Household HSBC Watch

A History of Predatory Lending With an Emphasis On Household International in America

OVERVIEW:

We decided to write this document as a lesson plan for teachers and professors. You decide if it is appropriate for the courses that you teach. Throughout the lesson you will see student questions, summaries, research questions and real life consumer experiences which may be discussed in detail.

At the college level this document asks questions which are appropriate for moral values classes, business law classes, ethics in business classes and others. The effect of what we see here can be the focal point of micro and macroeconomics classes. Management classes can study the material from many aspects. We encourage the widest dissemination of this document. Throughout the document we refer to teachers, however, one may substitute the word ?professor? when appropriate.

OBJECTIVES:

Teaching objectives must be measurable. Thus we require an action, a condition, and a standard by which to measure satisfactory mastery of the teaching objectives. Each teacher determines the standards for his or her class, and the institution determines the overall standards. We put forth the following example:

Given student notes taken from this lesson, the student will correctly state three detrimental economic impacts of predatory lending. In this example the action is to ?state three detrimental economic impacts of predatory lending?; the condition is ?using student notes taken from this lesson?; the standard is to do it correctly.

INTRODUCTION:

Every new loan that is larger than the last contributes to increasing over-all economic instability. The outcome of such has historically been a crash corresponding to the magnitude of this debt distortion.

John Bley, Washington State’s Financial Institutions Director, at a Federal Reserve Board hearing in San Francisco once said “Predatory lending isn’t a new problem, it’s just that the name has changed. What was once called mortgage fraud is now called predatory lending. Under either name, our mission to investigate violations and enforce the law has remained the same.”

According to The New York Times, in 1980, Congress helped launch the sub-prime lending industry by effectively eliminating state laws capping interest rates on first mortgages, and two years later by ending “most state restrictions on alternative loans”.

Home Ownership Becomes a Reality

Home ownership became a reality for many households in the early 90s. At that time, lenders began offering mortgage loans to deprived borrowers, many with blemished credit, and the sub-prime market was born. Predatory practices target both home buyers (20% of predatory loans) and homeowners taking out second mortgages or home equity loans (80% of predatory loans). Many homeowners use home equity loans to get money for home improvements, personal or medical expenses, or to consolidate debts. Some predatory lenders have been known to target high-cost home improvement loans to low-income homeowners.

STUDENT QUESTIONS:

1. What are the ramifications when a lender gives the borrower the funds instead of writing checks to companies that the borrower intends to pay off?
2. With a home equity line of credit where the borrower gets a checkbook and disburses the funds is the lender at fault? (question assumes students answered the first question as expected)

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