Ethics Newsline®

WASHINGTON
U.S. banking officials last week cracked down on what started as an ethical issue and mushroomed into a financial meltdown: high-interest mortgage loans made to individuals with poor credit records.

So-called subprime lending has led to a surge in defaults and a skyrocketing foreclosure rate in the past five years, according to a Bloomberg report.

According to rules issued late last week by the Federal Reserve and other banking regulators, lenders should more scrupulously verify income levels, be more forthcoming about possible interest-rate hikes in adjustable mortgages, and gauge more appropriately whether borrowers can afford to meet higher payments in the future, the Reuters news agency reports.

In addition, reports MarketWatch, banks must limit prepayment penalties, which under some circumstances can lock consumers into high rates and limit their ability to pay off the loan by refinancing.

While subprime lenders have argued that those who take out loans must exercise personal responsibility, critics contend that the industry is predatory and victimizes unsophisticated borrowers with low “teaser” rates that skyrocket to levels beyond their means to pay.

The practice also has been characterized as racist because minorities are hit hardest. In an editorial, the Houston Chronicle, which is located in a city where problems related to the economics of housing are particularly acute, claims that regulators must reckon with “the blatant institutional racism that has been integral to the abuses.”

“A 2006 report by the Consumer Federation of America revealed that 53 percent of black borrowers and 37.8 percent of Hispanic borrowers receive subprime loans, compared to 21.6 percent of white customers and 13.5 percent of Asian,” the editorial claims. “In many instances, the minority borrowers were steered to subprime loans when their credit history might have permitted more favorable terms.”

Industry analysts also note that the troubles in the subprime market became acute after many loans were extended in 2006 and 2007 to people with increasingly weak credit ratings on the assumption that rising house prices would allow them to re-mortgage the property to meet rising payments.

But what happened, reports the Times of London, is that housing prices plunged, shredding that safety net and causing several funds investing in subprime loans to close and sell their assets. The collapse included some firms in the United Kingdom.