Predatory Lending and the United States Sub-Prime Market

Paper Summary:

This paper begins by defining important terms from the mortgage industry. It defines the elements that make up predatory lending practices. The paper details the difference between prime loans and sub-prime and how a potential borrower would fall into either category. The paper briefly defines the term foreclosure for context purposes and briefly discusses the aftermath of foreclosure as an aspect of economic impact. The paper offers data from the Home Mortgage Disclosure Act, also referred to as "HMDA" and statistics to prove the correlation between predatory lending and the rate of foreclosure. The paper explores how predatory lending has, as a result of the rise in the rate of foreclosure, affected communities across the country. This influence can be seen in community growth and re-urbanization of these particular neighborhoods. Finally, this paper discusses what is being done at local community levels but also focuses on how state and federal governments are looking to improve the home-buying process to combat the practice of predatory lending. It also discusses how mortgage companies, such as Countrywide Home Loans, are attempting to not only battle predatory lending but also make the dream of home ownership a reality to the under-served populations of the United States during the life of the loan.

Paper Outline:
Introduction
Definitions
Statistics and Data
Economic Impact of Predatory Lending
Public Response to Economic Impact
Conclusion

From the Paper:

"A variety of loan terms and lending practices have been described as predatory or abusive, especially when employed in high-cost or subprime loans. Some of these practices, particularly loan terms such as prepayment penalties are used in the subprime market and this does not seem to scare the borrower away. The use of such terms and practices is highly inappropriate. For example, debt-to-income ratio above 40-45 percent is considered normal practice with prime loan but is entirely inappropriate for subprime loans. Fifty percent for housing costs may be okay for a family with high-income but could cause potential disaster for that of a lower income. Predatory lenders look to stretch the debt-to-income ratio to a point where, it is not considered responsible lending (Smith 3)."

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