Richard Lord

“C.J. and Jill Eselman wouldn’t seem to be much of a fiscal meal for Wall Street’s gluttons. But these days, even a makeshift family in a has-been hamlet is fair game"--these two lines of American Nightmare encapsulate the book’s storyline and politics. Richard Lord is not shy about aggressively documenting, and expressing his feelings about, the injustices he perceives in the subprime lending market: practices commonly called predatory lending.

Subprime loans are made to people who have credit problems; their rates of interest are much higher than the prime rate charged by banks, which is usually the lowest rate around and only available to borrowers with exemplary credit. A subprime loan may be considered predatory for four reasons: the terms of the loan are more costly than would be appropriate to a borrower’s credit; the loan contains deceptive provisions that escalate the cost to the borrower; the monthly payments on the loan are unreasonably high given the borrower’s income, especially when other factors are taken into consideration (such as the insurance and taxes also due on a mortgaged property); or--more straightforwardly--the provisions of the loan clearly break existing lending laws. Intertwining a web of figures with compelling individual stories, Lord details the many ways loans can be predatory and the varied circumstances in which they commonly occur.

He tells the stories of first-time homeowners convinced to bite off more than they could chew, a lady convinced to finance home improvement work through a second mortgage, a single mom seduced by a “rent-to-own” offer, a grandmother who owned her home free and clear but consolidated other debts in a mortgage, a re-financing that turned out horribly wrong--all these situations lead to foreclosure papers, and foreclosure nearly always ruins lives in one fell swoop. Then there are the far greater number of predatory loans that do not end in foreclosure. Though perhaps less dramatic, these loans strip the equity of the poor, the elderly, and disadvantaged minorities, one unfairly inflated payment at a time.

The effect of these stories is that American Nightmare reads like a book-length, well-written feature article from an alternative weekly like the Pittsburgh City Paper, where Lord started his career as a journalist. His style is both the strength of the book, as well as its very obvious limitation. Nightmare does not stray very far from the City Paper: while a pretty good work of investigative journalism--if you don’t mind the author wearing his politics on his sleeve--there’s not a single footnote helping to identify any of the reams of studies, statistics, and facts Lord cites. And Lord focuses almost solely on the Pittsburgh region. Nonetheless, he finds more than enough examples there not only to explain predatory lending but to trace the connections between an abundance of local hard-luck stories and a broader pattern perpetrated by “Wall Street gluttons.”

Following investment trails, Nightmare exhaustively traces how major institutions such as Citigroup add ruthless subprime lender subsidiaries to their more familiar stable of corporate and Main Street lending arms. Going a step further, Lord implicates the vast array of insurance companies, banks, funds, and other investors that put money into subprime mortgage-backed securities without ensuring that those loans are not predatory. Simultaneously, the industry works to forestall, subvert, or otherwise subvert anti-predatory-lending laws.

The problem with American Nightmare is that it outlines a problem but fails to suggest solutions: how anti-predatory-lending laws could be made effective, for instance. With each tale of a variant of predatory loan devastating a new family, one can’t help thinking, “All right, I’m convinced. I’ve heard this song before. What comes next?”

Lord argues that greed pushes subprime lenders to be overly aggressive, cut ethical corners, and callously expand into a market full of potentially fleeceable victims. He might look past their personal motives, however, to consider that predatory lending is made possible, perhaps even inevitable, by a market failure. In a mature, well-functioning market, profit margins are kept reasonably small due to competition--only innovation and other disruptive forces or market flaws allow otherwise. While the “innovation” of providing underserved poor and minority communities with loans might allow for some excessive profit in the short run, it is almost certainly a market flaw that allows enough room for subprime lenders to become predatory lenders. The flaw in question is the inability of consumers to effectively seek out the best deal (or sniff out fraud) because of the complexity involved in taking out loans--a flaw intentionally made worse by provisions of these loans and the techniques used to market them.

Clearly, stronger government action is needed to improve the functioning of the subprime market. Predatory lending not only puts individuals at risk of losing their equity all at once, or one over-inflated payment at a time; it destabilizes entire communities. A heightened default rate blights borderline neighborhoods, and the cumulative effects of many over-inflated loan burdens (especially when viewed in the typical low-income area context of check-cashers, Rent-a-Centers, and H&R Block “refund anticipation loans") strip a community of its wealth and potential.

But bearing in mind the more obvious dangers of government regulations, which can distort the market in various negative ways, limit useful lending tools, or add layers of red tape (making borrowers sign additional forms asserting that they understand the potential pitfalls of their loans’ provisions, for example. Predatory lending is also not entirely a black-and-white issue. With traditional borrowing, it is easy to go from one bank to another and compare terms. Because borrowers must be highly creditworthy to qualify for prime rates, there is less reason for more of the costly and complex provisions found in subprime lending, which is inherently costlier because it is riskier. The argument you will hear from anyone accused of predatory lending (those not engaged in outright fraud, at least)--"I am only offering an opportunity to a risky borrower in a way that will allow me to make a profit that clears my risk"--is not entirely without merit. Drawing the distinction between above-board subprime lending and predatory lending gets tricky and is not something Lord spends much time on.

If you only consider the effect on the borrower, for instance, how is a predatory lender (one not engaging in outright fraud) much different from countless non-profits and government agencies around the country who are encouraging people with marginal credit and finances to purchase homes with prices inflated by the housing bubble affecting many parts of the country? In either case, the new homeowner is stretched beyond a safe carrying capacity to acquire an over-valued asset.

Understanding--and then hopefully combating--predatory lending requires an assessment of what allows it to exist, and an honest differentiation between problematic business practices and broader structural concerns. If lenders are able to extract excessively high profit from subprime loans, then there are market flaws that need to be addressed. If lenders are not making excess profits but we still find the loans unpalatable, then perhaps the issue is our tolerance of high-risk lending. Questions then arise about limiting opportunity for the poor and credit-challenged to access loans to advance themselves--a much less comfortable position than damning corporate greed.

Fortunately for muckraking journalists and progressive government alike, there seem to be enough damaging lending practices to confront before getting to the tough questions like this one.