The importance of the term “predatory lending” is its injection of a much-needed moral dimension into the public argument. The press, especially the business press, is often uncomfortable with such an approach. That’s too bad. But there is also the fact that the very complexity of “predatory lending” threatens to render it imprecise to a fault. Which is to say that, frequently, any reader looking to move beyond the definition of “predatory lending” as bad lending—and into the realm of unscrupulous lending—will run into confusion. For example, the kind of lending we are discussing systematically targeted whole communities, but the words themselves give us very little insight into that aspect of the practice. To round out the term “predatory lending” then, we need to consider two important and related terms: “redlining” and “reverse redlining.”
Redlining is the denial of credit in certain, typically urban neighborhoods based on their racial makeup. The term comes out of the Chicago activist community in the late 1960s, according to scholar Amy Hillier, and refers to a practice dating to the 1930s when the Depression-era Home Owners’ Loan Corporation drew up maps that designated these neighborhoods as high-risk investments—and outlined them in red. Following from redlining, a practice by no means dead, is the more recent “reverse redlining,” which indicates an area of enthusiastic bad lending—expensive, deceptive, and heavily marketed—rather than a refusal to lend.
These terms get at the nature of lending “choices” in poor urban areas. The subprime industry, which came of age in the lending vacuum redlining created, is able to target these communities because prime lenders are (still) reluctant to serve them. And so predatory lending has thrived here (as have foreclosures). You can’t understand the practice of predatory lending if you don’t understand all of this.
That brings us to the term “subprime,” which overwhelmed “predatory” in the middle of the decade as the market exploded and subprime assumed an aura of legitimacy (subprime leader Ameriquest, you’ll recall, was the sponsor of the 2005 Super Bowl halftime show and owned not one but
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.’ ”