Subprime lenders are getting battered in a public relations war that shows no signs of ending soon, but they say they are not beaten.
The business has been assailed by legislators, regulators, and consumer advocates. The subprime industry argues that it is providing funds to risky borrowers who might otherwise be unable to buy a home, but its detractors accuse it of predatory lending.
Though subprime lending is profitable, some large lenders have concluded that the rewards do not offset the risks, which aside from bad PR can include costly lawsuits and run-ins with regulators. These are the types of things Bank of America Corp., the latest casualty, cited Wednesday when it announced plans to pull out of the subprime real estate market.
When the subprime industry consisted of many smaller, independent players a few years ago, it shrugged off these slings. But in its current, consolidated form it is much more sensitive to its critics.
Two of the biggest independent subprime lenders, Associates First Capital Corp. and Advanta Corp., were purchased by Citigroup Inc. and J.P. Morgan Chase & Co. in the last 12 months, and the lending giants Washington Mutual Inc. and Countrywide Credit Industries Inc. have both ramped up their nonprime activities. So far the big players have been unable to stop the flood of negative publicity or clarify the distinction between subprime and predatory, and their frustration at how the industry is perceived by the public and at its own slowness to respond to the problem is mounting.
But they are determined to survive in the specialized market they have built and some say that they are scoring small victories on the image front.
The message is getting through, Luke Hayden, an executive vice president with J.P. Morgan Chase, said in a phone interview. My sense is that youve got a migration toward well-capitalized, large organizations that bring highly skilled management to the table, and those managers are getting the word out.
Mr. Hayden said predatory lending cannot be eradicated unless all lenders are held to the same standards that apply to banks. Only 15% of subprime lenders are routinely examined by a regulator, he said. The best thing to do is to mandate annual examinations of subprime lenders, which goes back to the old adage trust but verify. Each subprime lender should be able to prove its doing things the right way.
Michael D. Youngblood, the managing director of real estate capital markets for Banc of America Securities LLC, said that lenders should write and implement best practices. These would signal a commitment to fair dealings with all applicants and help all employees of lending companies deal with this issue more easily.
William D. Dallas, the founder and chief executive of First Franklin Financial Corp. in San Jose, Calif., says that those trying to do away with this lending altogether should be careful what they wish for. Subprime lending helps open up funding avenues for affordable housing and folks who dont meet rigid guidelines, he wrote in an e-mail. Do we want this to shut down?
He added: Most organizations leading this charge have limited knowledge of the real issues and the solutions. Rather than pick on certain lenders, everyone would be better served to work with lenders to craft a real solution.
Pointing to the strict state laws against predatory lending that have been cropping up around the country, Mr. Dallas said, If you want the good lenders to leave, then keep it up.
But objective observers said subprime lenders must do a better job of making their case.
The subprime guys have got to tell their story and tell it very clearly that often they are the alternative to loan sharks, Lawrence J. White, a professor of economics at the New York Universitys Stern School of Business, said. Their loans are more costly, but there is a reason why their customers are riskier.
Maude Hurd, the national president of Acorn, one of predatory lendings staunchest foes is the Association of Community Organizations for Reform Now, said in an e-mail: Ending the criticism depends on ending the abuses. So responsible lenders should support legislation to create an even playing field, where predatory loan terms and features are out of bounds, and fair subprime lending can take its rightful place.
To be sure, there is a subtle difference between subprime loans, in which steeper risk justifies a higher interest rate, and predatory loans, in which a lender takes advantage of uninformed borrowers.
Subprime lenders have been buffeted by everyone from community activists like Acorn to New York Democratic Sen. Charles Schumer to Federal Reserve Board Chairman Alan Greenspan.
Adding injury to insult, a tough anti-predatory-lending law took effect last month in North Carolina, and the industry realized there was some bite behind the bark. Lenders complained loudly when it passed, with Countrywide ceasing its subprime activities in the state.
In North Carolinas wake, predatory lending ordinances emerged in city and county counsels, state legislatures, and even in the halls of Congress, further alarming the lending community. Dealing with a patchwork of regulations would be logistically impossible and debilitating to their business, many executives have said.
Industry representatives admit that, initially at least, lenders dropped the public relations ball. The industry might have to accept some level of blame by not coming out more forcefully early on when a lot of the charges were being leveled, said Wright Andrews, an independent lobbyist who represents many lenders. It took the industry longer than it should have to start sending up and rebutting many of the attacks.
One lender, however, said that poor public relations would soon be a thing of the past. A few years ago the industry had a cowboy contingent that did not care about the image game, but with large banks entering the business that should change, he said.
Others were less convinced that the industry will make the stain disappear.
It is not easy to draw the line between abusive and nonabusive subprime lending, said Bert Ely, an independent consultant in Alexandria, Va., by e-mail. There are always going to be bad guys out there who will take advantage of unsophisticated, naive, or lazy borrowers.