;
partnerships with shady home improvement contractors; switching
of loan terms at signing.
Q. What are the
marketing strategies of predatory home lenders?
A. Predatory
lenders aggressively market their loan products through mailings,
telephone sales, going door-to-door and partnering with home improvement
contractors. It is often difficult to get information about the
true costs of their loans. They target borrowers who can least afford
their loans. There is evidence that predatory lenders are engaged
in reverse redlining; that is, they aggressively market in city
areas that have traditionally found it difficult to obtain financing
from conventional lenders. So while people in these areas once could
not obtain any loans, now they are exposed to expensive and dangerous
loans.
Q. Aren't subprime
loans made to people who don't otherwise qualify for a mortgage,
thereby giving them a chance to own a home?
A. The
fact is, most predatory loans are made to people who already own
their homes, and up to half of all subprime loans are made to borrowers
who do qualify for traditional mortgage loans. Also, not all credit
is good; an unaffordable loan, secured by the borrower's home is
not good for the borrower.
Q. If the problem
is so bad, why haven't we heard more about predatory mortgage lending?
A. For
several reason:
- 1. It's a fairly recent problem. The
subprime market exploded in the 1990s.
- 2. It's a reporting problem. There are
few reporting requirements for lenders so it is difficult to collect
and report the extent of these abusive loans.
- 3. It's a human problem. Frankly, many
victims of predatory lending are afraid to come forward because
they feel ashamed and embarrassed, thinking they have done something
wrong. Their self-esteem is at stake. Moreover, many victims of
predatory home loans are poor, elderly or part of a minority community
- groups that are traditionally underrepresented in public discourse.
- 4. It's a problem of complexity. Predatory
lenders work the system using a myriad of tricks and gimmicks
designed to induce the homeowner to take a bad loan.
Rest assured, predatory home lending is a problem.
Q. Why should we
be concerned about predatory home loans?
A.
- 1. These are unconscionable loans, leaving
defeated borrowers and broken dreams.
- 2. For every unaffordable mortgage that
is later foreclosed, a family has been ousted from their home.
- 3. Failed loans result in empty homes
- attracting bad elements, diminishing the quality of neighborhoods.
Q. Don't predatory
lenders face pressure from the communities where they do business?
A. Not
much. Most of them are not located in communities where they do
business. They are corporations hidden away in far-off cities who
do most of their contact by mail or phone.
For more information, contact Danny
Wagener at 515-255-0800 or danny@iowacci.org. |
