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Subprime Lending

Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.

Many have questioned why minorities appear to be over-represented in the subprime lending market. Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.

Some allege this disparity to be attributed to subprime lenders purposefully marketing to African-American communities-what some have called reverse redlining. They allege lenders will provide loans to these communities, but at a higher cost and with less favorable conditions.

Some facts about subprime lenders

  • Home refinance loans account for higher shares of subprime lenders' total origination than prime lenders' originations
  • Subprime lenders originate a larger percentage of their total originations in predominately black census tracts than prime lenders
  • Subprime lenders are more likely to have terms like "consumer," "finance," and "acceptance" in their lender names

Want to read more about subprime lending and related studies?

Unequal Burden: Income and Racial Disparities in Subprime Lending in America 2002
HUD has released a study showing that the number of sub-prime home loans is skyrocketing in predominantly black neighborhoods and low-income neighborhoods…

Subprime Markets, the Role of GSEs, and Risk-Based Pricing 2002
This report will help to expand what is known about subprime borrowers by looking at lending practices in the sub-prime mortgage market and the current and potential role of Fannie Mae and Freddie Mac…