Is it just me? Or has the horizon changed? If people wanted to buy a home but had some recent bad credit, a bankruptcy or foreclosure showing up in their past they would go to a lender that offered "Sub-prime" loans. Loans that weren't quite good enough to be called "A Credit" or "Prime" but just under prime. Sub-prime.
But I haven't heard of Sub-prime lending lately. I've only heard "predatory lending." If a customer can't qualify for a conventional mortgage because of credit then they have to get a loan from a Predatory lender. Or "High Cost" lender. Where did the Sub-prime lenders go? Perhaps they didn't go anywhere. It's just that the name "Predator" sounds better in the newspapers.
I'm not here to tell anyone what is or is not a Predatory or high-cost loan. There are plenty of folks out there a lot smarter than me trying to figure that one out and some
Provinces have already defined what they consider to be High Cost loans. As a result of this column I'll get more than my share of emails from good-hearted souls explaining to me what a Predatory Loan is and why they should be banned. In advance, thank you.
A loan could be considered in some areas "High Cost" if the loan reaches a particular rate or has a spread between a One Year Treasury index of 4, 5 or 6 percent. Certain
Provinces require that closing costs not exceed a certain level. If loans can be called Predatory or High Cost then the loans could be considered illegal either to make, could require a higher level of disclosure to the borrower or to extend the
recession period. Or any combination of the above. Or other stuff we haven't thought of yet.
But should all loans be considered Predatory simply because they don't offer the same interest rates to someone who has pristine credit? Of course not. Lenders who make loans to people in the sub-prime category can offer a valuable service to those who have experienced credit issues. If there weren't sub-prime lenders then homeowners across the country would have to be shut out of home ownership until they've
re-established credit for two years or more.
The problem with that is that paying a mortgage on time is one of the best ways to regain a positive credit profile. Sub-prime loans fill a void created by those who've experienced job loss, illness or life-changing experiences that have negatively affected their credit. So what makes a loan Predatory?
As I said, I don't portend to know. But like art, I'll know it when I see it. Any loan can be Predatory in the hands of a greedy lender or loan officer. When a lender offers a loan program to someone recently out of bankruptcy and the loan officer charges a 1% origination fee and/or a discount point to buy down the note rate then I can see that as a consumer benefit.
If another lender takes that exact same client under the same scenario and charge eight points PLUS an origination fee, credit life insurance and five year prepayment penalty solely to line their pockets with loan commissions, I think that would fall into being called Predatory. No, it's more than Predatory. It's immoral. I don't see how people sleep at night when I hear of such practices. Trust me, I've heard of them, I think they're bad people and we should do whatever we legally can to stop them.
Can Sub-prime loans be Predatory? Of course they can. Are all sub-prime loans Predatory? Of course not. Sub-prime loans provide a certain group of people wanting to buy a home with a mortgage at reasonably competitive rates. The problems occur when such loan programs get into the hands of the wrong people. Unfortunately, that can happen anywhere.