Saturday, March 14, 2009

Those Racist Banks

First, they get in trouble for not making risky loans. Now they get in trouble for making risky loans.

Seems unlikely that banks as big as HSBC and Wells Fargo have been discriminating against minorities. Especially since the NAACP and related organizations have been beating them with the Community Reinvestment Act stick for so long.

There are few things that big corporations dislike more than the risk associated with lawsuits, bad publicity, the Jesse Jackson / Al Sharpton Rent-a-Mobs, government show trials, etc., that come with the discrimination territory. The only victim mentioned, one Amara Weaver of Milwaukee, doesn't exactly seem to have a slam dunk case:

An NAACP member, Amara Weaver of Milwaukee, said she was one of the victims of predatory lending. She bought her first home in 1984, receiving a 6.25 percent fixed-rate mortgage. She says she had a steady job as a human resources director for a social services agency, never missed a mortgage payment and maintained excellent credit.

In 2004, she wanted to buy the house next door for her son to live in. She said the bank promised her a low fixed rate for a $40,000 loan, but at the closing, when reading the fine print, she noticed that the rate was actually 11 percent.

'I was blown away,' said Weaver, an NAACP member. 'I didn't have any choice (but to sign). ... It made me feel violated.'”

So, she wanted a loan on a second property, probably still having about 10 years of payments on her primary residence. In most cases, the bank is looking to charge higher rates for either rental property, or a second home, so it's not surprising that the rate may have been higher than the prevailing primary residence rate. Additionally, we lack information on her income and the expected ability to handle the second payment.

I'm certainly not an expert on mortgage finance, but in the few transactions I've had, there's been endless review of the interest rates, both the stated rate and the effective APR. The “bait and switch” tactic described here is already illegal, and if she had any kind of paperwork with the original quotes at a lower rate, the lender would have to come up with a convincing case as to why the rate had changed.

If I thought that my lender was engaged in a 'bait and switch' practice like verbally saying 7% but then applying 11%, I'd have a) dropped the transaction like a hot potato, b) gone to the State Attorney General – they love raking big corporations over the coals over stuff like this; that's how you get to be governor; and c) gone to the BBB, and d) hit up the local TV investigative reporter.

For that matter, the local NAACP would likely have helped quite a bit.

The banks will probably take some of the TARP money and settle just to avoid further bad press.

The costs will be borne by increasing credit costs on the rest of us.