The Subprime Specter Returns: High Finance and the Growth of High-Risk Consumer Debt

21 January by Jennifer Taub

CC - Flickr - Butz.2013

With more than half of American consumers classified as having subprime credit scores, |1| it is no surprise that subprime lending is once again on the rise. Making expensive loans to the underemployed and overextended may help fuel economic growth |2|; however, it is neither just nor sustainable.

Dependence on higher-risk subprime loans to boost spending seems to be a symptom of larger problems––low wages and income volatility. With nearly all Americans, other than the ultra-wealthy living paycheck to paycheck, |3| families have too little savings, if any, to cushion downturns. |4| It is a paradox. Taking on more debt becomes necessary to afford essentials (such as a reliable car to drive to work), and increased private sector spending supports job creation, yet heavy debt coupled with unreliable income puts consumers and thus society at greater risk of insolvency. Even if the lenders themselves can charge high enough rates to make up for the delinquencies and defaults without failing, most families can­not avoid painful losses should they fall behind. Making subprime loans less predatory and more affordable (and thus less likely to cause defaults) is only one part of the solution.

Unlike the toxic home loans that led to the 2008 global financial crisis, the recent return of subprime is not in residential mortgages, but instead in auto, credit card, and personal loans. Approximately 40 percent of these types of loans that were made in 2014 were subprime. |5| This time is not so different, however. The pres­sure to make loans regardless of a borrower’s ability to pay is all too familiar. |6| Given the attractive price that banks, private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. firms, |7| and other financial institutions can pay for higher-yielding subprime loans, lenders who interact with consumers have incentives to engage in predatory, abusive, risky, and some­times unlawful behavior to produce them. Of notable concern is the increasing investor appe­tite for bonds backed by pools of subprime auto loans. |8| This demand drives volume, and the quest for volume may be pushing loan origina­tors deeper into the credit pool, encouraging fraudulent auto loan applications, and fostering other questionable underwriting practices and loan structures.

Fortunately, as advocates and the media shine light on these and other shady activities, industry is showing discipline, and federal and state regulators are taking action. Perhaps these steps can help avert unnecessary suffering and systemic risk while preserving access to fairly priced credit for low- and middle-income Americans. Meanwhile, arguably, higher wages and greater government spending for higher education and health care (which would lower business and household costs) would better strengthen the economy than continued depen­dence on maxed-out consumers.

The Troubled History of Subprime Lending

Subprime consumer loans are those made to borrowers with credit scores below 640 (or 660, according to some lenders’ guidelines) out of 850. Law scholars Teresa Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook charac­terized subprime lending in their 2000 book, The Fragile Middle Class: Americans in Debt, as “granting credit specifically to people who are living on the edge.” The authors explained that the “large new niche in the credit business” was “one much applauded on Wall Street” because it paid “such high returns that big prof­its still remain even after the defaults and bank­ruptcies are subtracted.” |9|

Their words were prescient. As we witnessed in the run-up to the mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
crisis, lenders bun­dled risky (often subprime) loans, transforming them assembly-line style into securities that were resold to investors. Selling riskier home mortgages to Wall Street earned loan originators more income than the traditional thirty-year, fixed-rate mortgage would. |10| As law scholars Kathleen Engel and Patricia McCoy docu­mented in their 2011 book, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps, the subprime lending market started out as a “pocket of the U.S. home loan market” but later “mutated like a virus into a crisis of global proportions.” Motivated by outsized profits, “the various actors in the subprime food chain [became] ever more brazen and, with each pass­ing year, subprime crowded out safe, prime loans, putting homeowners at risk of losing their homes and ultimately pushing the entire world economy to the edge of the cliff.” |11|

