To Lend or Not to Lend: What the CRA Ought to Say about Sub-Prime and Predatory Lending

Policies that support the expansion of affordable housing for low- and moderate-income persons must be reconciled with those policies that undercut the sustainability of home ownership. The sub-prime market represents a much needed expansion of credit markets to those who have been denied access to credit though they are creditworthy. The high failure rate of the sub-prime market indicates that market forces are ineffective in halting this economic abuse. This article argues that the public policy choices and justifications for certain practices have marginalized the concerns of particular consumer classes. It challenges the premise that the free market can and should operate without interference and critiques it from the a utilitarian perspective using home-equity lending as an example. It endorses the need for diversified financial services industry but argues that predatory lending, which is the result of market information failure, does not fulfill this objective and in fact leads to an onerous type of borrower market segmentation. The capital supply of predatory lenders is critical to eliminating the sharp practices presently sanctioned by law. Proposing a duty on the originating lender to conduct a due diligence analysis, the article suggests that closer adherence to the rules of commercial negotiation would place more scrutiny on both the funding of predatory lenders by the primary market and the selling of predatory loans on the secondary market