Thoughts & Comments
Predatory Lending Didn't Cause the Credit Crunch
And so what if it had? Let consumers act like growups.

Thomas Brown  ( about me )
Posted 03/08/2013
bankstocks.com
tbrown@bankstocks.com

A portfolio manager, spouting a piece of conventional wisdom that gets spouted way too often, writes the following:  

I’ve written many times about how disgusted I am that nearly every element of the U.S. financial system has engaged in predatory behavior toward their own customers, usually victimizing the most vulnerable people in our society. Just think about it: can you name even one area of consumer finance – mortgages, credit and debit cards, auto loans, student loans, insurance, debt collection, check cashing, pawn shops – that hasn’t been tainted by horrific, widespread scandals? So add this latest disgrace to the mix: a front-page story in the NY Times last week on how “Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.” . . .

It just makes me sick – and more determined than ever to champion a very powerful and independent Consumer Financial Protection Bureau, which is desperately needed. [Emph. added] 

This is bogus. First off, the notion that the credit crunch was entirely (or even somewhat) due to predatory lending by the banks is a myth that will not die, mainly because liberals love it so. But it’s still a myth. Subprime mortgage lenders weren’t “predatory.” They were merely doing what the government wanted them to do: ease their lending standards to subprime borrowers to boost homeownership among the “disadvantaged.” So the banks and non-banks lowered downpayment requirements, eased terms generally, and made loans to people with low credit scores. Dumb, in retrospect--but fully in line with federal policy. Come to think of it the FHA still does a lot of those things. Is it a predator too?

But more broadly, so what if lenders engaged in predatory behavior? The customers they were dealing with were grownups, and presumably mature and rational enough to, for example, vote, drive a car, and support themselves. As I say, fully functioning adults. They should be relied upon to be able to recognize a bad deal when they see one. And if they don’t, well, that’s why we call it “real life.” 

People aren’t “protected” from predatory behavior when they pay $3.75 for a peppermint mocha from Starbucks or put $1,000 on red in Las Vegas. Why? Because the vendors aren’t being predatory! Nor are state lotteries being predatory when they sell tickets that on average don’t pay out much more than 60 cents on the dollar1. The consumer knows what he’s getting into, or should know. You might think that in each case he was making a bad decision. You might even be right. But the decision should be left up to the individual. If he later comes to regret it, then, well, tough.

This ought to be common sense, but when it’s financial services transactions being scrutinized, suddenly common sense goes out the window and the consumer is somehow assumed to be semi-sensient, blubbering idiot—so that it’s soon decided that the industry has to be regulated nearly to death. That’s bad. Overregulation restricts consumer choice, drives up the cost of credit, and reduces economic growth generally. It doesn’t help anyone. Then again, this sort of paternalism provides plenty of opportunity for sanctimony and moral preening from the self-appointed watchdogs. What a bunch of blarney. The best markets—on both sidesare the most unfettered markets. 

Note: 

1. I never cease to be amazed, given the steady drumbeat of accusations from the do-good set regarding predatory this or that on the part of the banks, that these same people never seem to have a single bad word to say about the lotteries run by the states, even though state lotteries are incredibly bad deals for consumers and tend to extract the most money from the people who can least afford it. Yet try to price those same people’s credit cards to reflect their risk, and, literally, a federal law gets passed to make it harder. The world truly is crazy.

What do you think? Let me know!


  Add your comment

 

 

PureDakota Posted On 3/8/2013 12:24:12 PM

The problem was just the opposite --- making high risk loans and not properly charging for them. With many of the loans, there would have been no pricing that would have properly compensated for the risk.

oy Posted On 3/8/2013 12:27:45 PM

The quote you show does not make the claim that predatory lending caused the financial crisis. It merely states revulsion of a consumer credit industry that preys on its customers. Having myself worked briefly for a major tax preparer during a period when I was in between career positions, I too am appalled at those who prey on their customers. A large part of that company's proift came from outrageously high interest rates charged on tax return anticipation loans made to low income individuals who had no inkling of how much they could save if they would just wait a couple of weeks to recieve their refunds. Maybe customers and lottery players SHOULD know, but there are all too many who haven't got a clue. That doesn't mean they deserve to be ripped off.

stays Posted On 3/8/2013 12:31:23 PM

Yes, the world is truly crazy when people write articles with so few facts. Why don't you try writing something factual for a change? Show me the facts that support your claim that the government wanted subprime lenders to ease their lending standards to boost homeownership among the disadvantaged. Show me the memo from any government employee to a bank or other financial institution that instructed lenders to do this. Show me the memo, or stop writing such drivel.

jsc173 Posted On 3/8/2013 12:48:08 PM

Couldn't agree more. It's like the whole "robo-signing" mythology, or as I call it the "MERS lottery." Borrowers would have you believe that, even though they admit defaulting on their debt obligation they shouldn't have to pay anything because of a signature on an assignment in a 300-page loan file that is suspect. I guess this is the same logic as letting a known criminal go because a defective search warrant uncovered convincing evidence that is then excluded by the judge. A "technicality." And as for the current situation, who actually believes that Dodd-Frank will eliminate, let alone reduce, instances of fraud on the part of loan officers and others? My assessment so-far is it's causing private capital to think twice about trying to, yet again, compete with the GSEs. This time, they won't take the bait and as a result consumers will find it more and more difficult to find a loan.

elizabeth Posted On 3/8/2013 1:11:57 PM

well stated, Tom!

Michael Keller Posted On 3/8/2013 4:00:51 PM

She is totally out of control. It reminds me of the mindless mean spiritedness of Joe McCarthy's hunt for communist. It is constant drumbeat of misinformation for her own political ends. I am glad you speak out so directly. There was greed and incompetence all over the place. Beginning with Clinton administrations change in HUD policy which forced banks to make bad loans.

RJD Posted On 3/8/2013 4:33:42 PM

I guess you don't consider lenders who falsify income information on thousands of mortgage applications, lenders who knowingly lend to people he/she knows cannot repay the loan in order to get a commission, or an institution that bundles loans with knowingly falsified information and with misleading information for sale to investors; are predatory lenders. Just what would you call them. Tom, you or I would not enter a loan agreement without being totally aware of the terms and ramifications, but you have no idea how many consumers place complete trust in their lenders, whether they be a banker or mortgage broker. Banks promote this and that trust is well placed in the majority of instances. But, as we have seen time and again there are obviously far too many bad apples who do not police themselves or their employers don't care enough to do so. I would much rather see banks and bankers police themselves, which most can and do, but that did not stop the so called "credit crunch", which unfortunately hurt many who had nothing to do with making or receiving predatory loans. Your comments demonstrate a complete lack of understanding of the day to day marketplace.

ron Posted On 3/8/2013 5:47:49 PM

Tom, You are right the REAL predators were not the mortgage brokers providing financing to sub-prime borrowers and in the end these homeowners lost nothing but their dreams. They by and large had no skin in the game they lost their home but they had no down payment so they had no equity to lose anyway. The real damage was done to peoples pension funds and this is where the REAL predators were prowling. Creating slice and dice subprime mortgage pools that they KNEW were going to implode and then finding portfolio managers who were stupid enough to buy them. That said Country Wide KNEW it was making loans that people could not pay back and did not care of the consequences of their actions some times its just better to just say no thanks and walk away from unsavory business practices in spite of what Barny Frank wants you to do.

rivvir Posted On 3/8/2013 6:10:32 PM

"...predatory lending by the banks is a myth that will not die, mainly because liberals love it so. But it’s still a myth. Subprime mortgage lenders weren’t “predatory.” They were merely doing what the government wanted them to do: ease their lending standards to subprime borrowers to boost homeownership among the “disadvantaged.” So the banks and non-banks lowered downpayment requirements, eased terms generally, and made loans to people with low credit scores." As usual you omit what you don't want to see. Liar loans, ever hear of them? Probably not, your right wing ears clog up just before the tones enter, the eyes mist over just before you see the words, your hand goes to your mouth before you can even contemplate speaking the words. I won't fight with you over what i, too, think is the fact the gvt wanted easier standards for subprime borrowers, but i'll be damned if i agree with you when it comes to outright lying to qualify even under those lowered guidelines. I guess you think barney frank visited every one of those closings and told the borrower what to write, and told the originating agent what to accept even when they knew it was not the truth. You can dump on gvt all you want but those who pay attention to the truth know the only fault of gvt in this was one of naivete. Something that worked for 70 years, something that was instrumental in building America, was near put out of business by those whom you support by your assuaging their guilt. If you stop being so partisan some day the world of truth just might actually open up to you and a monkey you may no longer be..

tom brown Posted On 3/8/2013 6:53:26 PM

rivvir, borrowers who lied on their mortgage documents committed a crime. They are at fault.

rivvir Posted On 3/8/2013 7:56:19 PM

"...borrowers who lied on their mortgage documents committed a crime. They are at fault." No disagreement whatsoever, they are at fault, and they should pay the piper. But what about those lending agents that were complicit in the false pretenses? Is barney frank, is fanny, is freddie, to be faulted over the criminality involved? Did barney frank push for criminality? If so, then prosecute him. Did fannie and freddie push for criminality? Perhaps the ceo was so interested in his bonus he turned a blind eye rather than a critical one. I don't remember how that turned out but i sure hope we got back every penny of every bonus handed out. Maybe you should do a study on do performance bonuses help more than they hurt. Having been in management and having received stock options i can say only from my own perspective that it made not one iota of difference to me. I was hired to do a job the best i could, and i did Maybe self-pride had something to do with it..

twiz Posted On 3/9/2013 3:04:08 PM

I Agree

C'mon Posted On 3/10/2013 6:38:17 PM

Only an inhabitant of a leftist super zip could conclude Tom Brown a rightwinger.

JC Posted On 3/12/2013 10:56:12 AM

OY - Seriously....Seriously... First and foremost you are appalled at the individuals NOT knowing they could wait a few weeks?? Did your company actively council their customers that they would not reveive there tax refund unless they took out a loan. Do you think those same customers were so stupid that they didn't know there refund would come in a few weeks. More likely however, is that these customers knew EXACTLY when they would receive there refund and made a conscious decision (albeit a bad one) to get the money know and pay the fee. There are certainly bad examples of behavior that all of us can agree to eliminate. But we also can't design our entire regulatory system based off the assumption that people are too stupid to do there homwork. The fact that our esteemed government believes that people are too stupid to function in society is the only thing appalling here!!!!!!!

Acarolinensis Posted On 3/12/2013 5:30:45 PM

Umm, looking at your quoted text I don't see anything that remotely suggests causes of the credit crunch.

John Posted On 3/19/2013 9:07:11 AM

What's important is that you and Meredith both like Bank of America. Ha! Life is great...... .....if you can stand it.!

vollrath Posted On 3/22/2013 11:21:51 AM

Who's to blame? Obama, Pelosi, Reid, and Frank.
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