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Credit to the Blogosphere

posted by Bob Lawless

A few things catching my attention that might be of interest to Credit Slips readers:

  • An interesting post over at Underbelly about the relationship of debt and trust
  • On SSRN, "Turning a Blind Eye: Wall Street Finance of Predatory Lending" by Cleveland-State law professor Kathleen Engel and U. of Connecticut law professor Pat McCoy. Those payday and other subprime lenders are big business for Wall Street, and Professors Engel and McCoy offer some solutions. This paper deserves a lengthier post, if only someone would give me the extra hour in the day! In December, look for Professors Engel and McCoy as Credit Slips guest bloggers.
  • A blog post at The Carpetbagger Report about efforts by some congressional members to head off restrictions on the ability of payday lenders to prey on members of the military. Our guest blogger, Ronald Mann, this week discussed a DoD report about the payday lending industry targeting military personnel (see also Katie Porter's post on the DoD report). I agree with Mann's conclusion that payday lenders are not just a problem for the military, and Congress should consider broader legislation. I'll take what is politically feasible, however. We work with public policy with the Congress we have, not the Congress we want.


Regarding the Engel and McCoy link, which proposes to regulate securitization participants to diligence and identify "predatory lending", hopefully they can address when they beocome guest bloggers, what is "predatory lending"? What distinguishes it from "nonpredatory" lending, which presumably is good. What is the degree of confidence in the accuracy and feasibility of application of the criteria for distinction? Since it is obviously bad - by definition (whatever it is) - isn't it already regulated? If it is already regulated, can they quantify the marginal benefit of having more people regulated or more actions regulated to stop it - since obviously there will be a marginal cost (direct in the form of diligence costs and indirect in terms of securitization foregone and thus lending foregone to avoid those costs and also to avoid regulatory risk), it might be nice to know that the marginal benefit will outweigh the marginal cost. Have they quantified those marginal costs? Is their proposal the most cost-effective solution? Isn't there some other aspect of the system that is more broken that needs legislative attention more than this?

I look forward to reading the article and reading the authors' posts in December. In litigating dozens of predatory lending claims, I often wondered when the market would react to the loan losses. Unfortunately, although securitization provides the lending markets with access to funds, it also encourages unscrupulous originating lenders. If the originating lender does not have to live with the consequences of its lending decision, it is more likely to have slack underwriting criteria and oversight.

This is one of the biggest problems you find in the area of sub-prime mortgage brokers. The broker does not live with the loan (and often knows that the originating lender won't live with the loan for long). So why not fudge the numbers a bit, jack up the appraisal, or flat lie to the borrower about loan terms?

Mark T - Predatory lending, as used in discussing mortgage lending, relates to a variety of practices. If I were forced to pick a single distinguishing feature of all of these practices, it would be that the loan product is not suited to the borrowers' needs in a way that places the borrower at a higher risk of default. This could include everything from over-lending (requiring too much income be devoted to loan service), inflated appraisals (very prevalent), prepayment penalties and adjustable rate products, to forgery and fraud. Not a comprehensive list, to be sure. Often you see several abuses in a loan. Perhaps one abuse by itself may not be considered "predatory," but when viewed together, they leave no doubt.

I think you're right to be concerned about definitions. The law of unintended consequences will surely rear its head if "sweeping" regulation is implemented.

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