Apples, Oranges, and sometimes Lemons: Subprime vs. Predatory
I was at a party last nite when I handed a promotional plastic credit card to a friend. Having all the physical characteristics of a real credit card, it read Maxed-Out! The regular readers of my Blog may recall Maxed Out! is a just released documentary exposing the dark-side of the credit card industry. It opened in 12 cities last week. Due to the nature of the film, an expose', I don't expect it to be in theaters too long. It will be available from NetFlicks... anyway,
As I explained my role (insignificant though exciting to be involved) in the film to a gathering audience, I was asked by one brave soul about the subprime situation. I inferred he, along with most everyone in the room equated subprime with predatory.
This would be a good exercise for me, I thought. I'm preparing an outline for a course at a local college, "Threats to Continued Homeownership" and listed predatory lending in the school's course description catalog.
I explained what predatory lending was, or at least what it was in my opinion since there is no universally accepted definition of predatory lending. Only transaction characteristics which include:
- making unaffordable loans based on collateral rather than on the borrower's ability to repay;
- inducing a borrower to refinance a loan, repeatedly, in order to charge high fees each time the loan is refinanced (referred to as loan flipping);
- engaging in fraud and/or deceptive practices to disguise the true nature of the loan transaction;
- mandatory credit life insurance as a condition of making the loan
I sensed I was losing my audience to a patio discussion about American Idol, so a summarized subprime lending as not all bad. Subprime lending was initially offered to and used by a more sophisticated borrower... but because it (collateralized mortgage obligations) was in such demand on Wall Street as an investment vehicle... "subprime" went mainstream by extending into a less qualified (poorly) consumer market.
A stock broker who wasn't much interested in the American Idol exodus, confirmed Wall Street's hunger for subprime adding, "If you got something they want... SELL!"
Bottom line: Subprime lending is not necessarily predatory, and not necessarily bad. But all predatory practices including lending, deed stealing, and equity theft is bad.