Despite the best efforts of consumer advocates to distinguish between predatory practices and good loans to high-risk customers, that distinction was, in reality, collapsing as the subprime industry hit a new low in the mid-2000s. With the rise of such particularly abusive products as 2-28s and 3-27s (a 2-28 loan had a two-year teaser rate that then adjusted every six months for the next twenty-eight years; a 3-27 loan was basically the same thing but with a three-year teaser rate), the subprime industry was now essentially
rotten through and through. Both of these loans—and other products that will effectively be banned under new Federal Reserve lending rules and that are also the target of proposed federal legislation—hit their strides in 2005 and 2006, the “boom years for bad subprime,” according to Kathleen Day of the Center for Responsible Lending. In other words, “subprime” became the dominant term just as predatory lending was becoming the dominant practice.
It’s also important to remember the degree to which “subprime”—both the word and the industry—received powerful rhetorical support from right-wing political and intellectual elites who pilloried the very concept of predatory lending. Take, for example, former Senator Phil Gramm. We can see his rhetorical strategy in quotes like this one, which appeared in a March 20, 2008, Wall Street Journal article: “ ‘Don’t apologize when you make a loan above the prime rate to someone that has a marginal credit rating,’ Texas Republican Phil Gramm … told a group of bankers in 2000. ‘In the name of predatory lending, we could end up denying people with moderate income and limited credit ratings the opportunity to borrow money.’ ”
In mid-2000, around the time that HUD and the Treasury Department published a major joint report on the problem of predatory lending, Gramm, then head of the Senate Committee on Banking, Housing and Urban Affairs, ordered his own report on “what the regulators refer to as ‘predatory lending.’” The slim report’s conclusion? It’s all about language:
It is difficult to understand how the regulators or Congress can formulate proposals to combat predatory lending when there is no clear understanding as to what it is. A definition of the practice is sina qua non [sic] for any progress toward a remedy.
In the absence of a definition, not only might we miss the target, but we may hit the wrong target.
Acknowledging the problem of definitions is one thing. But using it as an excuse for doing nothing is ridiculous. This illustrates the danger of turning the discussion into a linguistic argument—of working from the words back to the practices, rather than the other way around.
Gramm, of course, wasn’t the only big shot running interference for mortgage lenders and their Wall Street backers. John D. Hawke Jr., then the comptroller of currency charged with overseeing nationally chartered banks, said in a February 2003 news release: “The OCC has no reason to believe that any national bank is engaging in predatory lending.” This is the agency that challenged the states, both in and out of court, for trying to protect consumers, and in a 2007 Supreme Court case won the right to supervise national banks without state interference. Except that the industry-funded OCC brought only thirteen consumer-related enforcement actions (out of 495 total) between 2000 and 2006, according to an excellent piece in BusinessWeek last fall by Robert Berner and Brian Grow.
But the press did have other “official” voices it could have listened to more carefully. There were even serious warnings from inside the federal government. Some prominent examples: with the subprime market heating up in the late 1990s, the Federal Trade Commission went after predatory lenders, although it had limited power to do so; in an effort to address predatory lending, Congress passed the Home Ownership and Equity Protection Act in 1994, and then the Fed made revisions to the act that took effect in 2002, although both versions lacked real muscle; hearings before a variety of House and Senate committees in the late 1990s and early 2000s demonstrated a growing awareness of problems in the lending industry, as did a handful of attempts by some enlightened lawmakers to pass additional regulations. These efforts fell far short, but for anyone paying attention they shed quite a bit of light on the problems that would soon lead to disaster.