Erin O’Leary

Abstract

This note distinguishes predatory lending from subprime lending while focusing on the insurance consequences of predatory lending. It examines how single premium credit insurance (SPCI) and private mortgage insurance (PMI), two mortgage-related insurance products, have contributed to the current predatory lending crisis. The note argues for reforms that would eliminate SPCI and make PMI a more feasible option for insureds—changes that would enable subprime lenders to offer mortgages to qualified borrowers while reducing predatory lending and foreclosures. The introduction provides background on subprime and predatory lending; the second part analyzes several issues concerning the role of insurance in the subprime mortgage market; the third part discusses necessary reform measures to mitigate problems associated with mortgage insurance; and the fourth part reviews recent Federal Reserve Board actions and evaluates whether they are likely to bring meaningful change. The note concludes that although the Fed’s regulations are a positive step, an outright ban on SPCI is needed and predatory lending must be stopped entirely.

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