The new sophisticated mortgage options available to sub-prime borrowers119 contained
extremely complex terms. 120 These loan options, generated by predatory lenders, were designed
to target particularly financially vulnerable segments of the American population, namely the
marginalized groups in society. 121 At the time, this was justified under the democratization of
credit concept discussed above. 122 While that was likely the case for some lenders, for others the
motivation was to simply to sign up more borrowers, regardless of their ability to repay the
loan.123 Lenders undertook a calculated risk that brought about disastrous results for the families
forced from their homes.124 Moreover, this calculated risk resulted in a disaster for the larger
American economy, as the housing bust played a major role in the length and depth of the
3. Eagerness to Accept Loans and the Inability to Question the Lender
Third, financially illiterate Americans often fail to ask important questions of their
lenders that would allow them to detect potential fraud and abuse, and to truly compare financial
products.126 As discussed, during the housing boom, many borrowers did not understand the
contracts they signed or the agreements they were entering into—they saw the document merely
as a means to getting them into a home they loved.127 Because the financially illiterate usually
have poor credit ratings, obtaining approval for a loan can be a challenge, and they are less
inclined to believe they can get better terms elsewhere.128 Individual experience tells them they
such as some of the statements made to them by mortgage brokers, many of which would have likely raised questions in the minds of
more financially literate people.”).
119 Melissa M. Ezarik, Are You a Subprime Borrower?, BANKRATE (Nov. 1, 2005),
There’s not a hard and fast rule of what constitutes “subprime,” because these labels are really up to the lender.
But in general, banking regulators consider subprime borrowers as those with:
a FICO score of 660 or lower
two or more 30-day delinquent payments in the past twelve months, or one 60-day delinquency in the past
a foreclosure or charge-off in the past 24 months
any bankruptcy in the last 60 months
qualifying debt-to-income ratios of 50 percent or higher
limited ability to cover monthly living expenses
120 Dinwoodie, supra note 24, at 196-97 (“For example, in order to take into account the individual, borrower-specific circumstances
of subprime borrowers, lenders commonly created mortgages that contained unique and borrower-specific terms and features. As a
result of the sophisticated nature of mortgages and the prevalence of highly customized mortgages during this period, many borrowers
did not understand their obligations under their mortgages.”).
122 See Austin, supra note 67 (“Formal lenders would justify the extension of their financial products to debtors occupying the lowest
socioeconomic tiers on the grounds that they, no less than the affluent, are deserving of the benefits of a democratization of credit,
which is to say ‘formal credit.’”).
123 Dinwoodie, supra note 24, at 200.
124 See id. at 189-90 (explaining that lenders loosened their standards to attract subprime borrowers).
125 See id. at 190-92 (explaining the impact the housing bust had on triggering the 2008 financial crisis); see also Iyanatul Islam &
Sher Verick, The Great Recession of 2008-2009: Causes, Consequences and Policy Responses, in FROM THE GREAT RECESSION TO
LABOUR MARKET RECOVERY 19, 19-20 (Iyanatil Islam & Sher Verick eds., 2010) (explaining that the housing bust triggered a
financial crisis that was exacerbated by the financial sector’s heavy involvement in the U.S. housing market); Siems, supra note 108
(describing the Great Recession as the longest and deepest economic retraction since the Great Depression).
126 Dinwoodie, supra note 24, at 195-96.
127 Id. at 196-98.; see also Austin, supra note 67, at 1249 (stating that “poorer consumers . . . often have little understanding of the
contracts they sign”).
128 ALEXANDRA BASAK RUSSELL, WHAT GAVE RISE TO THE GLOBAL FINANCIAL CRISIS 5 (2010), available at
http://blogs.law.uiowa.edu/ebook/sites/default/files/Part_5_1.pdf (“Characteristics of subprime borrowers make them easy targets for
unscrupulous mortgage brokers. For example, subprime borrowers often think that they do not have better options and are less likely
to shop around for better loan terms. They often have low levels of education, which forces them to rely on the broker for an
explanation of the terms. Finally, low-income borrowers often have little experience with mortgages—they have few family members,