Should This Be Legal?
Are there some deals that are so bad that they shouldn't occur? Or it is enough to say that people have choices, and if they make bad choices, tough?
I had lunch with a bankruptcy lawyer, who followed up with an email story:
Today I was interviewing one of my clients and she said that one of the loans she that she had should have been illegal. I asked her what she meant and she said that the loan she received should never have been permissible. Turns out she had a car loan with Volkswagen with an interest rate of about 3% and a loan balance of approximately $23,000.00 Because she had her home mortgage with Wells Fargo (or at least that is what she thinks is the reason) she received an offer from Wells Fargo for an equity loan on her car! (i.e. just like a home equity loan except the collateral is a car instead of a house) I had never heard of such a thing before. In any event, she agreed to do the deal with Wells Fargo (she needed to money to pay her bills and was much too embarrassed to go to family and friends) so she agreed to the refi and at closing she received $4850 in cash, Wells Fargo received $1300 in fees and the total amount of the debt went from $23,649 (the amount owed VW on the original car financing) to, hold on to your seats, $48,852! The interest rate on the new loan was a mere 16.24% (remember the old rate with VW was approximately 3%). Of course she defaulted and Wells Fargo repossessed the car and is now seeking its deficiency balance. Amazing to see an equity loan on a rapidly depreciating asset but when she received the loan Wells Fargo told her that she had paid down her car loan so quickly she had accumulated equity and they had a way to get the equity now.
The Wells Fargo loan was made in 2006 - the cost of the new financing was $17,900 - almost as much as the balance (i.e. $23,649) then due on the original note with VW. Also, the term of the new loan with Wells Fargo - 72 months, on a 2005 VW Passat!
The woman in the story got an immediate benefit ($4850 in cash), and that saved her some serious embarrassment. But these charges are head-snapping.
What is the best way to think about this? The woman is an adult, she received a benefit, she is stuck with the deal. The company's terms are unconscionable, disclosure was inadequate, and charges at these rates should be banned.
Or is there a third option that nudges toward a more rational decision, but that leaves open a number of degrees of freedom? So, for example, should this be permissable, but only if
1) there are very, very aggressive disclosures
2) the consumer seeks out the deal
3) some form of third-party advice is available
In other words, are there other nudges that would maximize consumer benefits? Yes, I'm reading Richard Thayler's and Cass Sunstein's book Nudge, and it makes me think about consumer credit.
The current system seems plainly wrong to me. The question is whether nudges can work, or if some deals are bad enough that they should be banned outright. No one can buy an exploding toaster, even if it would be a little cheaper or even if the buyer was warned. But perfect safety is not required, and someone can still start a fire with a toaster. What's the right approach with financial products?
If a regulatory opportunity opens up so that it is possible to get more effective consumer protection, we may need to think about right way to go.
What we should do is mandate a simple system (enforced by a mandatory application form that can only accommodate certain terms) to avoid buried terms.
May 31, 2008 9:59 PM | Reply | Permalink
I think we're missing some of the email ---
What did Wells Fargo say when the lady's attorney asked them to explain the loan?
May 31, 2008 10:15 PM | Reply | Permalink
How 'bout this! I've just received an email from Wells Fargo -- Loss Mitigation Dept.- Consumer Loans. It's amazing who reads TPMCafé.
Hi Ellen,
It may surprise you and other commenters at TPMCafé to learn that those of us here involved in consumer loans follow Prof. Warren's publications and speeches most carefully. We regularly check the blog Credit Slips where she usually posts but also, secondary blogs like TPMCafé, as well. And that's where I read her attorney friend's sad little anecdote. No; in answer to your question, the borrower's attorney didn't contact us, but I recognized the story and just now completed reviewing the file.
First, a little background. Wells Fargo promotes its business to its clients by mailing out flyers making them aware of the many services it offers -- trust department services, mortgages, refis, home equity loans, HELOCs, credit cards, and much more including, as in this case, collateral car loans also known as automobile equity loans.
Ms. xxxx first contacted WF in early 2006 to discuss applying for a home equity loan. At the time there was plenty of equity in her home, but we couldn't make the loan. Her ex-husband was still liable on the first mortgage (he was paying the P&I on alternate months per court order) and he wasn't willing to allow additional liens on the property.
