Definition Of Subprime Lending

The proper definition of subprime lending has several aspects. Federal banking agencies define a subprime loan as one which is made to a borrower with a weak credit history or less of a capacity to repay. There is no single subprime mortgage lenders list which categorizes specific lenders. In fact, such lending is not confined to mortgages. For example, several other areas of the industry are involved with credit cards and car loans, or with certain investment properties.

In a general sense, though, the definition of subprime lending is lending at a higher interest rate to a customer who for some reason is not able to qualify for a prime rate loan. This is often associated with a person who has a poor credit rating, or who has outspent their credit card limit. However, it also encompasses those who have not acquired a sufficient credit history. Perhaps an individual has low income or a poor debt-to-income ratio. A loan may be large compared to the property which secures it (high loan-to-value ratio). The increased risk associated with such loans in each of the above scenarios means that the cost of borrowing is greater for the lender, and is passed down to the client in the form of higher interest rates.

Another part of the popularly understood definition of subprime lending has a more sinister aspect. Because customers involved in such lending are often in urgent need of additional funds, they may believe that they do not have the time to search for the best deals on their loans. Maybe they do not even know how to go about doing so. This is unfortunate, considering that it is not difficult to locate a subprime mortgage lenders list and find a responsible lender by using an Internet search. These customers are especially targeted by scam artists who seek to capitalize upon the borrower's desperation.

By manipulating loans with high interest rates, 'interest-only' requirements, sudden balloon payments or hidden costs, these criminals seek to use the client's situation for their own financial gain. Choices of products offered may be limited, and the loans structured in such a way that a customer who does not have an understanding of financial matters may be tricked into accepting a loan which the lender knows is inappropriate and doomed to result in failure. These types of lenders are characterized as predatory. They certainly provide a modern example of the ones in Amos 2:6-7, who ...sold the righteous for silver, and the poor for a pair of shoes; That pant after the dust of the earth on the head of the poor, and turn aside the way of the meek... Some lenders have also been accused of discrimination with regard to the assignment of mortgages or other loans on the basis of race.

Painting all subprime lenders with this brush would be a matter of throwing out the baby with the bath water. Proponents of such lending believe that the industry is providing a service to people who would otherwise be excluded from the market entirely. These proponents would argue that predatory lenders do not fit the true definition of subprime lending. They would say that such predators are not just the black sheep of the subprime lending family, but wolves, and should be prosecuted and excluded from any subprime mortgage lenders list. One problem with this proposal is that it is sometimes difficult to prove the motivations behind actions, especially in a legal sense. Where is the line between a 'black sheep' (who may need to be corrected and yet has hope of restoration), and a wolf who needs to be punished and driven away?

Federal banking agencies view predatory lending as an aspect of subprime lending which tends toward abusive practices. Predatory loans seem designed to transfer wealth from the borrower to the lender, without giving anything in return. Thus, the originators of these loans make their decision based on the borrower's assets rather than whether he or she can repay the money. Deception is also used to obscure the full terms of the loan from those who are not knowledgeable about financial matters. Furthermore, the predatory loan dealer may try to convince the borrower to refinance over and over again, in order to collect additional fees.

The Community Reinvestment Act (CRA) attempts to provide some guidance as to the definition of subprime lending as it relates to banking practices. Three purposes of the Act are to encourage banks to make more loans in their communities (particularly to persons at lower income levels), to make sure that these loans meet the credit needs of the community (best possible terms and affordable credit), and to practice sound banking procedures as they do so. The CRA issues four levels of ratings for financial institutions: 'outstanding', 'satisfactory', 'needs to improve' and 'substantial noncompliance'. There is some differences in requirements for banks with different levels of assets.

Predatory lending obviously violates most of the above conditions, and banks or other financial institutions which evidence such behavior are assigned a lower rating. Lenders without such predatory behavior may still have problems in certain areas, such as guarding against racial discrimination or the tendency to push subprime instead of prime-rated loans. At times there is a rather mixed bag of results, for these same subprime lenders can help a bank meet its responsibility to provide services for lower income customers. Most recommend keeping better oversight of lenders, while recognizing the need to halt the activities of predatory lenders. Some websites are available which provide lists of available lenders in the prime rate market, as well as a subprime mortgage lenders list. These sites can offer substantial amounts of information on hundreds of lenders, as well as the services they provide. Information, whether from ratings by federal banking agencies or on private websites, may prove to be the most significant weapon for consumers to use in fighting against improper lending practices.

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