The financial crisis that engulfed the United States in 2008 helped to shine a bright light on the risks associated with lending to borrowers with questionable—“subprime”—credit profiles. There was nothing new about these risks. Indeed, there were a number of high-profile bank failures tied to subprime lending about 10 years prior to the onset of the financial crisis.
The subprime story in the 1990s was not solely about banks failing to recognize their high-risk lending. Another important part of the story also encompasses federal bank regulators, who set capital requirements too low to take account of subprime lending risks.
One prominent bank failure tied to subprime lending involved the inappropriately named BestBank, which had its headquarters in Boulder, Colorado. BestBank had grown rapidly, with its assets rising from $34 million in 1996 to $314 million in 1998. The bank also had pursued a high-risk business strategy that involved subprime lending. In BestBank's case, it worked with another company, Century Financial, to issue credit cards to borrowers with poor credit histories.
Telemarketers working for Century Financial would target potential customers. Their pitch was that the credit cards included a prepaid travel plan. If prospective customers agreed to accept a credit card and paid a $20 application fee, they would be sent a BestBank ...