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), |12| many of the predatory yet prof­itable residential mortgage-lending practices that were often associated with subprime credit have been banned. |13| In addition, under Dodd-Frank, a new federal agency, the Consumer Financial Protection Bureau (CFPB) was cre­ated with unified authority over many areas of consumer finance and the power to create new regulations. For example, the CFPB now for­bids the payment of home mortgage “steering” incentives. |14| Steering involved paying mortgage brokers bonuses for putting borrowers into higher-risk, higher-cost loans than they quali­fied for. In addition, the CFPB’s Ability-to-Repay Rule mandates that, generally, creditors make a “reasonable and good faith determina­tion at or before consummation that the con­sumer will have a reasonable ability to repay the [residential mortgage] loan according to its terms.” |15| Among the eight factors that must be considered is the full monthly payment, not just an initial teaser or partial-payment rate. |16|

The Return of Subprime Lending

The promise of big profits from subprime lend­ing––at least in the short run––is just as entic­ing today. With regulations tighter on home mortgages, investors are seeking other sub­prime opportunities. Whereas in 2007, sub­prime comprised 20 percent of home mortgage loans originated, it accounts for less than 1 per­cent today. |17| As noted above, in 2014, it accounted for more than 40 percent of non-res­idential consumer loans made. As the Wall Street Journal reported in June 2014, “At a time when many other revenue engines are sputter­ing, subprime borrowers are especially attrac­tive to banks because they tend to pay higher interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and generate more revenue as long as they don’t stop making their minimum required payments.” |18|

Subprime loans can also benefit consumers, to the extent they are offered at fair rates, and they actually have the means to pay them back. These loans also boost certain sectors of the economy, as they facilitate the purchase of vehicles and other consumer goods and services. Without access to this type of credit, consumers might resort to even more expensive, and sometimes dangerous, fringe sources of funding such as exploitative payday loans |19| or illegal loan sharks. As Benjamin Lawsky, superintendent of the New York State Department of Financial Services, explained, “We don’t want to totally disrupt the market [and] create a problem where people can’t get credit.” |20| Similarly, economics professor Lawrence White acknowledged that although “not all subprime loans are inappropriate . . . no lender should put a borrower into a loan he or she can ill-afford.” |21| And therein lies the problem. Given current incentives, and borrower profiles, some lenders appear to be doing just that.

Investigative journalists, academics, advo­cates, and even industry insiders have been uncovering problems in consumer subprime markets. Michael Corkery and Jessica Silver-Greenberg of the New York Times recently reported the story of an unemployed woman on food stamps who was given a loan of more than $30,000 at an 11.89 percent interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate to pur­chase a BMW and had not made any of her pay­ments. She said she thought she was just co-signing for her daughter and also indicated that she had informed the dealership employee that she did not have a job. |22| After conducting personal interviews with borrowers, attorneys, and credit analysts, and scouring court records, the reporters concluded that, “some of the com­panies, which package and sell the loans, are increasingly enabling people at the extreme financial margins to obtain loans to buy cars.” |23|

Economics professor Amir Sufi has expressed concern about vulnerable consumers. “Subprime borrowers, who pay much higher interest rates on loans than customers with good credit scores, are more prone to missing pay­ments in periods of economic distress.” |24| Sufi and economics professor Atif Mian, who co­authored House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, have docu­mented the relationship between the build-up of household debt and the financial crisis. |25| In a 2014 blog post, they expressed concern and provided evidence that “the only way the U.S. economy can generate significant consumer spending is through aggressive lending to bor­rowers with low credit scores.” |26|

Also concerned are some industry experts. A former Wells Fargo executive offered words of caution in an American Banker op-ed: “I pre­dict two bad outcomes as a result. A new wave of consumers will become overextended, default on their loans and further damage their credit. And the new non-bank lenders,” includ­ing Silicon Valley start-ups, who have helped drive the increase in subprime lending are in for an unpleasant surprise. . . . As new entrants in a highly competitive market, they are likely subject to “adverse selection.” They’ll take on riskier customers in order to build their business. |27|

