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Subprime Lending- Illegal, Unethical, or Both

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Subprime Lending- Illegal, Unethical, or Both

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    1. Subprime Lending- Illegal, Unethical, or Both? Presented by: Shady Business

    2. 2 Subprime lending The practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history or lack of credit history.

    3. 3 History (1) Evolved with the realization of a demand in the marketplace and businesses providing a supply to meet it. Bankruptcies and consumer proposals being widely accessible, a constantly fluctuating economic environment.

    4. 4 Subprime mortgage lending industry originated at $173 billion in loans in 2001 (11 % of total mortgage originations) . Loans have been made to borrowers with blemished—or nonexistent—credit records. Borrowers are charged a higher fee to compensate for the greater risk of delinquency and the higher costs of loan servicing and collection. Financial firms re-package loans as collateralized debt obligations (CDO) and improved their profits by 20% to 50%.

    5. 5 Subprime mortgages Subprime car loans Subprime credit cards

    6. 6 Subprime borrowers have: Bad credit (credit scores under 620) Lack of credit history Low income Poor debt to income ratios Large loans relative to the securing property (high LTV ratio) Maxed out credit cards

    7. 7 Subprime lending is risky for both lenders and borrowers due to: High interest rates Poor credit history Adverse financial situations usually associated with Sub-prime applicants

    8. 8 Predatory lending practices Subprime loan designed for people w/ weak credit scores or no credit history Seek naive borrowers Lie to borrowers regarding actual credit rating Pressure home owners to re-finance frequently charging hi-closing fees and rolling closing cost into mortgage Deter clients from shopping for other mortgages lenders because to many inquires will hurt credit score Non-disclosure of : That broker is being paid by both lender and borrower Pre-payment penalty All fees associated

    9. 9 Predatory lending practices by subprime lending companies leads to: default seizure of collateral foreclosure

    10. 10 The majority of subprime loans are refinance loans The Subprime home refinance market ranged from 74 % of Sub-prime loans in 1996 to 65 % of Sub-prime loans in 2000

    11. 11 Use of Broker or Lender

    12. 12 Subprime borrowers wanted: Low monthly payments Loan approval Quick turnaround Interest rate and mortgage terms were least important. Characteristics of loan

    13. 13 Familiarity with the mortgage process

    14. 14 1. AARP studies have shown that a significantly greater percentage of Sub-prime loans are held by older borrowers who are: Widowed Female Black Less educated 2. There is concern about the increasing percentage of foreclosures associated with Sub-prime mortgage lending.

    15. 15 3. These older borrowers… Used a broker to obtain their current loan. Had the lender/broker initiate the contact. Responded to “guaranteed approval” advertisements. Refinanced two or more times within the past three years. Were dissatisfied with their loans. Received a loan different from what they expected.

    16. 16 Decrease in stock price/ shareholder value of major financial institutions related to Subprime loans:

    17. 17 Write-downs due to the subprime mortgage crisis Merrill Lynch- $22.4B Citigroup- $19.9B UBS-$14.4B Morgan Stanley- $9.4B HSBC-$7.5B Other (12+firms)$34.2B

    18. Subprime lending is unethical.

    19. 19 The Metaphysics of Subprime Lending (1) Reality often creates situations where behavior sometimes is compromised or rationalized during the conduct of business. Subprime lenders created new instruments to entice weaker borrowers during the slow down in the mortgage industry.

    20. Brokers saw it as a way to make more money by selling loans which had a higher Yield Spread Premium. Lenders saw the possibility of making more money by producing loans with higher fees to cover their risk. It seemed like a great idea but GREED took over. The Metaphysics of Subprime Lending (2)

    21. 21 Ethical behavior occurs in a framework of behavior shaped by various concepts including:

    22. 22 Sub Prime Lending unethical Justice is interpreted in an ethical framework in terms of three factors. Does a person or organization:

    23. 23

    24. 24

    25. 25 Concept of Loyalty : NOT MET (2) Loyalty. One party can count on the support of another party. Not so, in the subprime crisis. Lenders are putting up their hands and saying, “You signed on the dotted line.”

    26. 26

    27. 27 Untruthfulness between Lender/Borrower Borrower reporting higher income claims on the loan applications. Unfortunately the “Stated Income” loans allow borrowers to state their income without the lender verifying the information. It assumes the borrower will be truthful.

    28. 28

    29. 29 Respect - the subprime lenders are not respecting the borrowers. Lack of Respect. This occurs when the organization treats people as means to an end. Equity - Not being fair and just to all parties. By not providing an education as to what other products are available and what borrowers would be eligible for, is: UNETHICAL, but not ILLEGAL

    30. 30

    31. ……………………the dotted line Is Subprime Lending legal?

