The subprime (that is, non-prime or below “A” rated credit) mortgage lending industry
has grown significantly in recent years, expanding from a $35 billion industry in 1994
into a $140 billion industry in 2000. Subprime mortgages currently represent 13
percent of total mortgage originations, an increase from four percent of originations in
1994. A recent study found that older borrowers were three times more likely to hold
a subprime mortgage than borrowers younger than 35 years of age.1
A combination of factors account for the growth in the subprime mortgage lending
industry. These factors include: increased home equity and homeownership,
particularly in minority and low-income communities; federal preemption and
deregulation of state usury ceilings; elimination of the consumer loan tax deduction;
and increased availability of capital through securitization.
There is increasing concern about subprime lending for several reasons, including
growing evidence of abusive lending practices in the subprime lending market.
Practices such as charging exorbitant fees and interest rates often occur when
subprime borrowers are unsure about their credit history and loan eligibility or are
unaware of mortgage details (balloon payments and prepayment penalties, for
example).
In a recent joint report on predatory mortgage lending, the United States Departments
of Housing and Urban Development and Treasury cite four categories of “all too
frequent abuses” in the subprime market:
· loan flipping2;
· excessive fees and “packing”3;
· lending without regard to the borrower’s ability to repay; and
· outright fraud and abuse.
Similarly, federal banking regulators4 have issued examination guidance for supervising
subprime lending activities that targets the following potentially abusive lending
practices: making unaffordable loans based on the assets of the borrower rather than
on the borrower’s ability to repay an obligation; inducing a borrower to refinance a loan
repeatedly to charge high points and fees each time the loan is refinanced; or
engaging in fraud or deception to conceal the true nature of the loan obligation, or
ancillary products, from an unsuspecting or unsophisticated borrower.
Abusive subprime lenders often target older homeowners, who frequently have
substantial equity in their homes. Nearly 80 percent of older Americans are
homeowners, and 80 percent of these older homeowners own their homes free and
clear. According to the latest American Housing Survey (1999), over 60 percent of
homeowners age 65 and older had at least $50,000 in home equity. Moreover, older
homeowners are more likely to live in homes in need of repair, and less likely than
younger homeowners to do the home repair work themselves.