I know I’ve been harping on the TALF program which is divesting banks of toxic credit card and autoloans. TALF was supposed to get credit flowing by breathing life into the securitization market for bank loans. Our country’s economic system became dependent on the securitization process to manage the flow of credit. Securitization translates into banks initiating loans, then packaging them together and selling them off through a product called Asset Backed Securities (ABS).
The ABS’s are purchased by investors such as insurance companies, mutual funds and pension plans. Ultimately, we, as individuals are the purchasers through these other investors.
If you were going to buy a pool of assets, and in this case I focus on credit card and auto loans, what level of due diligence would you expect the bank to perform in evaluating these loans? Most banks today have a pre-programmed “scoring” system. It puts significant weight on the credit score of the borrower. In large part, this scoring process is governed by Regulation B, the Equal Credit Opportunity Act.
During the years of sub-prime mortgage lending, what the banking industry did was grant loans on what was called “stated income”. The borrower simply “told” the bank what they earned and the bank simply took their word for it. Today, we are calling these loans “liar loans”. The banks failed to apply even the most basic of credit underwriting processes to these loans: income verification. Banks simply stopped caring because they knew they would be divesting themselves of these loans when they sold them to Fanny Mae and Freddie Mac. We all know how that turned out.
You’d think we would have learned our lesson. But we have NOT!!
Go into a bank today and apply for a credit card or go into a car dealership and apply for an auto loan. All you need is a credit score over 680 and you are likely to be approved. You will be asked for your basic information: Name, address, social security number, phone number, date of birth, etc.
Then you will be asked to “state your household income” and if it’s a business credit card you will be asked to “state your annual revenue”. The bank does not verify this information. They ask for no tax returns, they ask for no pay stubs. They ask for NOTHING!!
In the August 18, 2009 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, it states:
What types of non-mortgage receivables are TALF eligible?
Auto-related receivables will include retail loans and leases relating to cars….
Eligible credit card receivables will include both consumer and corporate credit…
How are subprime versus prime defined for auto loan, auto lease, and credit card ABS?
Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus.
Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.
Consider this: Small Business working capital lines of credit issued by banks cannot be sold through TALF. And early on in this financial crisis, the banking industry systematically cancelled credit lines across the nation to the small business community. No warning. They simply mailed the customer a letter stating that their credit line had been cancelled. These decisions were not based on any repayment history and point-in-fact, many of these borrowers never missed a payment. The banks decision was based primarily on the credit score they pulled. If the score was less than 720, the line was cut. This was the banks way of divesting itself of risk on these lines.
These lines, over at least the last five years, were granted to businesses without the banks verifying any financial information on the companies or the owners that personally guarantee these loans. Lines of $5000 to $100,000 were the most affected. The banks wrote to the customers and said they could reapply, if and only if they submitted current financial information to the bank. The reconsiderations were done on a case by case basis. Today, all new credit applications to small businesses require tax returns, both personal and business, for proof of revenue and proof of income. Thank goodness!
Over the last year, over $21 Billion dollars in credit cards and over $10 Billion dollars in auto loans have been sold by the banks through the TALF program. And these loans were ALL granted without any form of income verification. Yet the amounts are the same ($5000 to $50,000) as those of the working capital lines which are held to a much different credit underwriting standard.
Our bank regulators, all of them, have put in place regulations regarding safety and soundness in lending. The foundation of these regulations come from the Federal Deposit Insurance Corporation Act of 1931. Included in these regulations are guidelines on lending which speaks to loan documentation and credit underwriting. The regulations state:
C. Loan documentation. An institution should establish and maintain loan documentation practices that:
1. Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;
2. Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;
D. Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:
1. Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;
2. Consider the nature of the markets in which loans will be made;
3. Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;
Here is the thorn that pricks me each and every day as I witness the banks granting credit cards and auto loans to so many borrowers that have no hope of ever repaying this debt and to those that continue to incorrectly state their level of income. This interagency regulation governing safety and soundness does NOT state that the banks don’t have to apply the basic rules in lending if they are going to sell off the loans through TALF and stick the taxpayer with the risk. Yet, in the face of this regulation, which is supposed to be enforced by our bank regulatory agencies: FDIC, OTS, OCC, and FRB, there comes along a program, TALF, which ENCOURAGES the banks to violate the most basic directive for safety and soundness: income verification.
And the banks flaunt this behavior in their Regulating Agency’s face. With one hand, banks pull back credit to the small business community, because these loans must continue to be carried on the banks books. Banks are now (thank goodness!) requiring tax returns for all business loans. They generally refuse to lend to a business whose owners have a credit score of under 720. Some banks even set different underwriting criteria for “customers” and for “non-customers”. Chase Bank, for example defines a business customer as one who banks with them for more than six months and maintains average deposit balances in excess of $5000. Their approval rate for non-customer loans is a mere fraction of those for customer loans. (I have to wonder if this special evaluation criteria would be supported by CRA which is designed to ensure that banks lend in the communities in which they do business and not just to the customers with whom they do business….. but that is for a different article).
On the other hand, compare the underwriting standards used by these same banks for credit card loans to businesses and consumers and consumer auto loans. The amounts of the loans are, again, in the same range: $5000 to $50,000. Yet the banks refuse to apply ANY safety and soundness standards in underwriting these credits simply because …. they are going to absolve themselves of the risk when they sell them off through TALF. Additionally, they are granting these loans to borrowers that have credit scores as low as 660 and 680, again, because they are going to divest themselves of the risk through TALF and those scores make the loans eligible for the TALF program.
What can you do about this?
The New York Fed has established a 24-hour telephone and internet-based hotline for reporting of fraudulent conduct or activity associated with the TALF. The hotline can be reached at 1-866-976-TALF (8253) or www.TALFhotline.com.
I seriously have no personal vested interest in correcting this situation. In fact, I probably risk losing my job each time I write one of these articles. But I feel quite strongly about TALF’s risks to us, as taxpayers, and to the future of our country’s economic recovery. We cannot recover if we continue to allow the banks to make the same mistakes over and over.
As citizens of the United States, we enjoy a democracy that provides us with a level of freedom not experienced elsewhere in the world. Written into the framework of our constitution is the idea that if we, as a people, demand a change, it must be made. The change may not be the will of Congress, but if the people call for a change in a law that they feel is unfair and detrimental to the health of our nation’s economic foundation, then it is incumbent upon our Congress to listen and to act.
I hope after reading this article you will take a moment to send your email to the TALF hotline, protesting both the use of our taxdollars to divest the banks of these new toxic credit cards and auto loans and demanding that our Regulators force the banks to apply reasonable verification of income for all forms of credit, not just the loans the banks will hold on their books. I will also provide links on my website that will guide you through the process of writing to your Congressional leaders. You may feel free to use this Anonymous Banking article to express your concerns.
When you write to the TALF police, please also ask them why, in this new age of so-called transparency, the TALF rules do not require the disclosure of the names of the banks that are selling these assets, how much each bank is selling and what form of credit they are selling. I asked them. They emailed me back and said TALF rules don’t require them to share this info. Transparency?????
Let’s be heard on this issue. If you don’t do it for yourself, then please consider doing it for the security of our future generations.
Please share this article with your friends, family and business associates.