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Ellen Schloemer Headshot

Not So Little 'So What'

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In a recent blog post, Bankstocks.com publisher Thomas Brown argues that predatory lending is a myth, but that, even if it does exist, it's the borrower's fault for taking a bad deal. As he put it: "So what if lenders engaged in predatory behavior?"

Brown claims consumers shouldn't be protected from predatory mortgage loans any more than other arguably bad financial deals, like $4 for a latte or a buck or more for a lottery ticket. Oh yeah, those are real similar: one takes away some of your pocket-money, while the other strips away your home equity and locks you into costly debt for decades.

I worked for General Electric in finance and for their financial services affiliate for almost 20 years before joining CRL. Whenever I give former colleagues examples of the predatory lending I've seen, their reaction is never "so what?" -- it's more like "ugh."

In my experience, people are aghast to hear about the 81-year-old gentleman whose mortgage loan rate adjusted upward 24 hours after closing (and this was a loan from the fourth largest originator in New York at the time, not some fly-by-night firm.) Or the widower in NC who took out a $29,000 loan on a home he owned outright, and was charged $15,000 in fees. Or how banks generate more overdraft fees by re-ordering checking account transactions to take out the biggest charges first and more rapidly drain the account. Or 400 percent APR payday or car title loans.

In my experience, there are some financial practices that reasonable people agree are just plain wrong. In the words of a law professor who testified at a Senate committee hearing several years ago:

"... the lender-borrower relationship has never been viewed as a place where all bets are off... When it comes to consumer lending... people expect more than the law of the jungle to prevail."

Brown also writes that "over-regulation" drives up the cost of credit and limits access. But common-sense consumer protections aren't over-regulation. For example, the Credit CARD Act of 2009 improved consumer safeguards on credit cards without leading to higher rates or more difficulty in getting credit, CRL's research shows (For more on the flaws in this "regulation is bad" mantra, see my March 2012 blog post.)

Finally, Brown claims that the best markets are unfettered ones. Even Alan Greenspan now would disagree with him on that; in Congressional testimony, the former Federal Reserve Chairman conceded it was mistake to believe in the self-correcting power of organizations that operate in their own self-interest. Greenspan called that assumption "a flaw in the model ... that defines how the world works."

And that "flaw" has a real cost. The Government Accountability Office recently reported that the economic toll from the financial crisis was equivalent to a full year of U.S. economic output: $13 trillion. Talk about a 'so what.'