Apples, Oranges, and sometimes Lemons: Subprime vs. Predatory

By
Services for Real Estate Pros with S.P.O.C.H. a 501c3 Charitable NP

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. 

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Comments (3)

Cynthia Sloop
Community Association Manager - Indianapolis, IN
David - Your very last statement is one of the most important ones!  Many people hear the words "sub-prime" and immediately believe it's predatory.  Many also believe if the interest is a bit higher than a typical conventional loans, it's predatory.  Educating Realtors, customers and the general public about this is very important!
Mar 31, 2007 03:27 AM
Jacob Morales - Arizona Mortgage Planner
US Bank - Scottsdale, AZ
Great post and very very true. Subprime is a great way to help people get back on track and still finance their homes. Something is better than nothing for many people. 
Mar 31, 2007 04:52 AM
Michael Hutchins - Consumer Advocate, Chicago
Michael Hutchins Ent. - Chicago, IL
David I too agree with you.  Predatory lending in my mind means taking advantage of the consumer or banking regs.  And sub-prime is simply defined as lending programs for borrowers who have less than "prime" credit.
Mar 31, 2007 05:50 AM