The rise in subprime consumer debt coin­cides with the growth of total non-housing­related household debt. Whereas aggregate housing-related debt (including mortgages and home equity lines of credit) peaked in late 2008 at $9.99 trillion and now stands at $8.68 trillion, non-housing household debt (which includes student, auto, credit card, and personal loans) has climbed higher over the years. In 2008, the total non-housing household debt was $2.71 tril­lion, but by the first quarter of 2015, it was up to $3.17 trillion. The largest portion is student loan balances ($1.19 trillion), with auto loan bal­ances ($968 billion), and credit card loan bal­ances ($684 billion) next in line. |28| Each of these types of consumer debt are also often bundled and transformed into asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). -backed securities. |29|

A Boom in Auto Loans

Presently, there is about $968 billion in auto loans outstanding. |30| Of this balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. , roughly 20 percent is from subprime or “deep subprime” loans (those with credit scores in the three hun­dred to five hundred range). |31|
According to data from Experian, in 2014, subprime borrowers with very low credit scores, on average, paid 12.72 percent interest on their auto loans. In contrast, borrowers with the highest scores paid 2.63 percent, and on average, all borrowers paid 4.47 percent. |32| Subprime auto loans are also structured to reduce monthly payments by stretching out obligation over a longer period of time, sometimes seven years. Like higher inter­est rates, longer terms impact a borrower’s abil­ity to pay. |33|

Lenders are more attracted to auto loans rather than other types of consumer subprime loans because they are backed by collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. . The car can be repossessed upon default. In contrast, often credit card and personal loans are unsecured. Of course, with low down pay­ments and lengthy terms, the repossessed car may be worth less than the amount owed. According to Corkery and Silver-Greenberg, Americans are so dependent on their cars that investors are betting that they would rather lose their home to foreclosure than their car to repossession. Or in the words of a Santander Consumer investor, “You can sleep in your car, but you can’t drive your house to work.” |34|

However, they noted that this truism is start­ing to lose its validity with rising delinquencies. In addition, car repossession rates are rising. According to Chris Kukla of the Center for Responsible Lending, “Between the second quarter of [2013] and the second quarter of [2014], Experian has reported a 70 percent increase in the repossession rate.” |35|

The subprime auto loan boom coincides with the remarkable growth in new auto sales. As Sufi and Mian observe, “The financial sys­tem was lending against homes before the Great Recession, and now it has moved to lending against cars. But the basic message is the same.” That message, in their words, is that, “It appears that the key to boosting spending in the U.S. economy is subprime lending.” |36| The ninety plus day delinquency rate was at 3.5 percent at the end of 2014 up from 3.1 percent from the previous quarter, but an improvement from the end of 2010, when it was at 5.3 percent. And, it was down to 3.3 percent by the end of the first quarter of 2015. Subprime loans have helped to boost auto sales year after year. |37| Overall, new car loans are higher in 2014 than they were in 2007. Subprime auto lending is now back to the same level as in 2007, with roughly $130 billion originated in 2014. |38|

These subprime auto loans are pooled together into conduits that issue securities backed by the monthly payments. These sub­prime auto asset-backed securities (ABS ABS
Asset backed security
A generic term designating a security issued by an intermediate entity (SPV) between a transferor and investors in the context of a securitization operation. This security is a bond. When the assets backing these securities (called underlying assets) are made up of mortgage loans like subprime loans, they are called Mortgage Backed Securities (MBS). MBS are subdivided into Residential Mortgage Backed Securities (RMBS), backed by mortgage loans made to private individuals and Commercial Mortgage Backed Securities (CMBS). The term Collateralized Debt Obligations (CDOs) is used when the underlying assets are bonds issued by companies or banks, and Collateralized Loan Obligations (CLOs) when these assets are bank loans.
) are reminiscent of subprime mortgage-backed securities. Attorney John Van Alst of the National Consumer Law Center said, “We’ve seen a lot of Wall Street money chasing these loans.” |39| Institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. that purchase subprime auto asset-backed securities include mutual funds, hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. , pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, and insurance firms. As the New York Times reported, in September 2014, Santander led an offering that was in such high demand, they had to increase it by 35 percent to $1.35 billion. The securities issued had yields double that of some U.S. Treasuries, yet were rated just as safe. |40| According to the Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
Bank of New York, securitizations of subprime auto loans in the second quarter of 2014 were double the amount of four years earlier. |41|

