New Minnesota Attorney General, Lori Swanson, vows to put an end to predatory lending. She formed an 11-member task force to come up with proposals to curb the practice.
That sounds pretty good unless you don’t know how to define predatory lending. Arizona Governor, Janet Napolitano, pursued this fight back in 2000. She was Attorney General Napolitano then and proposed that Arizona adopt legislation that mirrored the North Carolina predatory lending bill. Napolitano had the good sense to listen to banking industry representatives before moving forward and was surprised with some of the things she didn’t know:
1- No “over equity loans”- VA loans are 103% value loans when a buyer purchases a home; that got cast aside as Arizona has a large military presence.
2- No negative amortization loans- three staff members had loans on their homes that were considered a violation of that guideline. They explained the usefulness of those loans as a financial planning tool.
3- No prepayment penalties- It was quickly realized that prepayment penalties reduce the overall costs of the loan and encouraged responsible home ownership by encouraging homeowners to view real estate as a long-term investment
4- No balloon payments- balloon payments can reduce the overall cost to the consumer and are now extendable with a good payment history.
This sounds like I’m an apologist for my industry; I’m not. There are some despicable originators in my industry who have taken advantage of consumers by:
1- “Steering” them in to more expensive first liens when refinancing for as little as $5,000 cash when a less-expensive second mortgage would have solved the problem.
2- Engaging in the practice of “flipping” loans through serial refinance transactions.
3- Encouraging borrowers to borrow more money they can afford.
4- Making loans to borrowers whom have not demonstrated an ability to repay the loan.
I wonder if legislation is really the answer to these problems facing our industry. I have repeatedly claimed that legislated loan guidelines stifle creative loan products that encourage homeownership and penalizes the 96% of the consumers who benefit from these loans. Borrowers make poor decisions, often against the advice of an originator. Prepayment penalties, negative amortization loans, stated income documentation requirements and over-equity loans are offerings that can reduce the overall borrowing costs to a responsible consumer.
Unfortunately, it is not politically advantageous to legislate personal responsibility. That, however, is an argument for a political or philosophical weblog. I’m just a purveyor of debt.22 comments