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.
What is subprime crisis? How it caused financial mayhem?
It all begins with an American wanting to live the famed American dream.
So he seeks a housing loan to give shape to his dream home. But there is a slight problem. He doesn't have good credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individual before it sanctions a loan.
Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a default by him are high. Banks don't like customers who default on their payments.
But lo!, before the American dream can fade away, there enters a second American -- usually a robust financial institution -- who has good credit rating and is willing to take on some amount of risk.
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