What Is Subprime Lending?

Victim of Subprime Lending?

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In the 1990's the number of subprime loans rose sharply. Predatory lending tactics by subprime lenders often target minorities calling it reverse redlining. Not only were minorities harmed, but others have also fallen prey to subprime lending through aggressive broker tactics and mass marketing campaigns.

The Law Office of Michael P. Forbes, PC is knowledgeable in all aspects of subprime lending, predatory lending, and collector abuse. I have helped clients by successfully defending against foreclosure proceedings. I represent the best interests of my clients and protect their rights against fraudulent and deceitful lending and collection activities.

What is Subprime Lending?

Loans are either prime or subprime and the term usually refers to the borrower although there are lenders who focus on subprime lending. Supporters of subprime lending claim it allows borrowers with poor credit history and limited assets a chance to obtain a loan previously denied because of the inability to meet the prime lending standards.

Subprime lending became viable in the United States after the Tax Reform Act (TRA) of 1986, and it found its popularity throughout the early 2000s. The market for subprime lending however has been under a gradual state of recovery involving the execution of some serious measures following the stock market crash in 2008.

Subprime mortgage loans are an example of subprime lending. It is the most popular form of subprime lending and involves stricter terms and higher than average interest rates due to the higher credit risk associated with lending. Many families who are unable to afford to pay a monthly mortgage or have a lower than average credit score (credit scores typically lower than 640) look to subprime lending. Through subprime lending, families are given the opportunity to accumulate wealth throughout the years through homeownership. The interest rate associated with the subprime mortgage will depend on a couple of factors.

These factors take the following into account:

  • The borrower's credit score
  • The borrower's down payment amount
  • The type of delinquencies found on the borrower's credit report
  • The number of late payments found on the borrower's credit report

Following are some of the loans made to borrowers who cannot qualify for a traditional prime loan:

  • Non-conforming loans
  • Subprime lending
  • Near prime lending
  • Non-prime lending
  • Second-chance lending

Subprime borrowers are limited in their ability to obtain favorable loans due to:

  • Size of possible down payment
  • History/number of delinquencies
  • Type of delinquencies
  • Excessive debt
  • Lack of assets or security
  • Legal orders to pay judgments
  • Bankruptcy

Subprime loans essentially have higher interest rates with less favorable terms to compensate the lender against the risk in case the borrower defaults on the loan. The subprime loan is at a higher cost than a prime loan and has less favorable conditions.

What Happens to the Interest Rate?

Many subprime or non-conforming loans start out with low-interest rates for the first year. After the first year, the interest rates rise and that increases the monthly loan payment. Borrowers would refinance into a new subprime loan with additional points and higher interest tacked on. Borrowers who took out adjustable-rate mortgages (ARMs) which gave them lower interest rates at the beginning of the loan ended up defaulting when the interest rates increased after the designated time period.

Subprime Lending Market

Brokers are very aggressive in the subprime lending market. Some state the value of a property above its actual value, overstate the borrower's income, increase the interest rate in the loan or relay false credit score information to lenders. The purpose is to get the loan for the borrower and receive a sizeable commission.

If you were the victim of aggressive broker tactics that were fraudulent or deceitful when you obtained a subprime loan, you may have a possible recourse against the broker and lender. You should involve your attorney in your legal matter. My Philadelphia foreclosure defense office can review your loan paperwork and advise you on your possible case.

What Are My Consumer Rights?

Lenders in the subprime market often approve loans easily or they fail to fully explain the actual cost of the loan to the borrower. They also encourage frequent financing to get better interest rates and roll the costs to the new loan making it harder for the borrower to repay. The lender benefits each time a loan is refinanced and it costs the borrower dearly. The predatory subprime lending traps uneducated or targeted borrowers into a cycle of debt. In the meantime, the lenders realize large profits from each loan origination.

If you face foreclosure due to illegal activity on the part of a subprime lender or broker or you suspect wrongdoings, you should seek legal help from a Philadelphia foreclosure defense attorney experienced in debt collector activities.

Suggested Reading:

The Law Office of Michael P. Forbes, PC protects the rights of victims of subprime lending in Pennsylvania. Call today at (610) 991-3321.

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