Prime, Subprime, and Predatory Lending
What exactly is predatory lending? It is any biased lending system or procedure that causes injury to the borrower or encourages a credit scheme that promotes inequality or the continuation of poverty. How does it happen? First, let’s examine the prime and subprime mortgage lending markets for some clues.
Prime mortgage lenders loan money to a consumer to purchase or refinance their home at prime rates. Prime rates are the most favorable and least costly to borrowers and they are normally offered only to those with income, assets and a credit record that meet the standards of the prime lenders. These borrowers are considered the lowest risk group in terms of the likelihood of paying the loan on time, or according to terms and are also known as “A paper” borrowers.
Subprime mortgage lenders work with consumers whose records place them as higher risk borrowers, also known as A-, B, C and D borrowers. Each category represents the increasing risk to lenders for repayment. The lenders then set terms that increase the cost of credit in accordance to the level of risk. Other elements that set these lenders apart are their focus on borrowers as they refinance their mortgages and the higher equity levels as an extra guarantee of repayment. Let’s be very clear: Not all subprime loans are predatory in nature; however, most loans with predatory characteristics are subprime loans.
How can you spot these predatory characteristics? Here are some questions to ask:
- Has refinancing your loan several times caused either your monthly payment to increase or the total amount that you owe to increase?
- Is the loan amount higher than the value of your home?
- When you closed the loan were terms, payment amount and so on the same as the “good faith estimate” you received?
- Were you encouraged to include false information or leave off less positive information from your loan application?
- Did anyone from your lender change information you had put on your application?
- At closing, were you notified of any unexpected costs that were unexplained prior to the closing?
- Is there a prepayment penalty?
- Does the loan include charges for credit life or credit disability insurance? Was this insurance mandatory as a term of the loan or was it optional?
- When you signed your loan papers, did you read and understand everything? Was any portion of the loan papers left blank?
- Did your lender discourage you from shopping around for interest rates from other banks, credit unions or other mortgage lenders before agreeing to your loan terms with ‘today only’ offers?
Answering in the affirmative to the above questions does not guarantee you have been a victim of predatory lending. However, if you did answer ‘yes’ to any of the questions above there may be reason for concern and you are encouraged to discuss the issue with a certified housing counselor at your earliest convenience. The housing counselor will review your concerns with you and assist you in determining if you are financially at risk from a predatory lending situation.