Don't take your prime credit to a subprime lender
By Julie Sturgeon • Bankrate.com

When you walk into a financial institution for a loan, you may not receive the interest rate your credit score deserves if you go into the wrong institution. That's OK if you know enough to shop around. But too many people don't know exactly how the system works and don't realize that subprime lenders, even if they are a subsidiary of a prime lender, demand higher interest rates.

The problem is compounded because many parent banks and their subprime subsidiaries don't "refer up" -- that is, send good credit customers up the chain if they apply in the wrong location. In 2000, Bankrate.com investigated the discrepancy between mortgage rates at a parent bank versus a subsidiary and discovered a person with great credit requesting a $40,000, 15-year second mortgage could pay 12 percent at Citifinancial (subprime lender) but just 9.95 percent at a prime lender in the same geographic area.

Today, the gap between the two has grown, says Matthew Lee, executive director of Inner City Press/Fair Finance Watch consumer advocacy group in New York. Virtually none of the loans at Citibank or Citimortgage were at "higher cost," which the Fed defines as 3 percent over treasuries on the first lien and 5 percent on a second lien.

But at its subprime unit, Citifinancial, nearly 60 percent of the loans are over that threshold. A majority fall between 3 percent and 4 percent higher than prime, and that's before you start talking about the prepayment penalties, higher closing costs and other restrictive terms and conditions at subprime affiliates.

"It's like Dr. Jekyll and Mr. Hyde. You want to know which one you're dealing with," says Lee.

Bettye Banks, senior vice president of education at the Consumer Credit Counseling Service of Greater Dallas, often sees good credit records caught in the subprime net.

"College-educated people, folks with master's degrees and good careers -- and still they get caught up paying more than they should pay for credit," she says. "They have not a clue how the environment works."

One client came to Banks after consolidating credit card debts with a 12-percent loan, a deal she jumped at because it was lower than the credit cards' interest rates. "Yet she had a 700 credit score. She qualified for a 9-percent rate, but the subsidiary didn't bother to tell her that," Banks says.

Gouging is legal
Unless lenders discriminate by race, it's not illegal to charge different prices to similarly situated people. Unfortunately, consumers often assume the person they're doing business with is under a legal obligation to give them the best rate, Lee says.

"We don't have a problem with the idea of pricing by risk. But we've now done six studies, we've used regression methods and consulted with professors. Gouging is taking place in this industry, and it's not a few bad apples. It seems most of the disparity in the nationwide data comes from the Citigroups, Wells and Washington Mutuals," he says.