Aware of looser lending standards, higher delinquency and repossession rates, some lend­ers are cutting back. In a move demonstrating a desire to contain potential losses, as of March 2015, Wells Fargo was “limiting the dollar vol­ume of its subprime auto originations to 10 per­cent of its overall auto loan originations, which last year totaled $29.9 billion.” |42| Most of these loans are made indirectly through dealerships. As a result of this cap, the bank was turning down loans some dealers would have expected to be approved. Indeed, more prudential lend­ing by the largest banks has led to lower default rates overall. |43| Although this might result in safer loans, it is quite possible that even if other big lenders follow Wells Fargo’s lead, smaller banks and new non-bank entrants to this market may scoop up these riskier loans. Data do sug­gest an increase in riskier loans entering these pools. According to figures from Citigroup, about 73 percent of auto loans that are securi­tized have terms of greater than five years. |44|

There are other concerns that echo the pre­mortgage-crisis abuses that appear in subprime auto lending that have come to the attention of consumer advocates and regulators. The Center for Responsible Lending (CRL) released a report in 2011 highlighting how hidden dealer markups on auto loan interest rates greatly impact subprime borrowers. The markup of an auto loan is some­times 2 percent above what the lender informed the dealer that the customer would qualify for. Yet, according to CRL, there has been no legal obligation to disclose the markup to consumers. |45|

These dealer markups are similar to the bonuses or “yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. -spread premiums” paid to mortgage brokers to steer borrowers into more expensive loans. Dealer markups impact many people as about 80 percent of car buyers finance their purchase with a lender indirectly through the dealership instead of directly obtaining a loan from a bank or credit union. The CRL report was based on industry sources as well as an “analysis of automobile asset-backed securities [and] data from twenty-five auto finance companies repre­senting combined 1.7 million accounts at year­end 2009.” On average, auto loans were marked up $714. Used car loans were higher than average at a markup of $780, with new car loans marked up about $494. |46| According to Chris Kukla of CRL, “People who bought a car in 2009 paid $25.8 billion in interest over the lives of their loans associated with dealer markup.” |47| In addi­tion, dealer markups have been part of allegations of racial discrimination in auto lending and asso­ciated legal settlements. |48| CRL recommends ban­ning discretionary dealer markups and permitting transparent flat-rate fees. |49|

In addition, there is increasing evidence of misrepresentations and possibly fraud on auto loan applications. Both federal and state govern­ment officials have begun investigating investi­gating allegedly fraudulent practices within the subprime auto lending industry. According to at least one account, this includes an investigation into “whether dealerships have been inflating borrowers’ income or falsifying employment information on loan applications to ensure that any borrower, even some who are unemployed and have virtually no source of income, can buy a car.” |50| The Department of Justice has also begun investigating lenders for whether there were racial disparities in how auto loans were offered. |51|

Also, the Federal Trade Commission (FTC) is continuing to keep an eye on subprime auto loans. In recent years, the FTC “has cracked down on a group of dealerships found to be misrepresenting customers’ monthly payments. Other cases have addressed dealerships that allowed customers to trade in cars on which they still owed money, requiring them to pay off their old car and their new car at the same time.” |52| Dodd-Frank generally exempts auto dealers from CFPB jurisdiction. However, the agency is permitted to supervise many other participants in the auto lending market. This includes banks with assets of more than $10 bil­lion that either directly lend to consumers or purchase installment contracts from dealers. The CFPB has power to supervise, regulate, and bring enforcement actions against these large bank lenders. Smaller banks must follow regulations but are not subject to CFPB super­vision or enforcement. |53| The CFPB is like other federal and state authorities, concerned about dealer markups as part of discrimination in auto lending in violation of the Equal Credit Opportunity Act. It has sent civil investigative demands and warnings to lenders and other par­ticipants involved in auto loans. |54|

