Toward Curing Predatory Lending

Abstract

Cash-poor lower- and modest-income folks are often credit deprived with limited borrowing or financing options. To compensate, such persons sometimes seek financing or credit from so-called fringe bankers or credit providers like pawnshops, check cashing outlets, rent-to-own merchants and tax refund-anticipation lenders. More recently, especially over the last decade, people have new opportunities to use accumulated home equity to secure loans from corporate mortgage bankers, including some that are affiliates of mainstream true banks or depository institutions. Such sub-prime lending is sometimes abused by lenders that engage in a set of ugly, if elusive, practices that have come to be known and criticized as predatory home mortgage lending. The victims are typically modest-income home owners who may often be under-educated, elderly mortgagors of color.

This article is organized in several connected parts. Part I briefly describes the history of second-tier financing including but not limited to sub-prime home mortgage lending. Part II focuses on the contemporary problems with predatory home mortgage loans and relies on certain data and trends. It describes relevant loan content and designs, offensive behaviors of certain predatory lenders, the negative effects on borrowers and various external or spillover consequences. Part III analyzes the causes of predatory home mortgage lending. This Part relies on certain relevant economic reasoning and describes the reluctance of true or depository banks to make subprime home mortgage loans. It further treats the rise of non-bank mortgage lenders that benefit from the information disadvantages of "adversely selected" home mortgage borrowers. Other influences include certain economic trends, income tax changes and borrower psychologies. Part IV describes and analyzes various strategies for correcting predatory home mortgage lending problems. It treats an early group of traditional state protections, a newer generation of federal correctives and the most recent era of state and local strategies. Finally, Part V describes and analyzes the core monopoly problem and reflects on new federal supports for subprime home mortgage lending. This part especially describes the recent involvement of specialized credit unions in making and encouraging private home mortgage loans for the under-served.

Keywords: poverty law and lending policy, subprime loans, predatory home mortgage loans, abusive lender behavior, specialized credit union loans, fringe banking