Predatory Lending
Predatory Lending
J. Bradley Jansen
April 19, 2001
Beginning in 2000, the public debate began to change the content of the public dialogue about mortgage lending – and, in particular, mortgage lending in poor and minority communities.
Some consumer advocacy groups have attacked so-called “predatory” lenders engaged in illegal practices. However, some of these attacks use the terms “predatory lenders” and “subprime lenders” as interchangeable expressions, implying that all lenders offering loans to credit-impaired consumers operate in illegal or unethical ways. Many news stories covering this subject did the same thing.
In order to clarify the debate, let’s define our terms better: subprime lending describes loans made to people with blemished credit records. While the name “subprime lending” is relatively new, the business of making such loans is more than a century old. So are some of the companies that still lead the industry.
Abruptly, it seems that legitimate lenders – companies that have been serving the credit-impaired consumer for years – have been cast as enemies of the poor. Regrettably, the byproduct has been the creation of the fiction that mortgage lending itself is predatory and therefore must be severely limited.
Federal and state financial regulators, as well as federal, state and local legislators, have made a variety of proposals and actually passed laws designed to “combat predatory lending.” Caution is needed for several reasons.
Policymakers will actually have to define “predatory lending” before rules could be implemented. Since there is no systematic or organized data on predatory lending, most of the data that has been collected so far is anecdotal at best. There is no lack of existing legal authority to penalize those abuses that have been identified.
While well-intentioned, the haphazard reactions on the part of some policymakers may have the unintended consequence of hurting those whom the policymakers hope to help.
It would seem that before any action is taken predatory lending must be defined so that the problem is understood and can be addressed. In addition, data must be collected and published in a systematic and organized fashion to avoid the reliance on anecdotal stories. Finally, current laws against fraudulent and deceptive practices should be fully enforced.
In addition, upstanding members of the mortgage industry should speak out more loudly and clearly against the bad apples. Educating consumers against the problems associated with loan flipping, excessive fees, irresponsible lending based on income to debt ratios and deceptive practices would be the best place to start.