Very recent developments show promise. In June 2015, the CFPB issued a rule that allows the agency to supervise large non-bank auto lenders. According to the CFPB, this group of non-bank lenders accounts for about “90 percent of non-bank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.” |55| In addition, in July 2015, Honda Finance Corporation settled with the Department of Justice and the CFPB related to violations of the Equal Credit Opportunity Act. A two-year long investigation of Honda revealed that unfair lending practices including discretionary dealer markups resulted in higher interest rates paid by African-American, Hispanic, Asian, and Pacific Islander borrowers than non-Hispanic white bor­rowers. Honda paid $24 million into a fund for affected borrowers (who on average paid $150 to $250 more on their loans) and agreed to cap the dealer markup at 1.25 percent above the buy rate for loans with terms of five years or less. |56|

Subprime Credit Card and Personal Loans

Subprime credit card lending is also growing. |57| Like auto and home loans, subprime credit card debt is also resold and transformed into securi­ties. And, recently, there has been a return of securitization of subprime personal loans, a practice that had been rare since the 1990s. |58| In 2014, there was more than $21 billion in new subprime credit card loans. |59| In 2014, the Wall Street Journal reported based on data from Equifax that “Banks and other lenders issued 3.7 million credit cards to so-called subprime borrowers during the first quarter, a 39 percent jump from a year earlier and the most since 2008.” |60| In early 2014, one-third of Capital One’s credit card balances were with customers who had subprime or no credit scores. At JPMorgan Chase, more than 16 percent of credit card balances were owed by borrowers with subprime scores. A spokesperson for the bank indicated that borrowers were better positioned to manage credit-card debt than previously. |61|

One of the abuses associated with subprime credit cards includes “fee harvesting.” Fee har­vesting involves offering a card with a very low credit limit but with very high upfront fees that are immediately charged to the card, becoming part of the consumer’s balance and leaving an even smaller amount of credit remaining avail­able. |62| According to a National Consumer Law Center report, in some cases, consumers were offered credit cards with a $250 limit. However, much of this was eaten up by various fees, reducing the available credit to just $72. |63| The CFPB is concerned about fee harvesting and has taken action against lenders in violation of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. |64| This law limited up-front fees to no more than 25 percent of the available credit limit.

Lenders, including non-banks, are offering personal loans at very high interest rates. For example, online lender Elevate reportedly charges between 36 percent and 365 percent on loans to borrowers with credit scores between 580 and 625. There were approximately $27 bil­lion in subprime personal loans in 2014. Although securitization of subprime personal loans had been rare for several decades, recently, there has been a return of this practice. |65|

The Long-Term Risks

The rise of subprime consumer lending can, over time, create winners and losers. With expanded opportunities for borrowing, con­sumers with lower credit scores will have access to goods and services they need and desire. However, if they are overcharged, or are given loans regardless of their ability to pay, trouble will ensue. When consumers can­not keep up with their payments or if doing so compromises their ability to afford other essen­tials, individual and systemic consequences follow. |66|

Recognizing the risks to the public, regula­tors have begun to step in to curtail abuses and hold accountable those who violate the law in lending practices that affect all borrowers, including those with subprime credit scores. While default rates remain relatively low now with these subprime loans, we should guard against complacency. Despite the fact that large banks may be pulling back, the summer 2015 issue of Subprime Auto Finance News suggests that auto dealers are encouraging, not shying away from, subprime lending. |67| History shows that the accumulation of excess private debt when consumer and business borrowers are already burdened leads to disastrous results. |68| Moreover, creating an economy that depends upon leveraging household balance sheets of the most vulnerable is neither fair nor sustainable.


