Predatory Lending - Predatory Borrowing

Predatory Borrowing

In an article in the January 17, 2008 New York Times, George Mason University economics professor Tyler Cowen described "predatory borrowing" as potentially a larger problem than predatory lending:

"As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default. Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers."

It should be noted that mortgage applications are usually completed by mortgage brokers, rather than by borrowers themselves, making it difficult to pin down the source of any misrepresentations. The only situation in which the application would not be done by the broker, but rather the borrower, would be in a "stated income loan."

A stated income loan application is done by the borrower, and no proof of income is needed. When the broker files the loan, they have to go by whatever income is stated. This opened the doors for borrowers to be approved for loans that they otherwise would not qualify for, or afford.

Several commentators have challenged the notion of "predatory borrowing," accusing those making this argument as being apologists for the lack of lending standards and other excesses during the credit bubble.

Although the target for most scammers, lending institutions were often complicit in what amounted to multiparty mortgage fraud. The Oregonian obtained a JP Morgan Chase memo, titled "Zippy Cheats & Tricks." Zippy was Chase's in-house automated loan underwriting system, and the memo was a primer on how to get risky mortgage loans approved.