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Subprime loans are back with a vengeance

Imara Jones | 8/6/2014, 1:35 p.m.

Just when you thought that the subprime mess might be winding down, the truth is that it’s coming back with a vengeance. Even though Citibank recently received the largest penalty ever issued against a financial institution for subprime mortgage loans, toxic loans are showing up for another product: cars. As the New YorkTimes reports,banks are bilking working poor communities of color to the tune of billions. Sadly, they are the latest reason why America should have brought the banks to heel when it had the chance at the height of the financial crisis. Instead the nation propped up the banks and millions are back in a lurch.

As the Times reports, subprime auto products “have risen 130 percent in the five years since the immediate aftermath of the financial crisis.” If loans continue to be issued at the same rate as this year’s, they will reach $600 billion in 2014 alone.

Just what’s brought subprime loans back to life? The answer lies in the origins of the first crisis and the many parallels that this new one has to the old.

The problem is that families haven’t had the opportunity to heal from the last subprime mess. With more than 13 million foreclosures impacting nearly 40 million individuals, personal balance sheets are still recovering. That’s because foreclosed debt weighs down credit scores for nearly a decade. Low credit scores lock out borrowers in need from traditional, non-predatory loans. The legacy of the original subprime crisis is to make once creditworthy people vulnerable to the latest subprime push.

And those most at risk are black and brown. Since people of color with excellent credit before the financial crisis were up to 70 percent more likely to be steered into subprime mortgages—and then foreclosed upon—than white borrowers with similar credit scores, the original subprime mess wrecked both the wealth and credit of black and Latino communities. Not only has the loss of millions of homes sent the level of black and brown wealth to the lowest on record, it’s tanked the credit profile of these borrowers. We’ve arrived at the point now where three out of out four African-Americans have subprime credit scores of 620 and less. Not surprisingly, lenders are pushing the latest predatory loans on anyone with a credit score of 640 and under.

With the millions of new subprime borrowers that the 2008 meltdown created, it’s no surprise that the finance industry is off to the races. As Mother Jones put it, banks “are pooling bad loans just as subprime mortgage lenders did, and then slicing them up and selling them to investors including hedge funds and pension funds.”

As with subprime mortgages, lenders are squeezing borrowers of subprime auto loans in almost every way imaginable. The interest rate on these loans can be up to five times higher than standard-rate loans. Not only can interest rates hover at 20 percent, but subprime loans are often twice or even three times what the car is worth. Financial institutions are profiting from the vulnerable by charging them an exorbitant interest rate on a sky-high principal.