|1| Jonnelle Marte, “The Majority of Consumers Have Subprime Credit Scores,” The Washington Post, January 29, 2015 (“The majority, or 56 percent, of consumers have subprime credit scores, according to a report released Thursday by the Corporation for Enterprise Development (CFED), a nonprofit that advocates for policy changes to help low- and moderate-income households.”).

|2| Atif Mian and Amir Sufi, “Subprime Lending Drives Spending,”, June 13, 2014, available at http://houseofdebt .org/2014/06/13/subprime-lending-drives­spending.html.

|3| Doug Henwood, “Financial Ups and Downs Don’t Just Hurt the Poor,” Aljazeera America, June 1, 2015 (“[A]lmost all Americans, save for the very richest, are just a few paychecks away from penury”).

|4| JPMorgan Chase Institute, “Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals,” May 2015 (Study of random sam­ple of 100,000 out of 2.5 million account holders with findings including that “Individuals experi­enced high levels of income volatility and higher consumption volatility across the income spec­trum” and “The typical household did not have a sufficient financial buffer to weather the degree of income and consumption volatility observed in the data”), available at­­volatility.htm.

|5| Alan Zibel and Annamaria Andriotis, “Lenders Step Up Financing to Subprime Borrowers,” The Wall Street Journal, February 18, 2015, available at­ers-step-up-financing-to-subprime-borrowers­1424296649?alg=y.

|6| Jessica Silver-Greenberg and Michael Corkery, “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates,” The New York Times, July 19, 2015, available at­prime-bubble-for-used-cars-unfit-borrowers­pay-sky-high-rates/?_r=0.

|7| Sarah Mulholland, “Moody’s Joins Fitch Slamming Subprime Auto Bonds,” Bloomberg Business, November 17, 2014, available at 2014-11-18/moody-s-joins-fitch-slamming­subprime-auto-bonds-credit-markets.

|8| Michael Corkery and Jessica Silver-Greenberg, “Investment Riches Driven on Subprime Auto Loans to the Poor,” The New York Times DealBook, January 26, 2015, available at investment-riches-built-on-auto-loans-to-poor/.

|9| Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook, The Fragile Middle Class: Americans in Debt (New Haven: Yale University Press, 2000), 135.

|10| Jennifer Taub, Other People’s Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business (New Haven: Yale University Press, 2014).

|11| Kathleen C. Engel and Patricia A. McCoy, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps (New York: Oxford University Press, 2011), 13.

|12| Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Pub. L. No. 111-203, 124 Stat. 1376 (2010).

|13| Mike Calhoun, “Dodd-Frank Measures Funda­mentally Reform the Mortgage Market,” in An Unfinished Mission: Making Wall Street Work for Us, ed. Mike Konczal and Marcus Stanley (New York: Roosevelt Institute, 2013), 30-42.

|14| Consumer Financial Protection Bureau, “CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages,” Press Release, January 18, 2013, available at­to-prevent-loan-originators-from-steering-con­sumers-into-risky-mortgages/.

|15| The Ability-to-Repay Rule, Regulation Z Section 1026.43

|16| Sanford Shatz, “An Overview of the Consumer Financial Protection Bureau’s Ability-to-Repay and Qualified Mortgage Rule,” Business Law Today, April 2013, available at http://www shatz.html.

|17| Zibel and Andriotis, “Lenders Step Up,” citing Inside Mortgage Finance.

|18| Annamaria Andriotis and Robin Sidel, “Credit-Card Lenders Pursue Riskier Borrowers,” The Wall Street Journal, June 26, 2014, available at­lenders-pursue-riskier -borrowers­1403807505?alg=y.

|19| James H. Carr, “A $1,000 Loan Can Balloon Into a $40,000 Debt—And It’s Legal,” Forbes, July 14, 2015, available at http://www.forbes .com/sites/janetnovack/2015/07/14/a-1000-loan­can-balloon-into-a-40000-debt-and-its-legal/

|20| Matt Scully, “Subprime Auto-Loan Bonds Skew Lender Incentives, Lawsky Says,” Bloomberg Business, April 23, 2015, available at http://www lawksy-says-subprime-auto-loan-securities­skew-lender-incentives.

