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Archive for Thursday, July 5, 2007

Lending practices need refining

July 5, 2007

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Every holiday, various organizations find clever ways to link the special occasion to a product or service they are offering.

For example, the Consumer Credit Counseling Service of Atlanta is encouraging people to declare their independence from credit card debt. Make this Fourth of July the start of your lifetime of economic freedom, says the nonprofit organization.

This group's call for self-defense is useful considering the latest bankruptcy statistics. The number of consumer bankruptcies filed during the first three months of 2007 jumped to 187,361, a 66 percent increase over the first quarter of 2006, according to the Administrative Office of the U.S. Courts.

This sad news comes at the same time that the five federal regulatory agencies that oversee banks, savings institutions and credit unions issued a statement directed at certain lenders. The organizations implored the lenders to be more forthcoming about the eventual sting that borrowers may feel after signing up for teaser interest rates on subprime mortgage loans. The regulators are particularly concerned about adjustable-rate mortgage products that are contributing to the rise in bankruptcy filings.

The crux of the regulatory clarification to lenders is this: An institution's analysis of a borrower's ability to repay one of these hybrid loans should include an evaluation of the borrower's ability to repay the debt after the introductory rate expires.

John M. Robbins, chairman of the Mortgage Bankers Association, issued the following comment in response to the new guidelines: "This is a strong statement that will help curb abuses, but will likely also constrain consumer credit choices."

That's right. Although late, the recent regulatory action needs to limit the loans some people can qualify for because, as we see with the subprime loan mortgage meltdown, life happens. Consumers were overly confident. As regulators pointed out, these subprime loans were supposed to be just temporary credit in anticipation that people would see their earnings grow, or refinance or sell the property before the new rate kicked in. For many, that didn't happen.

True financial independence is making financial decisions based on the resources you have today, not on what you might have tomorrow.

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