How bad regulations force bad loans

We often hear that regulations are not strict enough or that bad loans are the result of banks avoiding regulation. Take a look at this article. For those unable or unwilling to read it, let me sum up. A small California bank had a nearly perfect loan record, even in tough times. They had to foreclose on eleven (yes only 11) loans. This result was produced by prudent lending, i.e. lending money only to those with a good chance of paying it back and not making risky loans. They are now being punished by Eric Holder’s Justice Department for this wisdom.

It seems that prudent lending creates a "disparate impact" on poor minorities. Disproportionate impact is a dishonest standard that looks to equality of results instead of actions, behaviors or circumstances. If you applied disparate impact standards to professional basketball, you would find serious "discrimination" against most ethnic groups and all people of below average height. If you applied disparate impact to skiing, you would find that there was significant discrimination against ethnic groups who did not live in snowier environments. If you put something in writing, you have a disparate impact against those who "don't read too good." In fact there was a serious charge of disparate impact of lottery sales and cigarette taxes, which tend to fall unevenly on the population.

In fact, there is pretty much nothing you can think of that does NOT have a disparate impact, which is why the grievance community loves it so much. No matter what you do or how you do it you are ALWAYS guilty and you are subject to a shakedown whenever anybody thinks you have too much money or are not kissing enough ass with target populations.

So prudent lending has a disparate impact against poor minorities and there is no particular surprise. Default ratios are higher in some populations. If you concentrate on factors like ability to pay and credit history, you will tend to impact those who have not paid in the past and may not do so in the future.

The Eric Holder gang has found a way to rob banks without danger and w/o even having to ride into town. Just study the loan applications and find some place where you can accuse them of disparate impact. Everybody is guilty, you just have to find the specifics. Now the California bank has to pay a find and reach out to the undeserved community. This means essentially that they have to lower their loan standards and accept the fact that they will pay giving some money away to members of the underserved community, who will then blame the bank for enticing them into loans they cannot pay. (Only they won't use that word "enticing" because they probably don't know what it means. Being underprepared goes with being underserved.)

You wonder why banks don't want to lend? One of the best things about an Obama defeat in November will be getting rid of Holder and the gang.

Posted by Christine & John at September 17, 2012 4:58 PM
Comments
Comment #353217

C&J,

Prudent lending isn’t the issue that led to the lawsuit. It was a loan minimum of $400,000.00 that resulted in a disparate impact on minority borrowers. The comparison was between similarly situated prime lenders using comparable prime rate criteria.

“In the greater Los Angeles area, for example, only 5.8 percent of Luther’s single-family residential mortgage loans were made to African-American and Hispanic borrowers during this time period, compared to 31.8 percent of such loans made to African-American and Hispanic borrowers by comparable prime lenders.” http://www.justice.gov/opa/pr/2012/September/12-crt-1104.html

Posted by: Rich at September 17, 2012 5:31 PM
Comment #353218

It’s a cockeyed world that’s for sure C&J. When I was in the banking business years ago we judged a loan and applicant with what the industry described as the three “C’s” of finance. Character, Collateral, and Capacity. Capacity is the Ability (debt to income ratio) and Intent (credit history) to repay the loan.

Back then Bank Regulators would audit loans for performance of the loan, not some audit formula designed to force the bank to lose money as is the case today. Bank regulators back then seemed to frown on banks losing their depositors money thru shoddy lending practices or sheer incompetence.

Posted by: Royal Flush at September 17, 2012 5:31 PM
Comment #353220

Nice Try, no Cigar. Minority does not equate to bad loan. Plus, subprime loans, in the majority, were made by institutions without much exposure.

Can you accept that the treadmill of bad lending, speculative overinflation of the Housing Market, and Derivatives was willfully profit-driven? I guess not, because if you did, that would invalidate a major Republican position.

The truth hurts. The experiment in Wall Street Policing itself was a 12 trillion dollar failure. A failure, might I add, that is only being explained as a GSE or CRA problem after the fact. Before then, you heard neither hide nor hair about the problem, and Republicans threw active roadblocks to putting stricter controls on most players.

Besides the GSEs, of course, since they were government backed competition.

The problem is, despite your claims, these institutions actually behaved in less risky fashions. Of course, they also didn’t make as much money as the Wall Street giant that manuevered around things.

This is just high class race-baiting, and you should be ashamed of yourself for falling for it. Loans under CRA jurisdiction, even subprime, defaulted less than their unregulated competition.

Posted by: Stephen Daugherty at September 17, 2012 5:38 PM
Comment #353225

Royal Flush-
Don’t kid yourself. It was bank policyto seek out bad bets. Why? Because over the life of the loan, those people would end up owing more. Then they could take that, do some derivatives-related magic, and take that big hole out of their asset sheet.

The trouble is, the lack of good regulation made it impossible to keep these people on task, doing the functionally proper market function of a banker, which is as you described. They got creative, and their creativity bit us all on the ass.

Posted by: Stephen Daugherty at September 17, 2012 5:45 PM
Comment #353227

Royal Flush,

This case has nothing to do with sub-prime lending. The three “Cs” were a given in this lawsuit.

Contrary to the allegations of C&J, the bank at issue is not going to have to lower its lending standards. The same prime lending criteria apply. They simply can’t limit their borrowers to very high income levels with very large mortgages.

Posted by: Rich at September 17, 2012 5:59 PM
Comment #353231

comments

Posted by: Rich at September 17, 2012 7:44 PM
Comment #353233

Rich

They chose customer who could pay back the loans. There is no indication that they discriminated. Their clientele was upscale. So what?

Maybe it should be incumbent on borrowers to become better.

Why should a firm not be able to lend to whom it prefers w/o regard to race, gender or national origin? Martin Luther King said that we should judge by the content of character, not color of skin. I believed it then and believe it now. I am distressed that liberals have abandoned the ideal in return for the politics of grievance.

Stephen

I never said minority meant bad loan and neither did the bank. Holder’s gang of extortionist read that into the results and were able to rob the bank to give to their cronies. It is despicable for Holder to be so racist.

So this firm acted responsibly, made less money than it could have and “your people” robbed them. Don’t you feel at least a little ashamed?

Posted by: C&J at September 17, 2012 9:31 PM
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