|21| Alice Holbrook, “Is There a Subprime Auto Loan Bubble,” USA Today, September 27, 2014, available at subprime-auto-loan/16272641/.

|22| Corkery and Silver-Greenberg, “Investment Riches Driven.”

|23| Ibid.

|24| Zibel and Andriotis, “Lenders Step Up.”

|25| Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again (Chicago, IL: University of Chicago Press, 2014).

|26| Mian and Sufi, “Subprime Lending Drives Spending.”

|27| Neil Librock, “Subprime Consumer Lenders Will Learn Their Lesson the Hard Way,” American Banker, March 5, 2015, available at subprime-consumer-lenders-will-learn-their­lesson-the-hard-way-1073110-1.html.

|28| Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, May 2015.

|29| Susanne Soederberg, “The Student Loan Crisis and the Debtfare State,” Dollars & Sense, May/ June, 2015, available at http://www.dollarsand­

|30| Richard Cordray, Prepared Remarks of CFPB Director Richard Cordray at the Auto Finance Field Hearing, September 18, 2014, and FRBNY data (see note above).

|31| Hannah Lutz, “Subprime Loans Fall to the Lowest Share Since 2012,” Automotive News, May 20, 2015, available at http://www.autonews. com/article/20150520/FINANCE_AND_ INSURANCE/150519860/subprime-loans-fall­to-lowest-share-since-2012.

|32| Annamaria Andriotis, “Loan-Shopping Tips for Subprime Borrowers,” The Wall Street Journal, February 18, 2015, available at loan-shopping-tips-for-subprime-borrowers/.

|33| Matt Scully, “Rise of Subprime Auto Loans, 7-Year Terms Cause for Concern,” The Chicago Tribune, July 19, 2015, available at http://­tive/sns-wp-blm-news-bc-autos-subprime24­20150624-story.html.

|34| Corkery and Silver-Greenberg, “Investment Riches Driven.”

|35| Holbrook, “Is There a Subprime Auto Loan Bubble.”

|36| Mian and Sufi, “Subprime Lending Drives Spending.”

|37| Federal Reserve Bank of New York, “Quarterly Report.”

|38| Zibel and Andriotis, “Lenders Step Up.”

|39| Holbrook, “Is There a Subprime Auto Loan Bubble.”

|40| Corkery and Silver-Greenberg, “Investment Riches Driven.”

|41| Michael Corkery and Jessica Silver-Greenberg, “Wells Fargo Puts a Ceiling on Subprime Auto Loans,” the New York Times DealBook, March 1, 2015, available at http://www.nytimes .com/2015/03/02/business/dealbook/wells­fargo-puts-a-ceiling-on-subprime-auto-loans .html?_r=0. (“In that quarter, lenders originated $20.6 billion in subprime auto loans, nearly two times as much as in the same period of 2010.”)

|42| Corkery and Silver-Greenberg, “Wells Fargo Puts a Ceiling.”

|43| J. P. Morgan, “Wells Fargo Earnings Show Bad Loans on the Decline,” available at­earnings-show-bad-loans-on-the-decline­1436918335?alg=y.

|44| Scully, “Rise of Subprime Auto Loans.”

|45| Ibid.

|46| Delvin Davis and Joshua M. Frank, “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses,” Center for Responsible Lending, April 19, 2011, 2.

|47| Holbrook, “Is There a Subprime Auto Loan Bubble.”

|48| Davis and Frank, citing Mark A. Cohen, Imperfect Competition in Auto Lending: Subjective Markup, Racial Disparity, and Class Action Litigation (Nashville: Vanderbilt University, 2006).

|49| Davis and Frank, “Under the Hood,” 6 and 17.

