As an attorney working for one of the 5 largest lenders in the nation, I specialize in reviewing the documentation of failing banks, which we consider purchasing. I also review all our loan sales and buys in the bulk markets. Straight up facts leading to this huge increase are these 3 and in this order.
First, the government tells us, we MUST make bad loans. We have our credit rules, and many loans just are not good investments and we know it. When we do the worksheets, it screams off the screen. DO NOT LOAN! But, by law, to even be allowed to loan, we MUST make bad loans for certain demographics, which include sex, age, race, and geography. If we “profile” we are going to go out of business by law. Most of these laws were done under Democrat Presidents, the worst of them, during the Clinton Administration.
Thus, we know it’s bad paper, and we tag it internally as such, but do the loan anyway, tossing it in with a bundle of VERY GOOD paper to spread the loss and risk.
Investors to whom we sell the notes, but usually retain the servicing, that is we take the payments, make the collection calls, and do the “work” for a small up front fee, while the investor has a safe and moderate long term profit, know this. They usually allow for a 3% failure rate in any bundle. Anything more than 3% and they LOSE money. The bank doesn’t. We made our money three ways. Upfront fees for closing, and upfront cash for the “loan bundle sale” and “servicing”.
Second, because the investors, not the banks, got screwed when many banks made many more bad loans than the minimums required, basically because of all those front loaded fee profits, these investors demand a LOT more info before they will but them. They have to buy them. No bank actually has the money to loan any more. We buy and sell bulk loan groups every day. If we did not, we’d run out of cash to lend in a few days and be done. The banking system is just like a grocery store, miss one truck shipment, and you are OUT of business and inventory.
Thus, these fees are higher because the investors want us to actually TELL them about the loans in far more detail than previously. Now, honestly, it’s not THAT much more work, so banks ARE jacking the fees, which is why you see the rates wildly ranging. How much do you think we can charge today, is the rule. And as much as we can is the answer.
But, it is simply because the bank doesn’t have the money to actually lend, which is the reason why the fees exist in the first place.
Lastly, banks are getting less in the fees from the investors. These investors HAVE the cash. They can buy or not buy any damned loans they wish and after this asskicking they took, they are picky SOBs. They just won’t pay what they used to pay and tell the banks “hey, you don’t like our lowball offer, go find someone else to buy them”. Which of course, would wipe the bank out to hold these notes more than 30 days. Most loans are sold to investors the week after the closing and right of rescission has expired.
So, there we are. You want a loan, you are a good risk, the bank would LOVE to have you, the investors want to be sure the bank is not lying to them, but you are covering for the bad loans the government DEMANDS the banks make. And the only way the bank makes any money at all, is to over charge YOU the good credit risk.
It sucks.
All of us in the banking industry would love to see these laws changed. We lobby and spend billions to protect our rights and see true fair lending laws enacted. But, not all banks. There is a war going on between the big 20. Some, who I cannot mention for obvious reasons, do NOT want to see these rules changed and actually supported the bad loan rules. Because they not only got to make out like thieves when they charged fees for bad loans, but they lobbied for the tax payers to cover them if the defaults went beyond 3%. Which, of course, all happened.
The bottom line is this: Until those laws are repealed. Until banks are free to say “you suck and we won’t lend to you” without being racist, profiling, Fill-in-the-blank-Phobes, bad loans are going to be made and YOU the good customer, are going to pay for them. One way or the other.
So, there are BAD banks, good banks, and banks stuck in the middle trying to just not go under today.
Bravo Sierra. A lender commits fraud every time they knowingly write a bad loan, and commits fraud again when they knowingly bundle it up with good loans and sell them to investors on the street.
There is no law that 'forces' a bank to make bad loans. If you're advising them otherwise you should be disbarred.