I was happy to see this post today over at Enclave. S-Town Mike takes predatory lenders to task, and rightly so. I have seen lending practices from just about every angle, in fact, the financing arm of auto sales is what ultimately drove me from the business. I mean, it got so bad, I walked away from 60k a year in a bad year. Mike makes the perfect point, that current lending practices depend on exploiting those least able to defend themselves. I have a few friends that have had their credit go bad for any number of reasons. One of them is a single dad, who I wouldn’t describe as an extravagant spender, but who did make a practice of shifting balances to lower rate cards over and over. He never skipped a payment, but once his balance became pretty high, his card issuer suddenly, without explanation, raised his interest rate to 30%. Thirty percent! He called to ask why, and they essentially said because they could.
The mortgage industry is complicated, and I don’t pretend to understand the whole lending portfolio thing. What I do understand is that teaser rates take advantage of those already underwater. I believe an area that needs some investigation is conversion loans, or, more precisely, consolidation loans. A guy with a high revolving debt consolidates to a loan that is tied to his home. The lender now has real estate as security, where before he had almost no leverage, and shared some of the risk. Now the same guy has a speed bump in his life, lost job, debilitating illness, whatever, and runs up his credit cards yet again. Now, he has a lein on his home, and high rates of interest on his revolving credit. So he looks again to re-finance, and the vultures start flying lower again. Don’t get me started on all those who profit from this, escrow companies, appraisers, etc. It’s a near impossible cycle to escape from.
I know this will drive the Libertarians crazy, but this is an area where I simply do not trust the market to “right itself”. I expect the Govt to take a larger role with respect to regulating lending. I’d like to see this organization open an office in Tennessee. I have tried to contact them, and while I appalud their goals, they are slow to assist when someone shows interest. Perhaps someone will read this, and agree to help me develop a program that aims to educate High School students about credit/contracts and other basic tenants of financial literacy. I have no interest in cashing in like Dave Ramsey. Just put the info out there, no “program” to sell, no book, just a presentation that they might remember when they sit down and negotiate their first major purchase.
Anyway, thanks to S-Town Mike, and I expect Kleinheider to acknowledge my use of paragraphs.