|50| Corkery and Silver-Greenberg, “Wells Fargo Puts a Ceiling.”

|51| Nathaniel Popper, “JPMorgan Chase Insists It’s Worth More as One than in Pieces,” The New York Times DealBook, February 24, 2014, avail­able at business/dealbook/jpmorgan-pushes-back­against-suggestion-of-split.html.

|52| Holbrook, “Is There a Subprime Auto Loan Bubble.”

|53| Loeb & Loeb, LLP, “CFPB Targets Fair Lending in Auto Loans,” Client Alert, March, 2013, available at­cles-clientalertsreports-20130308-cfpbtargets­fairlendinginautoloans.

|54| Carter Dougherty, “Auto Lenders Face More Scrutiny in Move to End Loan Bias,” Bloomberg Business, September 17, 2014, available at­scrutiny-in-move-to-end-loan-bias.

|55| Consumer Financial Protection Bureau, “CFPB to Oversee Nonbank Auto Finance Companies,” Press Release, June 10, 2015, available at http://­oversee-nonbank-auto-finance-companies/.

|56| Consumer Financial Protection Bureau, “CFPB and DOJ Reach Resolution with Honda to Address Discriminatory Auto Loan Pricing,” Press Release, July 14, 2015, available at cfpb-and-doj-reach-resolution-with-honda­to-address-discriminatory-auto-loan-pricing/; Jacob Bogage, “Honda Settles DOJ Charges that It Overcharged Minority Borrowers,” The Washington Post, July 14, 2015, avail­able at news/business/wp/2015/07/14/honda-justice­department-settle-over-claims-it-overcharged­minority-borrowers/.

|57| E. Scott Reckard and Dean Starkman, “Banks Raising Credit Card Borrowing Limits for Subprime Customers,” The Los Angeles Times, April 3, 2015, available at http://www­20150403-story.html.

|58| Al Yoon, “AIG, Fortress Unit Test ABS with Personal-Loan Securitization,” The Wall Street Journal, February 5, 2013, available at http:// 807004578286210256247312.

|59| Zibel and Andriotis, “Lenders Step Up”

|60| Andriotis and Sidel, “Credit-Card Lenders Pursue Riskier Borrowers.”

|61| Ibid.

|62| Ann Carrns, “Subprime Borrowers Often Lured by High-Fee Credit Cards,” The New York Times Your Money, February 5, 2015, available at­money/subprime-borrowers-often-lured-by­high-fee-credit-cards.html.

|63| Ibid.

|64| Brian Karimzad, “CFPB Fines Delaware Subprime Credit Card Company,” magnify­, February 5, 2015, available at cfpb-fines-delaware-subprime-credit-card­company892458115/.

|65| Zibel and Andriotis, “Lenders Step Up.”

|66| David Dayen, “The Next Subprime Crisis Will Ride on Four Wheels—Unless the Government Stops It,” New Republic, February 26, 2015, available at­cle/121152/subprime-auto-lending-how-govt­can-stop-new-financial-crisis.

|67| Nick Zulovich, “Why Subprime Has ‘Bullish’ Outlook,” Subprime Auto Finance News, July/ August, 2015, available at http://digital.sub­ +‘Bullish’+Outlook/2052366/265131/article. html.

|68| Richard Vague, The Next Economic Disaster: Why Its Coming and How to Avoid It (Philadelphia: University of Pennsylvania Press, 2014), 4 and 23 (“Runaway growth in private debt, especially when combined with high existing levels of that debt is what has caused most major economic crises of the last century. . . Lackluster demand is most often due not to the absence of confidence but to the bur­den of debt.”).


Jennifer Taub

is a professor at Vermont Law School, where she teaches Contracts, Corporations, Securities Regulation, and White Collar Crime. Her book about the financial crisis, Other People’s Houses, was published in 2014 by Yale University Press. Formerly an associate general counsel at Fidelity Investments, Taub is a graduate of Yale University and Harvard Law School.



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