Recently, among the flood of info that pours into my inbox about lending, was an item noting that the Federal Trade Commission and the Consumer Financial Protection Bureau had joined together to enter an amicus brief (a commentary) in connection with a case being reviewed by an appeals court. Apparently, a suit was filed by a consumer asking that a lower court compel Experian, the credit-rating giant, to investigate an incorrect item on the plaintiff’s credit report.
The FTC and the CFPB say that the lower-court decision, which said that Experian wasn’t required to do so, would inhibit a consumer’s right to redress in the event of credit reporting errors.
Don’t leave yet. This isn’t a piece about torts and briefs. Rather, I was struck by two powerful federal agencies coming in swinging on behalf of a consumer. A banker back in 1961 wouldn’t recognize the lending business today, and he certainly wouldn’t like it.
Oddly, people seem to be interested in what it was like to borrow money, way back in the last century. Even more intriguing is the reaction of senior banking execs. Financial institution CEO’s can’t believe what it must have been like when the only rules were those set down by lenders, and borrowers had better abide by them or not get the money. Yahoo!
Take credit reporting: Most of the credit bureaus were cooperatives, owned and operated by merchants and trade groups in a specific city or region. There were absolutely no consumer protection or accommodation laws, either state or federal. All of the leverage was on the side of the lender or merchant and the credit bureau itself.
To begin with, a consumer had absolutely no access to his or her credit history, and, by the way, married women had no credit history in any event. Business users of the bureau’s services were forbidden to disclose any information on a credit report to the customer or borrower, on pain of being barred from ordering reports.
The bureau took no responsibility for info on a consumer submitted by a business or lender. Some of the language in a report could get quite salty, as in, “DEADBEAT,” for example. In some parts of the country, the consumer’s ethnicity was a mandated piece of information in the report.
Since the user of the report was forbidden to disclose details contained in it, a borrower had no way of knowing what a report might say. There were many instances of lives being adversely affected, even ruined, by incorrect information, or mistaken identity, i.e. people with a similar name being saddled with the bad credit history of another “Sam Jones.” The phone numbers of credit bureaus were unlisted, their addresses undisclosed.
All of this secrecy could make it difficult to process a loan. For example, FHA and VA underwriting guidelines required a written explanation from the borrower regarding credit problems, such as late payments and debts referred for collection. The explanation had to be specific, and the borrower was somewhat non-plussed by the lender saying that “There’s an item on your credit report that needs an explanation.”
Another lending practice that was perfectly legal then, but very much illegal now, was the custom of “redlining”, which means exactly what it says. It meant that banks and thrifts (S&L’s) wouldn’t make loans on homes in certain neighborhoods, and those venues were identified by, say, a city map, with red lines drawn around the areas that didn’t qualify for a residential mortgage. To be fair, the intent was not to discriminate; the homes inside the red lines were older, smaller and often not in the best state of repair because their occupants were in a lower economic demographic.
You know where this is going: Often the ethnicity of that lower economic cluster was of a specific minority. So, the dictum against lending meant that the potential collateral deteriorated more, rendering it even less desirable as security for a loan.
One more item, and I’ll shut up, keeping in mind my wife’s repeated reminder to desist from “geezer-speak,” rehashing the Good Old Days:
This is one that lenders really loved. There was no mandate, either by regulation or statute. To clutter up a borrower’s mind with disclosing the real cost of money, the Actual Percentage Rate (APR). A bank, thrift, industrial bank or finance company could make a second mortgage at, say “six-percent interest.” But, what the lender didn’t explain, and wasn’t required to, is that the rate quoted was actually add-on interest, as opposed to simple interest, meaning that the six-percent rate was multiplied by the loan amount and added on to the amount of the promissory note. The actual cost of the loan often doubled, depending of the repayment terms.
Disclosures to borrowers were made on a strict need to know basis, and all agreed that all they needed to know is whether or not they got the money.
My first job in the lending business was working for a mortgage banker that made only FHA and VA purchase money mortgages (no refis). It was a busy shop, with closings scheduled hourly. Nothing threw the operation off schedule like a reader — a borrower who was rude enough to, say, read the note and deed of trust.
If that happened, the policy was to, politely, say, “Why are you reading that? Don’t you intend to make the payments?”
Worked every time.
