Subprime Lending

1295 Words Dec 24th, 2012 6 Pages
Defining Subprime Lending The problem to be investigated is the effect of subprime mortgage loans on the economy. According to Merriam Webster subprime is defined as having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers; extending or obtaining a subprime loan (Webster, 2012). Subprime mortgage loans are loans given to people with a low credit score. Subprime borrowers normally don’t qualify for prime loans or prime lending. According to Jennings, the subprime mortgage market is defined to include those borrowers with a FICO (Fair Isaac Co.) score below 570 (Jennings, 2012, p. 434).
The American Dream Home ownership has always been a big part of the “American Dream.”
…show more content…
The vast majority of subprime loans are now securitized; leading to claims that securitization facilitates predatory lending and should actively police lenders. New standards to protect borrowers against unfair practices were launched 1 July including requirements to ensure they are not lured into credit contracts they cannot afford to repay. The standards include provisions to stop predatory lenders from exploitative practices such as using household items as security for cash loans (Engel, K. & McCoy, 2007).
Lender and Incentives One has to wonder, why were subprime loans pitched to consumers? They weren’t pushed for altruistic purposes; not from the kindness of the heart. The results were inevitable. According to the readings, subprime loans ended with the same result. They were a risk for the consumer as well as the bank backing the loan. There had to be some incentive for the banks; some benefit that is reaped. In this case, it was a monetary benefit.
Yield-spread premiums is what lenders call them. Consumer groups call them legal kickbacks. YSPs are the cash that mortgage brokers or lenders get for steering a borrower into a home loan with a higher interest rate (Center for Responsible Lending, Yield Spread Premiums (YSPS).
However, the Federal Reserve stepped in and regulated these kickbacks.
New rules issued by the Federal Reserve Board mean that YSPs are no longer legal. The Fed rules ban brokers and loan officers from
Open Document