Subprime
The prime rate, according to Wikipedia, is the “interest rate charged by lenders to borrowers who they consider most creditworthy.”
The Wall Street Journal defines the prime rate as, "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks."
So does this mean that corporations are the most creditworthy borrowers? If so, why?
Subprime rate, then, is the interest rate charged by lenders to borrowers they consider not so creditworthy. How much above the prime interest rate is considered to be the subprime rate?
According to the Fair Housing and Equal Opportunity website , subprime loans "carry a higher rate of interest than prime loans to compensate for increased credit risk.”
According to the same government source, “Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.”
HUD has a 2002 study that looks at “ lending practices in the sub-prime mortgage market and the current and potential role of Fannie Mae and Freddie Mac…” But I’m not yet able to open this pdf file.
I dont think all subprime lending is considered predatory lending, but certainly all predatory lending is subprime.
It sounds like someone would opt for a subprime mortgage or loan if they have a bad credit history, can't document their income (illegal immigrants?), or want to borrow more money than most institutions would give them, based on their current assets.
What are the different ways a company can do predatory lending?
The Center for Responsible Lending has a list:
Excessive Fees on a loan (Approx 5% of the loan amount; for a non predatory loan, the fee is more like 1%)
Abusive Prepayment Penalties (Most predatory loans require that the borrower pay six months of interest as a penalty if they refinance or change the loan before three years pass. Yet, because the loan is at such a bad rate, people want to refinance earlier...)
Kickbacks to Brokers (Yield Spread Premiums) (I dont understand this one)
Loan Flipping (The lender convinces the borrower to refinance a loan and charges a refinancing fee, without making the loan any better.)
Unnecessary Products (Lenders add on unnecessary insurance.)
Mandatory Arbitration (Ouch --the borrowers sign something saying they won't "seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms.")
Steering & Targeting (Predatory lenders somehow convince a large number of borrowers to accept subprime mortgages and loans, even though the borrowers are eligible for regular loans. The lenders can be agressive and even lie. "Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.")
The Center for Responsible Lending says: "Between 1994 and 2004, subprime mortgage lending grew from $35 billion to $530 billion. " According to an LA Times article, "These loans have been the fastest-growing segment of the mortgage market and now account for an estimated 20% of all such lending."
Wow, this is a big deal. Who are some corporations/ companies that have been known for predatory lending?
Household Finance, now owned by HSBC Holding (ACORN won a settlement from Household in 2002, for $484-million.)
Wells Fargo (ACORN has a law suit against them now on behalf of 3,000 borrowers.)
Ameriquest (This week, 1.21.06, Ameriquest is paying a $325 million settlement --many borrowers get about $700 each--because of its predatory lending practices.) The company has to change its practices. Turns out the head of this company, who donates lots of money to Bush, is now Ambassador to the Netherlands. HIs appointment was delayed while this case was being deliberated. They should refuse him in the Netherlands!
Associates First Capital, acquired by Citigroup, paid a $215 million settlement to the Federal Trade Commission, on behalf of consumers, in 2002.
I'm sure there are others.
What kind of activism is there around predatory lending?
Aside from the ACORN lawsuits, the Center for Responsible Lending endorses state legislation, like that in North Carolina since 1999, that makes it illegal for a lender to charge excessive fees on loans, to have long pre-payment penalties, to make kickbacks to brokers, and to prevent borrowers from taking the lender to court.
The prime rate, according to Wikipedia, is the “interest rate charged by lenders to borrowers who they consider most creditworthy.”
The Wall Street Journal defines the prime rate as, "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks."
So does this mean that corporations are the most creditworthy borrowers? If so, why?
Subprime rate, then, is the interest rate charged by lenders to borrowers they consider not so creditworthy. How much above the prime interest rate is considered to be the subprime rate?
According to the Fair Housing and Equal Opportunity website , subprime loans "carry a higher rate of interest than prime loans to compensate for increased credit risk.”
According to the same government source, “Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.”
HUD has a 2002 study that looks at “ lending practices in the sub-prime mortgage market and the current and potential role of Fannie Mae and Freddie Mac…” But I’m not yet able to open this pdf file.
I dont think all subprime lending is considered predatory lending, but certainly all predatory lending is subprime.
It sounds like someone would opt for a subprime mortgage or loan if they have a bad credit history, can't document their income (illegal immigrants?), or want to borrow more money than most institutions would give them, based on their current assets.
What are the different ways a company can do predatory lending?
The Center for Responsible Lending has a list:
Excessive Fees on a loan (Approx 5% of the loan amount; for a non predatory loan, the fee is more like 1%)
Abusive Prepayment Penalties (Most predatory loans require that the borrower pay six months of interest as a penalty if they refinance or change the loan before three years pass. Yet, because the loan is at such a bad rate, people want to refinance earlier...)
Kickbacks to Brokers (Yield Spread Premiums) (I dont understand this one)
Loan Flipping (The lender convinces the borrower to refinance a loan and charges a refinancing fee, without making the loan any better.)
Unnecessary Products (Lenders add on unnecessary insurance.)
Mandatory Arbitration (Ouch --the borrowers sign something saying they won't "seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms.")
Steering & Targeting (Predatory lenders somehow convince a large number of borrowers to accept subprime mortgages and loans, even though the borrowers are eligible for regular loans. The lenders can be agressive and even lie. "Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms.")
The Center for Responsible Lending says: "Between 1994 and 2004, subprime mortgage lending grew from $35 billion to $530 billion. " According to an LA Times article, "These loans have been the fastest-growing segment of the mortgage market and now account for an estimated 20% of all such lending."
Wow, this is a big deal. Who are some corporations/ companies that have been known for predatory lending?
Household Finance, now owned by HSBC Holding (ACORN won a settlement from Household in 2002, for $484-million.)
Wells Fargo (ACORN has a law suit against them now on behalf of 3,000 borrowers.)
Ameriquest (This week, 1.21.06, Ameriquest is paying a $325 million settlement --many borrowers get about $700 each--because of its predatory lending practices.) The company has to change its practices. Turns out the head of this company, who donates lots of money to Bush, is now Ambassador to the Netherlands. HIs appointment was delayed while this case was being deliberated. They should refuse him in the Netherlands!
Associates First Capital, acquired by Citigroup, paid a $215 million settlement to the Federal Trade Commission, on behalf of consumers, in 2002.
I'm sure there are others.
What kind of activism is there around predatory lending?
Aside from the ACORN lawsuits, the Center for Responsible Lending endorses state legislation, like that in North Carolina since 1999, that makes it illegal for a lender to charge excessive fees on loans, to have long pre-payment penalties, to make kickbacks to brokers, and to prevent borrowers from taking the lender to court.
posted by oat collective at 12:28 PM
1 Comments:
wow, totally eye-opening how racist this loan business is.
you ask why would someone opt for subprime and i wondered: besides the corporations, how many people get the prime rate?
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