The rubberband effect, at least, in most racing games is a situation where where Car X falls behind Car Y for whatever reason (crash, pit, etc.). The rubberband effect comes into play by, miracuously, allowing Car X to come back up behind Car Y without Car Y taking any effect or force to be slowed down.
The effect typically only happens in Single Player modes, and is there to give players a last chance (or more in some games) to make one last push for another position that is far ahead by forcing the AI to "slow" down so the player can catch up.
A lot of folks detest it in simulation games because something like that doesn't happen in the real world without the leading car taking some kind of effect on its performance to cause it to slow down.
It's, essentially, a rubber band in short. You get too far behind or the opponent pulls too far ahead, the "rubber band" snaps back to a positon putting both cars back near each other.
