Remember how the financial crisis started? A series of bad loans, bought, sold, and traded as commodities, that all went tumbling down when people couldn’t afford to keep up with their repayment schedules. And remember how Congress was put in charge of making sure that something like that would never happen again?
Well, Congress didn’t keep up their end of the deal, and now, subprime lending is back — and it looks like it’s here to stay.
Subprime loans are those offered to borrowers who, for whatever reason, are not considered good candidates for credit. This usually means that they have poor credit scores (a result of debt, no prior credit activity, bankruptcies, or other issues), and they may also have limited financial literacy. Such loans typically come with terms that some critics claim are exploitative, including extremely high interest rates, inadequately explained balloon payments, and payments over the life of the loan that far exceed the value of the asset. That’s how so many people wound up underwater on their home loans, causing a foreclosure meltdown.
The subprime lending crisis disproportionately affected low-income communities of color from the start, as they were the most likely to be considered credit risks. Borrowers were misled, outright lied to, and coaxed into getting loans they couldn’t realistically repay, and many didn’t fully understand the implications of the documentation they were signing as they falsified income statements and made promises to pay that they could never keep. Banks kept profiting, though, and it took a major financial crisis to result in a meaningful push for reform.
Now, a similar lending style is cropping up at auto dealerships, which are already infamous for exploitative lending practices. Tragically, those with trashed credit from the earlier financial crisis are being pushed into risky loans, thus exacerbating the problem even more. Net worth for people of color has dropped dramatically since the recession, and that problem is likely to get worse as people are forced to take out bad loans in order to access transportation — many low-income people of color need cars to get to work and navigate their communities, which often have poor public transit access.
People are getting in over their heads with vehicle loans, falsifying their income, signing exploitative loans, accepting loans with outrageous interest, and more. If it sounds familiar and you’re wondering why Congress didn’t do more to put subprime lending in check, you’re not the only one.
The answer to that question lies in part in lobbying from the banks, which have a vested interest in continuing to offer subprime loans, thanks to the large profits it generates. For Congress to enact meaningful reform, it make take a firebrand like Elizabeth Warren to push for harsher regulations and better enforcement.
Meanwhile, subprime lending is posing an immediate problem in low-income communities of color across the United States, and regulators need to act soon if they want to prevent another financial bubble that explodes in the face of the financial industry. As the resurgence of such loans indicates, the banking industry appears sluggish to learn from its mistakes — perhaps it’s still laboring under the belief that it’s too big to fail?
Photo credit: Zelda Richardson