Democratizing Credit: Examining the Structural Inequities of Subprime Lending

Abstract:     
This Article critiques the current regime of mortgage lending, which favors economic subordination. Minorities and low-and moderate income persons, regardless of their creditworthiness, are receiving higher loan rates. This is due to three market phenomena- the dominance of sub-prime lenders in the market in which prime lenders are more restricted to lend, the segmentation of the market so that certain products are offered to certain consumers, and the liquidity of the secondary market, which encourages lenders to make loans that are easily sold, but which may be inappropriately and impermissibly priced. Only by incorporating some transparency into the process will the borrower be able to level the playing field with the lender who may be using inaccurate and even impermissible pricing strategies. Examining the lending phenomena and their impact on credit availability is critical to uncovering the structural inequities that are manifest presently. The solution is to mandate that fair lending laws require informed risk-based pricing. Meaningful disclosures to the borrower will validate the economic rationale that the borrower has entered voluntarily into the transaction and made an informed decision. Mandating disclosures would place some transparency in the lender's pricing decisions and would guard against lender abuse. Moreover, a critical examination of the current lending structure reveals that it is reinforcing an inaccurate status quo: 1) that borrowers have legitimate risk factors and voluntarily enter into transactions when, in fact, borrowers are unaware that the lender has made a determination that may be inaccurately priced and 2) that borrowers are unaware that they are not at-risk consumers.

Number of Pages in PDF File: 46

Keywords: mortgage lending, pricing strategies, fair lending laws, disclosure, lender abuse

JEL Classification: K11, K19, K29

Accepted Paper Series