Subprime lending is the vehicle used by financial institutions to conduct predatory lending operations. In layman’s terms, it is the art of helping people dig financial holes so deep that they cannot get out, while gaining profits at the demise of our economy. Between 1997 and 2005, subprime lending grew from $65 billion to $665 billion as financial institutions imposed abusive and unfair loan terms on borrowers while practicing aggressive sales tactics. The collapse of the subprime lending market is directly attributable to the risky lending behaviors of US banks in the home mortgage industry. As a refresher, subprime loans are offered to people who have substandard credit, are unable to produce a down payment, and/or have no reserve funds to qualify for a loan. This financial avenue perpetuates America’s propensity to buy on credit without regard to one’s ability to repay the debt.
Subprime lending gives a bye to the person who is in financial distress with a questionable financial history. Given that these same people are pursuing the loan due to some distressful situation needed to support their household, the requirement outweighs the more responsible behavior. This opens the door for more risky behavior by enabling the borrower to further overextend themselves and proceed further down the spiral of financial ruin. In attempts to use these loans to improve their tarnished credit, borrowers are going to great lengths to ensure they remain current on these loans by sacrificing basic survival needs for their families.
Leadership decisions within the banking industry to grant subprime loans emerge when greed trumps the greater good of providing ethical business practices that promote a stable economy. When financial institutions are driven by profits over everything else, they tend to take greater risk in lending money to their customers. They minimize this risk by bundling and selling off loans to investors who are looking for high yield returns. In essence, the financial institutions are creating a buffer and promoting deniability in the event of market collapse. John Watkins (2011) defines this in his article “Banking Ethics and the Goldman Rule” found in the Journal of Economic Issues, as the Goldman rule where organizations pursue profits regardless of the effects on others.
As if the housing debacle were not enough, lenders have targeted the auto loan industry as their next target. These acts further demonstrate how far we haven’t come.