Predatory lending practices by subprime consumer lenders and their economic effects



Predatory lending practices by subprime consumer lenders and their economic effects

Overview

A subprime credit is a form credit financial market United States that is characterized by a level of risk higher than the average of other credit default. This type of operation, granted to individual or companies, has the following characteristics:

The majority of subprime loans are character mortgage .

Financial institutions have a ceiling set by the FED of subprime, although this limit can be overcome by other intermediary entities that can acquire through assignment of credit rights to payment of subprime loans by banks to third parties, in exchange for paying the bank less interest.

The interest rate of a subprime loan is higher than average interest rates for loans of the same features aimed at users solvents, varying between 1.5 and 7 points.

The lending system in the United States is based on the establishment of a special assessment rate or the company requesting the loan, so that those who exceed 850 points in the evaluation obtained loans at prime interest rate low and broad benefits. Those with an evaluation between 650 and 850 points are considered solvents and interest rates that are applied to the credit operations are within the national average. Those who have a score below 650 is considered high risk, and are those that can receive subprime loans with higher rates of interest and bank charges expenses(Gramlich, 2007).

In 2002 the volume of subprime loans from financial institutions in the United States accounted for 7% of the mortgage market. In 2007 it was 12.5%. The subprime loans, like any other, can be traded by banks to other companies, so you can give them in exchange for paying less interest. The advantage of the bank to make the transfer is to guarantee the recovery of the claim quickly. Companies that purchase subprime loans try to make a profit from the difference between the amount paid to the lender and what they actually have the right to charge the particular debtor (Zandi, 2009).

Predatory loans are characterized by practices having to be abusive and unfair activities and direct the intention to take advantage of some individuals, like the old, minorities, and people with low incomes and less education. Owners need to have care- do when you borrow from your home equity (net investment at home after res- tar mortgage total value) High interest rates, refinancing your loan constant, prepaid penalties, honorable excessive rivers in a closing statement, balloon payments, forged signatures on documents loans and cannot afford monthly payments are possible indicators of predatory lending (Squires, 2004).

The international credit crunch is advancing at a rapid pace. The outbreak of subprime mortgages was only a first link, by the way have fallen some financial instruments such as CDO or commercial paper. However, the virus of the expansionary monetary policy of central banks and threatens several fronts: Both mortgages (subprime, alt-A, option ARM, prime and commercial), as ...