    32. 32 Factors to consider: The written contractual agreement The lack of education by the borrower The lender’s methods of advertisement The degree of negligence of every party

    33. 33 The Written Contractual Agreement (1) A binding agreement between two or more persons or parties. Basic Requirements of Contracts: Offer and Acceptance Consideration Competent Parties Legal Purpose

    34. 34 The Written Contractual Agreement (2) If the Offer is misleading and does not represent the written contract then this can be seen as fraudulent or an act of negligence. These actions would then be illegal. If all parties fulfill the basic requirements of the contract then the actions are legal.

    35. 35 Lack of Education by Borrower Is the lack of education by the borrower an act of negligence on his or her part.? Should the borrower be legally responsible to be educated when signing a contract or is it the responsibility of the lender to educate the borrower?

    36. 36

    37. Subprime Mortgage companies compete with each other and spend tremendous amounts of money on door to door marketing.

    38. Subprime Competition (2) Not to save the customer money, but because, according to Fannie Mae, -Half of the customers who receive subprime products would be eligible for a regular prime mortgage. -This could mean a loan up to four percentage points less - a tremendous savings for the borrower.

    39. 39 The degree of Negligence of every party Negligence is the failure of a party to exercise a proper degree of care in a given situation. Subprime lenders can act negligent if withholding certain information towards the borrower. The lenient standards in the past had omission seem unethical yet legal.

    40. 40 Has subprime lending been LEGAL? Characteristics of a Subprime loan: High Interest Rates Hidden Fees Unnecessary Financing Deceptive Terms and Marketing Practices Some pro subprime lenders argue that, except for fraud, false information or faked signatures -- there is no such thing as predatory lending, because borrowers are not forced to take the loans.

    41. 41 There are no laws that state otherwise. The lenders set the standards and rules for the Subprime loans. These elements included higher interest rate and fees to cover their risk. They unfortunately lowered the standard of the borrowers too much and just got loan happy.

    43. 43 As long as the lenders were not dishonest, lied about the terms, or forced a borrower to sign for a loan: The lenders did not do anything illegal. To stretch this even further, the borrowers actually have committed a breach of contract for not making the payments on their loans. Sounds ridiculous, but as long as the borrower signed on the dotted line… what remedy does the lender have?

    44. 44 Some new laws in recent years have helped in labeling certain loans as “Predatory”, effectively attempting to ban them. High cost loans are legal, but start taking on illegal characteristics when the following occurs: Loan flipping (repeated refinancing) Balloon payments (bulk of a loan is left unpaid at maturity) Not certifying that the borrower can afford the payments

    45. 45

    46. Subprime crisis draws FBI scrutiny NY State Attorney General Andrew Cuomo is about to launch an investigation. Numerous investigations on the federal and state level regarding discriminatory practices. FBI has recently launched an investigation, specifically into “allegations of fraud in various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

    47. Far Reaching – Beyond the Banks and Brokers Various federal agencies have issued subpoenas to large wall street firms. Among the allegations are marketing of securities backed by those mortgage loans, various accounting frauds and insider trading - backers of Subprime. Mortgages selling their stakes before the public became aware of the current problem.

    48. 48 Legality Conclusion If acts of negligence, fraudulence, or lack of fulfilling contractual agreements exists by ALL parties then the subprime loan is illegal. If there are no acts of negligence, fraudulence, or breach of contract then the Subprime loan is legal.

    49. 49 References: http://www.aarp.org/research/credit-debt/mortgages/aresearch-import-184-DD74.html http://www.marketwatch.com/news/story/Sub-prime-crisis-shines-spotlight-mortgage/story.aspx?guid=%7B5343C57B-AB5B-4D90-A9D4-AF9A76F7D9B3%7D http://www.marketwatch.com/news/story/Sub-prime-crisis-shines-spotlight-mortgage/story.aspx?guid=%7B5343C57B-AB5B-4D90-A9D4-AF9A76F7D9B3%7D http://money.cnn.com/2007/02/28/magazines/fortune/Sub-prime.fortune/index.htm http://boston.com/business/personalfinance/articles/2005/08/03/dark_side_of_Sub-prime_loans/ http://boston.com/business/personalfinance/articles/2005/08/03/dark_side_of_Sub-prime_loans http://www.consumer-action.org/english/articles/questions Here are a few references that discusses about Sub-prime lending being illegal. http://www.allbusiness.com/government/3515595-1.html http://www.mortgageratesetc.com/2007/12/26/making-Sub-prime-mortgages-illegal/ http://www.consumer-action.org/english/articles/questions_answers_about_Sub-prime_lending/#Topic_05 http://www.businessweek.com/bwdaily/dnflash/content/mar2007/db20070302_477856.htm?chan=search

    50. 50 Presented by: Shady Business Michael Garcia Ivan Gonzalez Douglas Goroway Spiro Mellis Maria Lita A. Sarmiento

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