Wednesday, December 23, 2009

The subprime mentality

Of course, nobody expected the recently-passed CARD Act to completely keep greedy banking companies from screwing their customers. The legislation eliminated some rather odious practices of credit lenders, but banks quickly found some loopholes to exploit. From the Chronicle's Loren Steffy:
To dance around the new consumer protections on credit cards, First Premier Bank is now issuing a card with an interest rate of 80 percent. Previously, First Premier had a card that charged $256 a year in fees for a $250 credit line. The new laws won't allow that - they cap fees at 25 percent of the credit line -- but they don't limit interest rates.

Now, obviously, First Premier is charging this rate because it's extending credit to some of the riskiest borrowers in the market. But it shows the subprime mindset at work. Banks will do whatever they must, circumvent whatever laws are written, to continue to tap this highly lucrative market of extending credit to people who shouldn't have it.

That's right: a card with an 80 percent interest rate. That used to be known as "usury." I guess now it's just known as "standard business practice," at least for the bank in question.

It can be fairly argued that such a scheme is the only way for people with bad credit histories to repair their credit scores, or that credit is such an important commodity that it should be available, in some form, to everyone, including people who really shouldn't have it. At the end of the day, however, practices such as this are simply predatory. These kinds of cards are targeted at people who've already proven that they can't manage debt. The bank knows that the overwhelming number of these people are not likely to show any newfound responsibility for their credit management and that most of them will eventually default, but if they can make a lot of profit in the form of interest in the meantime, then who cares that these people will likely end up in a worse financial situation than they were before?

Steffy also hits upon something else that I completely agree with:
It also shows the myth of those who believe the Community Reinvestment Act forced banks to make subprime mortgages. There was no need to force them. Banks rushed into the market, slobbering after customers they knew couldn't pay. The subprime mentality dictates that an irresponsible borrower is worth more than a responsible one.
Although there are valid arguments regarding the role of some government regulations and policies in the subprime housing bubble (for example, the Fed keeping interest rates low), I've never brought into the idea that the CRA was in any major way responsible for the housing bubble. I've yet to hear a cogent argument as to why a law passed in the 1970s to combat the discriminatory practice of redlining was responsible for a housing bubble in the 2000s. The CRA is a scapegoat for the "unregulated free markets are always good and government regulation is always bad" crowd, attempting to excuse a phenomenon that was, in fact, caused largely by the unregulated ability of lenders to make money off of people who should never have been allowed to buy homes in the first place.

Apparently, some bankers have not learned their lesson.

No comments: