Last week 60 Minutes did a segment on an elderly woman who seems to be the victim of predatory lending. The bias of the program was clearly designed to support the case of the woman and to discredit the lending agency. This problem is not so simple.
Here’s the short version, the elderly woman refinanced her home four times in the past four years. Each time she increased the loan amount by twenty thousand dollars. Her husband had passed away but the lending agency used his income in the formula to determine if the loan was justifiable. With the loan granted, the monthly payments soared to a $1,700 a month – less than the monthly interest. This is defined as an ‘interest deferred loan.’ It means that the interest is deferred to a later date – the interest not paid is merely added to the principle. The principle grows and eventually swallows the homeowner. Another note, not highlighted in the sixty minutes segment, the elderly woman received 20,000 dollars each time she refinanced.
There are two wrongs in this scenario. First – The lending agency was corrupt in fabricating the ability to pay. They have fraudently represented the facts to pass underwriting scrutiny, then sold the loan as a part of a package to larger banks. We taxpayers should not reward this behavior. Second – what did that woman do with the 80,000 dollars she received? This question was not asked. Did she take elaborate vacations, buy furniture, remodel her home – what? Are we taxpayers expected to pick up the 80,000 dollars?
Was this woman duped by the lending agency? Should she have known better? Should she have exercised more scrutiny in understanding the loan? Yes, yes, and yes. We, as a generous people, give the elderly woman more space than we give the lending agency. The lending agency was clearly perpetrating fraud – they are professionals and they know what they are doing. But this does not excuse bad decisions by individual borrowers.
I remember when I was young, raised by depression era parents, when people trusted the bank. Loans were applied for and if the bank granted the loan that meant something. It meant that the bank had evaluated the data and determined the borrower could afford the loan. Being eligible for a loan from a bank was seen as a mark of success – an affirmation of one’s responsible behavior. I remember, as a child, my mother and I would walk downtown to the Savings and Loan Company. She carried her cash and her payment book. She made the house payment and the Loan Company made an entry in her book – date of payment, amount applied to principle, amount applied to interest, and ending balance.
So what happened? In the ‘old days’ the bank granted the loan and collected the payments for the duration. The bank made money on closing the deal and collected interest for the life of the loan. In the past twenty years or so the lending agency was merely responsible for the up front paperwork. After closing they bundled the loan with many others and sold the package to a larger bank. The loan originator had no responsibility for the final outcome – and they only made money when the deal was closed. No closing, no money. The incentive was based entirely on the original loan – not on the long term collecting of interest. So loan originators began the act of fraud – misrepresenting borrower’s ability to pay.
The biggest and most responsible of banks began using tactics of used car salesmen. Get the money by any means available. It makes no difference if the car or the house is worth the loan amount – of if the borrower can afford the payment – just get the money.
That woman featured on 60 Minutes has some responsibility. She gained about 80,000 dollars. What did she do with the money? If she bought furniture or a new car – should she be required to sell that stuff? I feel sorry for her – but that does not excuse her behavior. Each of us is responsible for the deals we make in our lives. Her assets should be scrutinized and some money should be recovered.
The loan originators who fraudulently represented borrowers ability to pay are criminals who should be charged in criminal court.
Our government has to take action. Most of us have been responsible with our money. We can whine around about the irresponsibility of others. But ultimately we will suffer the consequences of the criminal fraud and poor judgment of others. It makes no difference that we were not responsible for bringing the plague infested rats into the country on the Mayflower – the rats are here and we have to take aggressive action.