Predatory Lending and the Subprime
The subprime mortgage industry relaxes numerous conventional under- writing standards in order to lend to less creditworthy customers. Many of the newly relaxed standards benefit lenders and borrowers alike. Examples include legitimate risk-based subprime loans to trustworthy borrowers with credit blemishes or scant credit histories, and loans with reduced down payment requirements or higher loan-to-value ratios (Engel & McCoy, 2011). In some segments of the subprime loan industry, however, lenders over- ride conventional lending norms by structuring loans to inflict seriously disproportionate net harm on borrowers. When the harm outweighs the benefit of loans to borrowers and society at large, such practices are predatory. One of the most compelling examples involves violations of the norm that no mortgage shall be made to a home owner who lacks the ability to repay, a practice known as asset-based lending.' All too often, these loans force borrowers into bankruptcy or foreclosure Victims of asset-based lending frequently default, which can lead to an- other predatory lending phenomenon, ?loan flipping.? Loan flipping occurs when lenders persuade home owners to refinance their mortgages at short, repeated intervals, as often as three or four times a year.