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View Diary: You too can become a subprime lender (24 comments)

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  •  There's a LOT more to this than meets the eye... (17+ / 0-)

    ...especially when it comes to standard consumer credit (i.e.: revolving credit/cards and installment loans). (I work in this space--among others--in the real world.)

    FACT: Most of the major Wall St players in the credit card/installment space charge significantly MORE interest to consumers than the smaller, "subprime" players. Usually quite a bit more. This is due to "PREEMPTION" laws relating to nationally-chartered lenders versus state-chartered lenders. What happens in preemption is, essentially, the large/Wall St banks get a license to pillage, while most states more closely monitor (this is a well-known, statistical fact, btw) and control the state-chartered lending institutions.

    So, as it relates to basic consumer credit (revolving and installment), the smaller lenders (supervised by better-staffed, in most instances, regulatory bodies at the state level) handle much of the subprime action--at annual percentage rates far better than their much larger counterparts, and these are loans that perform almost as well as their Wall Street counterparts; but the larger lenders can't be bothered with anything more than a one-size-fits-all credit scorecarding solution on Main Street, at least if they're going to continue bilking the public, accordingly.

    Federal banking Preemption Laws continue to enable this behavior and create an uneven playing field for the big banks. The larger, federally-chartered credit providers are provided with much more latitude than many of their state-sponsored competitors. For starters, they impose their (i.e.: a large lender's "home state's" credit/usury caps on consumer credit, as opposed to the state loan caps where they're actually issuing the loans--why do you think the Citi's and the GE's and Wells Fargo's of the world issue all their credit cards from Nevada, South Dakota and Delaware?) more egregious, home-state's rates on all of their consumers around the country (as opposed to the state-chartered banks which are governed by their state's usury laws), and this happens tens, if not hundreds of thousands of times per day.

    From 2008 through 2010, somewhere in the approximate neighborhood of 25% to 33% of the entire U.S. adult consumer population was, for all intents and purposes, forced out of being characterized as "prime" customers and ended up in a world of credit where they were only eligible--at best--for "subprime" products, with many of those products actually provided at lower interest rates than the national card issuers and related purveyors of t-called prime credit. (I've documented much of these statistics/facts in diaries during that period, right her.)

    Next time you're in a furniture or jewelery store, inquire about the store credit programs (and read the fine print in the application form you're provided). You'll see the A.P.R. is usually somewhere between 27% and 35%, depending upon the state you're in.

    Then ask about their alternative lending programs. Hopefully, they'll have subprime options available to you. Then checkout their A.P.R. rates. (If all they have are rent-to-own choices, walk away.) You'll find the A.P.R. rates are subject to state-implemented caps, as opposed to the Wall Street lenders (i.e.: GE, Wells, and TD Bank, which are the three biggest players in the consumer credit space at point-of-sale, today, for non-auto and non-real estate-related transactions).

    Let's take Arkansas as an example. Their state consumer credit caps (for state-chartered, retail/revolving credit and installment credit loans) are around 16%-17%, last I checked. If you walk into a big box store in that state, you'll find their big-bank card programs are all charging somewhere around 27%-35%. In Texas, the state-mandated interest/A.P.R. cap is around 21%-22%. (It varies from year-to-year in Texas.) Yet, it's one of the most lucrative states in the country for the large/national credit providers, as far as their credit card bilking "acquisition" programs are concerned.

    As far as real estate/mortgage lending's concerned, a large, well-run regional or state-based lender may very well turn out to be a better option than one of the top-10.

    Above all else, checkout the reputable Credit Union options!! (If you're able to find one that'll allow you to become a customer.)

    But, yes, the fly-by-night "Joe's Excellent Mortgages and Auto Loan" firms should also be avoided at all costs, too.

    The greater truth is this: MUCH OF THE CREDIT SCORING in this country is highly-flawed. I personally work with many retailers and local lenders that are providing billions in credit to consumers with <650 FICO scores, at significantly lower APR rates than their national counterparts. And, these legitimate lenders (including credit unions) make a profit on their loans, while providing much-needed services to retailers and the consumer public--especially the niche that's grossly underserved by the bigger players (in recent years), who run roughshod over our society, gaming federal laws that preempt state restrictions, while taking far more than their pound of flesh from Main Street.

    Above all else: CAVEAT EMPTOR. (READ THE FINE PRINT!)

    But, remember, there are many great credit union, honest, reputable "subprime" (which is really a misnomer for many of these smaller firms) and community bank credit programs out their that are charging FAR LESS for their money than the big players. Don't be sucked in by the big players and their "No Money Down, 60 Months To Pay" bullsh*t. Chances are, they're offered with so many catches in their contracts, starting with their preemptive interest rates, which may vary at the mere whim of the large bank, too--which include their prior knowledge of consumer behavior and related default rates, and opportunities to jack-up interim interest amounts as well as late fees, etc., etc.--that the greater reality is, walking around with an 800 FICO score, you're like a fish in a barrel as far as they're concerned!

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Tue Nov 12, 2013 at 11:37:22 PM PST

    •  Question....what would happen if any bank (2+ / 0-)
      Recommended by:
      bobswern, radical simplicity

      charging these kinds of rates lost the ability to borrow "our money"(translation borrow from the FED) if they charged anything over prime plus a couple to points to consumers?  Would that change the picture for credit in this country?

      •  The Fed should either open up the discount... (5+ / 0-)

        ...window to all, not just the "primary dealers," (roughly, the 20+/- largest lenders here in the U.S., which also includes a large number of non-U.S. firms) or, at the very least, provide some sort of alternative program that helps level the playing field for state-chartered institutions.

        The way things stand now, just like somewhere in the neighborhood of 1/2 of all car loans are originated in the dealership due to "convenience," similar stories abound in the consumer retail and mortgage sectors, too.

        This, not-so-tacitly, rips off many highly-scored (credit-wise) consumers (the big/nationally-chartered banks exploit this, dollar-for-dollar, much moreso than the state/local lending institiutions), and facilitates more egregious behavior for the other portions of the financial services sector, as well (all of the non-nationally-chartered/state-chartered lenders).

        The problem, on the lower side of the credit-score range, is that the good, non-nationally-chartered lenders only participate in selected programs (most don't have the resources to maintain more of a presence in the community; others, like your local credit union do, however; but, many folks that will qualify for a decent "subprime" line of credit from a reputable, state-licensed lender, will get turned away from many/conservative lenders), on a catch-as-catch-can basis. This also opens the door to less ethical options/opportunities for ethically-challenged firms to exploit (such as the mom-and-pop mortgage firms discussed in this diary).

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Wed Nov 13, 2013 at 06:44:44 AM PST

        [ Parent ]

        •  Great comments (1+ / 0-)
          Recommended by:
          BeninSC

          Thanks for adding to the diary. These comments are very enlightening.

           Personally I don't do debt, so I'm not familiar with all the ins and outs. But I just learned a few things about it.

          None are so hopelessly enslaved, as those who falsely believe they are free. The truth has been kept from the depth of their minds by masters who rule them with lies. -Johann von Goethe

          by gjohnsit on Wed Nov 13, 2013 at 08:56:36 AM PST

          [ Parent ]

    •  This is a fantastic comment, Bob. (4+ / 0-)
      Recommended by:
      melo, bobswern, gjohnsit, BeninSC

      I tend to get so absolutely pissed off at Capitalism that I shoot myself in the foot by ignoring a lot of the details of the shenanigans which go on in it.

      It's really great to have an inside expert such as yourself to really spell out the dirty details.

      Again, thanks for the great comment in an already great diary.

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