As noted in a 2007 Federal Reserve publication, What is Subprime Lending?, “a precise characterization of subprime lending is elusive.” In fact, the specific meaning of subprime lending has been the source of considerable debate among regulators, legislators, lenders, and advocates for low-income communities.
Webster’s dictionary defines subprime as “having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers.” According to former Federal Reserve Governor Edward M. Gramlich, “Subprime lending can be defined simply as lending that involves elevated credit risk.”
Subprime loans should be for people whose credit scores prevent them from getting access to a regular — or prime — loan. Borrowers with low credit scores can still get a mortgage, but they will have to pay a higher interest rate, and often higher fees. That’s because the credit score reflects the borrower’s debt history. If a borrower has a track record of not paying back loans, the lender will quite reasonably think he or she is a riskier bet than someone with a good track record, and will charge more for the loan, hedging against default.
In this project, the Center for Public Integrity used a definition employed by the Federal Reserve Bank to capture most subprime loans reported to the government. For that purpose, subprime loans are those at 3 percentage points or more above the rate of comparable U.S. Treasury securities. For more on the Center’s criteria, please see this project’s Methodology page.