The volatility of subprime lending may be due in part to some of the fraudulent or questionable practices this industry engaged in to generate greater profits through more loans. In addition to some of more well-known predatory lending practices (see the budgeting-help.com articles for more information), the Federal Trade Commission (FTC) has exposed other fraudulent and problematic procedures, including:

• Bait and Switch: A lender will offer a specific loan with specific fees and terms during the application process, then pressure a borrower to take a different loan with higher costs or add charges, processing fees or other items at the time of signing and loan completion.
• Equity Stripping: A loan is offered based on the equity available in your home, not the lowered amount you want to borrow or what you can afford based on your income
• Deceptive Loan Servicing: The lender fails to fully disclose the terms, or does not provide complete statements; you may be unaware of what you have paid, or what you will owe.

Even without such practices, the loan programs offered by lenders may have been of detriment to a borrower's financial situation. Often, such loan programs provide lenders with generous commissions or incentives, influencing lenders to offer loans that were not in the best interest of borrowers:

• Reverse mortgages: this type of mortgage gives lenders an advanced payout each month based on a loan amount secured by equity. The FTC notes that elderly couples are often targeted for reverse mortgages, and may not be fully aware of the ramifications---that equity is being withdrawn from home. Such mortgages may only be suitable for elderly who have no intention of passing down the house

• Non-traditional lending products: Some loan products offer a minimum payment that is drastically lower than the combined principal and payment, the interest only, or the principal only. Over time, the loan amortizes and grows so that the amount owed over time is greater than the original loan amount

However, many bank regulatory agencies along with the FTC have recognized these deceptive practices and alternative loan products as harmful to home buyers and owners, and are looking to make legal adjustments to curtail such activity (see "Loan Regulations in the New Housing Market").

Keep in mind, that even with tighter regulations and changes to the industry, subprime loans are still legal. You should remain aware of these practices as lenders (or related real estate professionals) may attempt them on you.

References

Federal Trade Commission. FTC Consumer Alert: Avoiding Home Equity Scams

Federal Trade Commission. FTC Education Effort Focuses on Home Equity Loan Fraud

Consumer Federation of America. Women are Prime Targets for Subprime Lending

Federal Trade Commission. FTC Testifies on Enforcement and Education Initiatives to Combat Abusive Lending Practices.