by Jane Smith
This guidance defined for the first time the criteria used to decide whether a potential borrower will be classified as "prime" or "sub-prime." It states that at least one of these issues will characterize a borrower as sub-prime when the person applies for a loan:
- Low credit score
- Bad credit history, including
- collection accounts
- repossessions
- late payments of invoices
- bankruptcy
- debts that have been written off as uncollectable, called "charge-offs"
- high ratio of debt to income
- decreased ability to pay off the loan
- has a Fair Isaac Corporation (FICO) credit score of less than 660;
- has collection activity, liens, charge-offs, or judgments within the past two years;
- within the past year, has had two late payments;
- within the past two years, has made a payment that was more than 60 days late;
- has a ratio of debt to income of at least 50%;
- has declared bankruptcy in the past five years;
- has been assigned a score by another credit rating service that would equate to a FICO score of 660.
Expanded Guidance offers a clear definition of lending practices to be considered "predatory." The agencies in no way insinuate that predatory lending practices characterize all sub-prime lenders. In fact, it is their belief that benefits for both the borrower and the lender come from using sub-prime loans that are administered properly. Nonetheless, the public should be made aware that predatory lending practices do exist, and that borrowing at sub-prime may leave them vulnerable to such practices. In predatory lending, the exchange between borrower and lender is very unequal: the lender gets the borrower's money and the borrower gets not much of anything.
Most predatory lending practices fall into three categories.
- Many car loans and housing mortgages are made based on assets pledged by the borrower as collateral, rather than on the borrower's actual ability to fulfill the debt.
- "Loan flipping" occurs when a lender coerces or talks a borrower into refinancing a mortgage, at no advantage to the homeowner, but at great advantage to the lender, who may collect sizable fees for the transaction.
- Failing to reveal to the borrower all the hidden fees and costs of a loan, and concealing information or providing fraudulent information to the borrower.
- Very often, these practices are perpetrated on vulnerable borrowers, like the elderly, minority homeowners, or low-income families. In many cases, these people would actually have qualified for a mortgage at prime rates; but they are at a disadvantage because of their lack of knowledge.
