Countrywide Financial Corporation, one of our nation’s largest mortgage lenders is under heat for allegedly selling high cost, subprime loans to borrowers who would otherwise qualify for more favorable loans.

Inside the Countrywide Lending Spree, an article recently published in the New York Times, accused Countrywide for swindling many of its borrowers by only offering high cost or subprime loans to clients during the mortgage lending boom. For years brokers and sales representatives in the subprime unit were unable to input borrowers’ cash reserves when assessing risk and determining the kind of loan the borrower would get access to. This meant the borrower was able to show fewer assets and thus posed a higher risk, ultimately giving lenders free reign to offer high cost or even subprime loans to clients.

According to this article, one of the reasons subprime loans are lucrative for Countrywide is because “…investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.” Therefore, the company’s incentive structure provides higher commission rates to brokers who sell risky subprime loans. For example, a broker who sold subprime loans made 0.50 percent of the loan’s value while receiving only 0.20 percent on loans that were slightly more favorable.

Last year 45 percent of Countrywide’s loans carried adjustable rates and because Countrywide has a large presence in California, more than 46 percent of Countrywide’s clients are Californians.

“As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year’s rate of 5.35 percent.”

The “spin” coming from spokespeople in the lending industry, and from elected officials on both sides of the aisle is that the current crisis was spurred by consumers’ irresponsible choices. But stories like the NYT piece on Countrywide’s incentive structure force us to re-evaluate the way we should consider the context in which these choices were made. Is this not similar to the debate about where to draw the line between allowing people to purchase cigarettes knowing they cause cancer? Rather than placing the blame solely on consumers, policy makers should take a hard look at the way the lending industry and its regulators operate.