Subprime lending - unethical or just dumb?

[Billy Cox]

For purposes of discussion, 'subprime lending' would be a focus on lending money, especially for mortgages, to people with a lower than average to poor credit history.

Not surprisingly, subprime loans charge higher interest rates and have higher default rates than other loans. These customers are also highly susceptible to financial disaster if their home value stagnates or goes down; leaving them with no equity on their interest-only variable mortgage.

The question I ask is at what point we as people of 'the Book' should have something to say about what could arguably be called predatory lending?

How about payday loans auto title loans and pawn shops?

[Dave McClung]

For purposes of discussion, 'subprime lending' would be a focus on lending money, especially for mortgages, to people with a lower than average to poor credit history.

Not surprisingly, subprime loans charge higher interest rates and have higher default rates than other loans. These customers are also highly susceptible to financial disaster if their home value stagnates or goes down; leaving them with no equity on their interest-only variable mortgage.

The question I ask is at what point we as people of 'the Book' should have something to say about what could arguably be called predatory lending?

How about payday loans auto title loans and pawn shops?

As most of you know, I am an owner of a construction company. Many of my employees fall into the category of "subprime." They make good money when they work, but they only get paid when they work. If the weather is bad or if we finish a project and don't have another ready, an hourly worker may miss several paydays in a row. Many of them rely on pawn shops (unfortunately, they frequently use tools from the job) and payday loans to carry them between projects. Would it be "more ethical" to deny their right to borrow?

[Dennis M. Scott]

What is inappropriate for one person may be very appropriate for another. Interest only mortgages used to be seen as outrageous because of somewhat limited understanding of what mortgages can be used to do. Today, more and more interest only mortgages are being written to accomplish things that were pretty much unheard of just a few years ago. They still may be not what everyone needs, but that doesn't make them wrong. Someone who doesn't understand all the viewpoints might see them as less than desirable.

On the other hand, just a few weeks ago I ran into someone who was joyous, because they had just been approved for a fixed rate, three and a half percent mortgage. What they infact had was a fixed pay rate, with another four and a half percent accruing. Even that mortgage isn't inappropriate in certain situations, but this person's mortgage broker had failed to communicate the accrual rate. Fortunately, we were able to help the person discover the omission before it was too late.

So, often it depends on more information than is obvious.

[John Kennedy]

I would agree that that type of financing may fill a legitimate need. The chief ethical objection I would have would be in terms of disclosure. I have seen instances where the adequacy of the disclosure left much to be desired.

As a tax preparer I frequently find myself in the position of advising a client as to the merit, or lack thereof, of a particular tax strategy. I make every effort possible to see that there is informed consent on the part of the client.

At the same time, many of the people we all deal with have, at best, a very minimal grasp of money matters. Unfortunately there are some very predatory lenders out there.

[Margaret Center]

For purposes of discussion, 'subprime lending' would be a focus on lending money, especially for mortgages, to people with a lower than average to poor credit history.

Not surprisingly, subprime loans charge higher interest rates and have higher default rates than other loans. These customers are also highly susceptible to financial disaster if their home value stagnates or goes down; leaving them with no equity on their interest-only variable mortgage.

The question I ask is at what point we as people of 'the Book' should have something to say about what could arguably be called predatory lending?

How about payday loans auto title loans and pawn shops?

Subprime lending is neither unethical or dumb. A subprime lender who does not charge higher interest rates would go out of business very quickly because people with a lower than average to poor credit history do default at higher rates. The subprime lender must charge higher interest rates to withstand the losses resulting from defaults. The subprime lender is, as a matter of fact, giving a chance to people that would not get a chance from anyone else...unless they find a friendly philanthropist.

[Billy Cox]

"The rich rule over the poor, and the borrower is servant to the lender."
Proverbs 22:7

So, are subprime lenders really doing the working poor a favor by loaning them money that they may not be able to repay?

I used to work for a mortgage lending company that primarily served subprime borrowers. The brilliant part of the business plan was that they were also in the foreclosure management business. Talk about sinergy.

It can be philanthropic to loan money for starting a business - such as with micro-loans. It is something entirely different to loan someone the money they need to pay their electric bill or to buy groceries.

[Wilson L. Deaton]

Payday loans, rent-to-owns, post-date check cashing services, auto title loans, etc., are simply forms of legal looting. It is exploitation of those who have few options.

Here's the logic: I've got some money to invest. I'd like to at least quintuple my investment. In order to get that kind of return, I'll have to find some people who need it really bad and who can't get it elsewhere...

I often drive by a "Check n Go." A quick check of their terms on the internet reveals their standard 14-day loan to have an APR of 573.57%. That's not a typo or misplaced decimal.

I'd be more than happy to make loans to any of you who find that acceptable! Doubling my money every 45 days would be kind of nice.

Wilson

[Dennis M. Scott]

I'd be more than happy to make loans to any of you who find that acceptable! Doubling my money every 45 days would be kind of nice.

Wilson

You could probably do that well by opening a place next door to the one you mentioned, and offer heavy discounts from what they offer. That way you could assist people in the community who need help, and get the kind of return you're looking for, too.

I join you in embracing the idea of not having that kind of business. Years ago, I worked for a guy who had a used tool business, where he bought and sold used items: pretty much a pawn shop. I marvelled that people would bring their tools in on Friday on the way home from the job site, and sell their tools for 10% of what they would have to pay to buy them back early Monday morning. I saw guys do that week after week. I could never figure out how they got money on Monday after having been so desperate for one tenth the money just three days before. The man I worked for paid me to go to auctions and buy tools in bulk so he could sell them.

Some may remember the Reagan cheese days a few decades ago. I was doing urban work in Cleveland, and each month we distributed two tractor trailer loads of cheese, and one truckload of butter at several locations throughout the city. There were some enterprising individuals who would wait in line for an hour for a five pound block of cheese - which their particular cultural group wouldn't be caught dead eating - only to come back wearing different clothes the next hour. They had to show a photo id to get it. (A needless form of humiliation for a hunk of cheese the feds paid someone to produce, IMO. But rules is rules.) These guys had the system down pat. We found out that they were taking it to bars and selling it. The bar owners paid them in booze. When we talked with the government officials about it, they said, "Well, it's just part of the economic system, and we need to help it along."

One guy kept coming all day. He would wear a jacket, then come back with only a t-shirt, then with the bill of his hat point left, then with it pointed right. Someone said they thought they had seen him earlier, and he said, "No that other guy wears his hat the other way."

We had some of our distribution points set up across the street from the "check cashing" stores. They were almost as busy as we were.