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Bad News: Subprime Loans are Back and Ready to Exploit More People

Bad News: Subprime Loans are Back and Ready to Exploit More People

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?

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Photo credit: Zelda Richardson

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72 comments

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5:02AM PDT on Aug 9, 2014

This is why consumers have to be educated and cautious.

4:34AM PDT on Aug 3, 2014

Sad. TY

9:47AM PDT on Aug 2, 2014

No surprise here. On the housing side we still have Fanny, Freddie, and the FHA backing housing loans one of the major causes of the housing collapse in 2008. We also have the FED distorting the market more than it has ever been distorted in the past with massive QE and zero interest for 5 years. Then the banking bailouts reinforced that the taxpayers were responsible for the risky lending of the banks encouraging more risk taking. The Dodd Frank bill added another 200 regulations but experts argue that they will do little to prevent the problems and only add to the cost of doing business in the USA.

All of this along with the massive government debt is setting the economy up for a bigger collapse. Private risk should never be rewarded by tax payer money. Progress would be to get the government out of manipulating the market and letting bad companies fail.

12:44AM PDT on Aug 2, 2014

Thanks for the article.......not good news at all.....many are still fighting foreclosures from the last round........

12:37AM PDT on Aug 2, 2014

TERM LIMITS!!!

10:48PM PDT on Aug 1, 2014

Very bad news. How can this type of loan represent large gains if they are being offered to people who will default on them soon enough? What about the insurance companies who are supposed to back up the banks? What's in for them here?

8:08PM PDT on Aug 1, 2014

Our lawmakers, both state, & national, are popetually running around with their hands out.

Their overriding concern is not serving the people who they represent.

It's getting reelected.

This probably isn't party specific, but Republicans, & particularly the teabaggers, really have nothing but contempt for the part of the population they see as "takers".

When they take money, they know they have to deliver.

They've basically become whores for anyone willing to give them the lifeblood of politics......MONEY.

6:12PM PDT on Aug 1, 2014

Why are subprime loans even legal?

6:11PM PDT on Aug 1, 2014

Awful

5:43PM PDT on Aug 1, 2014

Thank you Congress for doing such a bang up job.....NOT. There Ought to be a Law to prevent these banking vultures from this unethical practice, but our "lawmakers" are too damn busy hissing and spitting at each other and at women to do their jobs. :(

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