The Difference Between Subprime and Predatory Lending

What is subprime lending?

Borrowers who have less than perfect credit, or who have had past credit problems, are less likely to qualify for conventional home loans. Often these borrowers' only option in obtaining a home loan is through the subprime market. Subprime loans typically have higher interest rates and fees, since these are higher-risk customers for the lending agency. Subprime loans are intended to be short-term, about 2-4 years, giving the homeowner a chance to pay back debts and clean up their credit. At that time they should be able to qualify for or refinance into a lower risk, lower rate loan from a major bank or savings and loan institution.

What is predatory lending?

A predatory loan can be undertaken by mortgage companies, creditors, brokers or even home improvement contractors, and involves engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower’s lack of understanding about loan terms. These practices are often combined with abusive loan terms such as: loan flipping, excessive fees and very high interest rates, lending without regard to the borrower’s ability to repay, and outright fraud and abuse.

Predatory lending generally occurs in the subprime mortgage market, where most borrowers use the collateral in their homes for debt consolidation or other consumer credit purposes. Most borrowers in this market have limited access to the mainstream financial sector, yet some would likely qualify for prime loans. While predatory lending can occur in the prime market, it is ordinarily deterred in that market by competition among lenders, great homogeneity in loan terms and greater financial information among borrowers. In addition, most prime lenders are banks, thrifts, or credit unions, which are subject to extensive federal and state oversight and supervision, unlike most subprime lenders.