More Predatory Lending Nonsense

This one comes from Eliot Spitzer the Governor of New York. First, I will reference the article I reference every time when I talk about predatory lending.

There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay

Again, no one can actually define predatory lending and yet they make all sorts of claims about it. Here is how Spitzer starts...

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets

Now, the only specific practice that Spitzer talks about is the so called teaser rates. Of course, what Spitzer is talking about is ADJUSTABLE rate mortgages. He demonizes ADJUSTABLE rate mortgages and those that offered because they ADJUSTED. This astronomical balloon and every other effect of these ARM's was clearly spelled out in the closing documents that each of these borrowers signed. If they are unsuspecting, it is only because they didn't read the documents carefully before putting their signature on them. Of course, you will have to excuse the borrowers because it was difficult to read that particular document given it was mixed in with about one hundred more documents that were useless. Which brings me to Spitzer's next point...

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

Of course, fraud is not new in mortgages and so called predatory lending practices are not new either, and I support any Attorney General going after fraud, however it is a mis nomer to claim that new laws needed to be created. That is just plain nonsense. It was never legal for a mortgage broker to claim someone's income was something it wasn't. The reason it became prevalent is that no one was ever punished for the practice.



What's really important is that Spitzer touts the fact that many state legislatures created new laws. My state, Illinois, was one of those states. We had the Borrower Tangible Benefit Disclosure Illinois Fairness in Lending Act. The practical effect was the creation of the Net Tangible Benefits Disclosure. That is the practical effect of nearly every single new law, more paperwork to sign. Keep in mind, one of the main reasons it is so easy to rip people off is all of the paperwork they already need to sign. Spitzer is proud of the fact that he helped create laws that made even more paperwork. Furthermore, he demonizes Bush for not doing the same.



The demonization turns ugly, unfair, and down right despicable with this next claim.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

First, one should always beware of anyone that uses an obscure group and assigns them importance that most obscure groups wouldn't have. Second, this whole thing is nothing but a load of crock. The mortgage crisis hit everyone quickly and without warning and that is because all of these irresponsible loans were masked by a real estate market that seemed like it was going to go up forever. The reason these loans were made was because the assumption was that real estate would go up forever. These loans were perfectly reasonable because the property was going to increase ten twenty and thirty percent in a year. That made those loans look perfectly acceptable to any auditor including the one that Spitzer claims would have saved us.

Finally, throughout Spitzer again perpetuates the media driven myth that banks and mortgage brokers took advantage of unsuspecting borrowers. Believe you me, banks and mortgage brokers have plenty of responsibility in the crisis, however it is nothing more than demagoguery to claim these borrowers were unsuspecting. The truth is they were irresponsible. (Here is the full story as I see it of the roots of the crisis) They over bought. These borrowers took on these so called teaser rates, not because they were duped, but because that was the only rate they could afford, and even that they really couldn't.

The mortgage crisis has plenty of lessons and I do believe there are things that can be done in its aftermath, however demonization and opportunism are the order of the day, and Spitzer's piece is the latest example.