Faith Lost, Perceptions Changed: How the banking world needs to recover the confidence of the people after mass allegations of predatory lending and other banking malpractices
The events leading up the to the Great Recession of 2008 have been of great debate to the general public, congress and policy makers. Some have tried to place the blame on the banks; others on the regulators emplaced to prevent economic disasters, and some have been absolutely clueless to where and how their money had almost vanished into thin air. Millions of Americans saw their homes foreclosed; their mortgages ravished, their stocks valueless almost overnight, and many more lost jobs they had spent years at. Swarms of people turned their heads, and looked for someone to point their fingers at, but no one was to be found, their brokers like their money and homes had vanished like some mystical mirage. Unfortunately, this is not the case, and for the majority of Americans, this money did not disappear in some miraculous magic trick, but instead was strategically exploited from them by a banking system that had grown fat and greedy off subprime mortgages, and the process of predatory lending.
Predatory lending is an enigma to the general public, due in part to the fact that there are no legal definitions in the United States on the subject. However, the FDIC has broadly defined predatory lending in an audit report written by their inspector general as, “imposing unfair and abusive loan terms on borrowers.” The lack of acknowledgement on behalf of the government is startling, considering the fact that predatory lending claims have been on the rise. According to NERA Economic Consulting, predatory lending claims are up 55.56% since 2003, a possible sign that government needs to play a much bigger role in home loans. In fact, when the economic costs are quantified into real numbers, the issue becomes of even bigger concern, as estimates point that U.S. borrowers lose $9.1 billion annually to predatory lending practices.
Yet there has not been legislation related to predatory lending since 2003. While the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010 included “Subtitle G – Mortgage Resolution and Modification,” the bill provided only general guidelines, instead of a closer and decisive plan to eliminate predatory lending. The closet thing that legislators have come to a concrete bill has come from U.S Representative, Stephen Fincher (R-Frog Jump) who has recently introduced the Preserving Access to Manufactured Housing Act.
But, this new piece of legislation is too little too late for Americans like Roberta Green, who has had first hand experiences with predatory lending and the manipulative practices of certain bankers. In an article written by Jeanette Bradley and Peter Skillem of the National Housing Institute, they demonstrate how Greene’s story can be precautionary tale for all Americans.
According to the NHI, Green who is a North Carolina local, had just been laid off a job at a resident telephone company that she had invested 29 years at. Struggling with bills, she took up a job as school bus driver. But it wasn’t enough.
Enter American Mortgage Service Company, who according to their website, “helps individuals realize the dream of home ownership by working with a reputable, honest and family based company.” However the man who dealt with Green was none of those qualities.
Like a magician utilizes smoke and mirror to draw the attention of his audience elsewhere, this particular mortgage broker through some sleight of hand and false hopes of a better life was able to draw Greene away from the fact that she was being hopelessly exploited.
The American Mortgage broker would slide in paperwork in the last minute to get Greene to sign it, he would promise home improvement, better prices, and more savings. But instead he would actually refinance her existing mortgage at a higher interest rate. By the time he had finished his work and left Greene weeks later, she had acquired a check for $1,900. What she really had gained was a loan for $76,500 that refinanced her entire mortgage at a higher rate. Her monthly payments jumped from $500 to $740 a month, and after building up $23,00 of equity in her home, the refinancing reduced that number to $2,000.
At the end of the day, the loan broker walked away with a $3,500 commission, the lender bagged $13,900, while the credit insurance company received $3,000. But, these numbers are dwarfed by the estimated $40,000 that secondary markets earned.
This is where predatory lending gets complicated. Financial institutions, such as American Mortgage Service Company often sell existing loans, similar to Greene’s, to secondary markets. These secondary markets then bundle these loans and sell them to insurance companies, pension plans and mutual funds. With the addition of prepayment penalties, subprime loans become costly to refinance, and consumers are often stuck with high interest plans. This makes it easier for financial institutions to sell these loans to secondary markets, because they have the reassurance that consumers will not refinance due to the high penalties.
While this has allowed more people to buy the houses they want, it has created a chain of securities that is based off the month-to-month mortgage payments that the same consumers they exploited have to pay. When people cannot pay their mortgages this chain begins to collapse, and the whole system starts to implode. Continued manipulation of consumers have led to the housing bubble burst observed in 2008, and without further government checks on the financial sector who knows what will happen.
The Road Back
But banks continue to grow, and one particular North Carolina bank has many analysts feeling optimistic about the US banking sector since the recession. Bank of America is a Charlotte based multinational banking and financial services corporation, which has promised consumers a better, more equitable home lending experience. Senior Vice President of Corporate Communications, Kris Yamamoto has said that Bank of America taken the initiative to aid with the education of all their consumers, in the hopes to win over some faith lost during the 2008 recession.
Along with Bank of America’s “Home Loan Guide,” that is aimed to “provide potential homebuyers with tips on down payments, mortgages, refinancing and home equity options,” Yamamoto also said that they have partnered with the Khan Academy. The academy, created by Bangladeshi educator and MIT graduate, Salman Khan, is a non-profit that aims to provide free, quality education through various internet platforms. The two organizations have come together with the hope of developing a new self-paced, easy-to-understand website that will further aid and educate consumers.
According to Yamamoto, the new website, “BetterMoneyHabits.com” attempts to take the complicated financial topics, and put them into plain, “easy to understand information” that consumers can access easily and at their own pace.
However, Bank of America has not always been the stalwart defender of the people, and the financial goliath has been in a string of lawsuits over the past years, many regarding predatory lending. According to Money MSN business journalist, Jonathan Berr, the culmination of these lawsuits, paired with arguments with regulators have led to a $10 billion legal settlement with Fannie Mae, with similar smaller deals between more than a dozen banks and regulators. Nonetheless, many of the problems that have surfaced, have seemed to parallel the banks acquirement of Countrywide Financial, the notorious home loaner that has been tainted with accusations of fraud and malpractice since 2005.
Though Yamamoto promises that Bank of America Home Loans (previously Countrywide Financial) is a completely different organization that has a zero-tolerance for predatory lending, it hard to believe that consumers will begin trusting banks with the same level of faith that they did before the 2008 recession. If consumers do regain faith, it will be a lengthy process where the banks will need to demonstrate transparency, and most importantly win the confidence of the people through educational programs such as “BetterMoneyHabits.com.”
Of course, the work cannot stop at a website, and banks need to continue to improve their image and change this perception of greedy banker, to the safe keeper of the people’s wealth and trust – and that will take time.
Home foreclosures & Repossessions
CEO Salary Breakdown
Revenue & Net Income
Month by Month Stock Tracking – Bank of America
Kris Yamamoto, Bank of America: firstname.lastname@example.org
http://www.nera.com/59_2525.htm, NERO Economic Consulting
http://www.nhi.org/online/issues/109/bradley.html, National Housing Institute