And You thought Pay Day Loans Were Bad

By: Arment Dietrich | October 5, 2007 |

Worse than media spin, is perhaps when companies rely on spin to prey on unsuspecting people. A prime example of this spin is evident when looking at the current crisis in the subprime loan industry. To give some background, several years ago when interest rates were at all time lows, lenders enticed people to take on lines of credit for homes, cars, and credit cards, playing up the low interest rates and accessibility to those borrowers with bad credit. The companies spun the media hype about low rates and de-emphasized the catches to this low cost money of interest rates that would reset, companies awarding loans to people with little documentation or financial analysis, and pre-payment penalties. According to the secretary of housing and urban development, Alphonso Jackson, of the 2 million subprime home loans whose interest rates are scheduled to reset by the end of next year, perhaps 500,000 will go into foreclosure. This problem is now so large it is affecting the national economy and FED chairman Ben Bernanke is calling for regulations to restrict practices in the subprime market. According to an article in Thursday’s New York Times, the most controversial practice in the subprime industry are prepayment penalties, penalizing borrowers who attempt to pay off the loan early, eliminating the option for common re-financing, essentially throwing borrowers at the mercy of the markets with no safety net. Ultimately, the borrowers are responsible for signing documents they did not understand, but I think a lot of the current problems could have been avoided with more transparency and less spin on the part of the lenders. — Morgan Smith