On November 25th the Federal Reserve Bank committed two hundred billion dollars of our tax money to the TALF (Term Asset-Backed Securities Loan Facility) program. It is designed to get the banks to start lending again by increasing credit availability to consumers and small business owners that need to borrow through auto loans, credit card loans, student loans and S.B.A. Small Business loans.
One reason why banks aren’t making loans is that the securitization market is frozen. No one wants to purchase loans from the banks because the banks have proven that they are irresponsible in underwriting these loans. There is simply no confidence in the market. The TALF program will provide a level of confidence in asset backed securities through this guarantee program.
The flaw in the plan is that our congressional leaders and regulators have failed to address the issue of QUALITY …. the application of prudent, safe and sound credit underwriting that ultimately must be used by banks in order to restore justified confidence in this market. Confidence that is not based on government guarantees, but on assurances that the banks are doing their job when they underwrite loans.
With a little help from my friends, I was able to confirm that Bank of America continues with their business-as-usual, laissez-faire lending practices. And why should they change, when they are handed a way to take their profits up-front while at the same time passing-off all risk through the T.A.L.F program?
Here are two loans, approved within the last week. These scenarios represent loans that will be guaranteed under TALF.
A friend of mine went into a General Motors dealer posing as a person looking to purchase a new car off the lot. He chose a car that, with tax and delivery, cost forty thousand dollars. He asked for one hundred percent financing. He filled out a one page application on which he overstated his income. He earns $85,000 a year. He lied and he stated that he earned $125,000 and that he was employed for one year. He stated that he owned his own home. He does not. He stated that he had no mortgage payment and that he paid no rent. His rent is $1300 a month.
He was approved by Bank of America for an auto loan for 100% financing. They even agreed to finance the sales tax and delivery charges. He could pick any repayment term from four years to seven years.
With a salary of $85,000 a year, he has revolving credit available totaling $140,000. He owes only $3500 on one credit card.
There was no income verification performed. If there had been, they would have known that he lied and hopefully would have declined the application on that basis alone. He offered to provide proof of income and was told that it was not needed.
This is a loan that surely would have been sold off to investors purchasing auto loans under the new two hundred billion government bailout program. Bank of America failed to apply any reasonable credit underwriting standards to this request and based the approval solely on this persons credit score. Think about the value of the underlying collateral, which is the car. Drive the car off the lot and it depreciates by 20%. You now have the government guaranteeing a $40,000 loan with collateral worth $30,000. Think I did the math wrong. Think again. They financed tax and delivery charges too!!!
Another friend volunteered to have her daughter apply for a credit card on-line. She is a full time college student. She works part time and earns $10,000 a year. She has an existing credit card that originally started with a $1000 line of credit, but HSBC in their infinite stupidity has increased her credit line over the last three years to $4200 even though her income has not increased. Once this year already, she overspent and her parents had to bail her out and payoff her $3000 credit card balance. She has been late more than thirty days one time, but on her credit report, HSBC reports that she has never been late.
She went onto the Bank of America website where they suggested she search for “pre-approved offers” of credit. On this site, she put in her name, address, birthdate, social security number and email address. This time, Bank of America didn’t even bother asking for her annual income!!! They did ask her to check a box if she was a student. She lied and left the box blank. She was immediately approved for a $3000 credit card. This 21 year old, that earns $10,000 a year, will now have credit lines totaling $7200. How could any reasonable person expect her to be able to repay this debt if she went on a spending spree? While I believe that the consumer should be responsible for their own actions, clearly the banks need to provide the foundation for responsible borrowing through responsible lending.
The TALF program’s fundamental goal is to increase confidence in the Asset-Backed Securities market so that banks will start lending to consumers and small business. But Congress needs to protect the taxpayer too. And in order to do this, Congress needs to enact legislation that imposes credit underwriting standards on the banks when they make loans. At the very least, income verification must be included in the banks minimum underwriting criteria. These new laws and proper monitoring by our regulators would put in place safe and sound lending standards that would create confidence in the loans that are being granted and subsequently sold. Confidence based on the actual value of the loan and not based solely on a government guarantee backed by our tax dollars.
Absent safe and sound lending practices, the TALF program is nothing more than a credit card and auto loan bailout in sheep’s clothing.
If you enjoyed this article and want to learn more about the TALF program, what it is, how it works and more reasons why it is doomed to fail, a more detailed article can be found at:
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