The Common Good
January 2010

A Broken Trust

by Rachel Anderson | January 2010

Congress must rein in abusive lending.

Greed is at the root of the financial cataclysm that we are suffering today. Then again, greed beats at the heart of our very nature. What makes for financial calamity is not just garden-variety greed—it is a type of greed that undermines the foundations of trust that uphold an economy.

Core to this recent financial crisis was a heartbreaking breach of trust: the trust that millions of Americans, in pursuit of economic security, placed in home mortgage lenders.

Central to the problem is the fact that, over the past few decades, Wall Street reversed the traditional formula for how banks profit from mortgages. Historically, banks benefited when borrowers paid off their mortgages over time. But now, rather than collecting payments over decades, banks and mortgage companies make huge sums by quickly bundling and reselling mortgages to investors. The model has encouraged unsustainable and even deceptive lending for the sake of short-term gain. By 2006, 61 percent of subprime borrowers received loans more expensive—and more likely to foreclose—than what they qualified for.

How could homeowners know they were being set up to fail? The financial professionals they trusted—brokers and banks—declared “you’re approved!” Even political leaders encouraged families to draw on home equity for cash.

In the end, promised prosperity wilted into financial tragedy. Since 2007, more than 1.8 million families have lost their homes to foreclosure. Another 8 million will likely experience the same fate by 2012. During the next four years, foreclosures are predicted to destroy wealth built by 2.5 million African-American and Latino homeowners.

Americans have faced massive breaches of trust before. When muckrakers exposed vile and deceptive practices in meat-packing, we passed the Pure Food and Drug Act (now the FDA). When banks collapsed during the Great Depression, we established the Federal Deposit Insurance Corporation. In each case, we restored public confidence not merely by urging everyone to trust failed industries, but by creating a system for tarnished industries to earn that trust back.

This time around, Congress and the president have proposed a Consumer Financial Protection Agency (CFPA) to ensure the quality of credit extended to families. CFPA would oversee home loans, credit cards, and other financial services, ensuring that loans are offered on terms that borrowers can repay and that the true costs of credit appear in easily understood terms. In coordination with the existing system of bank examinations, the CFPA will monitor and restrict practices harmful to consumers and enforce consumer protection laws.

In recent years, abusive lending has become all too common. In addition to the faulty mortgages at issue in our current crisis, the market is full of predatory payday and car-title loans; even some credit card practices depend on borrowers’ entrapment in debt rather than prompt repayment. The Bible offers a different vision for lending and warns against exploitation of the vulnerable through debt. The book of Nehemiah records strong condemnation of those who exact usurious interest (Nehemiah 5:10). Old Testament laws prohibit charging any interest to those who are poor (Exodus 22:25).

The proposed Consumer Financial Protection Agency closes gaps in the existing regulatory system that enabled the subprime lending crisis and myriad other lending abuses. The Federal Reserve, the FDIC, and other regulators monitor banks’ fiscal stability, but no regulator principally concerns itself with how new forms of credit affect consumers. The CFPA would do just that, while bringing fringe lenders such as payday shops under federal oversight for the first time.

The recent financial crisis opened our eyes to what usury looks like in the modern economy and its pernicious ability to destroy not only wealth but also trust. Meanwhile, the unseemly bonuses that financial executives paid themselves belie any hope of financial-industry self-restraint. Practical new regulation like the CFPA is our best hope for restoring trust between Main Street and Wall Street and, perhaps, in the American dream of household economic security.

Rachel Hope Anderson works at the Center for Responsible Lending.

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