Around a month later she called again this time to discuss taking out an automobile equity loan -- perhaps, as she says, prompted by one of WF's flyers. At first blush she had a lot going for her and probably would have qualified for a rate somewhere around 7-8%.
The 2005 Passat was very low mileage. She'd had it for less than a year, and she'd gotten a great end-of-model-year deal -- pumped up trade-in value and a 3% loan. The payments were high ($872.44/mo.), though, because it was for 36 months, only. But then, her credit report came in!
She had a 525 FICO; she'd maxed out two cards and had applied for three new ones over the prior 6 months. She was paying the minimum except she'd missed payments on one of the old cards and one of the new ones. She was paying 21.5% on those cards. On top of that she was looking for "new monies" -- around an additional $10,000.
Well, to make a long story short, WF worked with her (she'd been a long-term customer and there was equity in her home). But given the low FICO and the fact that over 50% of the loan was unsecured the interest rate offered was high (still, less than the 21.5% she was paying on the credit cards). And by extending the term out to 2012 the total monthly payment was reduced. WF loaned her $48,852.13 disbursed, as follows:
22,750.88 VW Credit
10,362.71 Credit Card #1 (paid off in full)
9,588.54 Credit Card #2 (paid off in full)
1,300.00 Wells Fargo (fees)
4,850.00 Cash to Borrower
48,852.13 Total Disbursed
I might add that when WF assigned the loan to a Wall Street securitizer (WF is the current servicer, only), it received $48,215.00 so its fee income wound up being $663 and not the $1300 originally expected.
I hope this all makes the transaction clearer.
Best regards,
Ms. xxx xxxxx
June 1, 2008 5:30 AM | Reply | Permalink
Wells Fargo sends me these offers all the time. They go in the garbage unopened (where they belong). But Ellen, I'm interested in how you got involved. Are you Elizabeth Warren's minder?
Here's the thing: there are predatory loans, and then there are predatory loans. It's my opinion that if the bank can't make the loan at the original rate (3%) they should stay the fuck out of it. They should inform the customer that this would be a very bad deal. Wells Fargo has offered me some very bad deals as well. Wells Fargo is, without any reservation, the most aggressive bank I have ever done business with. That may be good for their bottom line, but it is clearly not in their customers' best interests.
June 1, 2008 9:57 AM | Reply | Permalink
But Ellen, I'm interested in how you got involved,
The strange reach of serendipity. (What a treasure is our Ellen...)
June 1, 2008 4:18 PM | Reply | Permalink
hrebendorf - If you want to stop the CC and Loan offers, and help save the environment, go to www.optoutprescreen.com and get your name removed. This is the official site. It works. I've done it, and have helped everyone in my family do it. No more junk mail. :)
June 2, 2008 2:55 PM | Reply | Permalink
Re-reading your post, I'd say this is the very definition of a predatory loan.
And they loaned her the money anyway. Good for the bank, perhaps, but the employees who facilitated this will burn in Hell.
June 1, 2008 10:03 AM | Reply | Permalink
So Wells Fargo, that noble institution, was doing her a favor?
Heh.
Sure they were. What ever happened to the concept of risk? They were charging that outrageous interest rate to cover their risk.
They lost.
Bummer.
Next thing you know, they'll be asking the taxpayers to bail them out because they made some boneheaded decisions.
Oh, wait.
June 1, 2008 10:17 AM | Reply | Permalink
Wow. I'm pretty amazed that Wells Fargo would respond like this. And more that a little suspicious, actually. If they sold the loan to a securitizer for a fee of $663, why is their loss mitigation department involved? Wells Fargo didn't lose a dime.
Regardless, it sounds like "Wells Fargo" knew exactly what it was doing. It paired a divorcee on the verge of bankruptcy with a network of speculators who, owing to multiple layers of abstraction, had no clue what they were financing. Wells Fargo knew exactly how risky that loan was, but didn't care because it collected $663 for about an hour's work. Nice.
So. What should be illegal? In my opinion, the securitization of loans. This stinky loan was enabled by a series of back room deals between corporations. Corporations are not human beings. They are not entitled to individual rights, and are certainly not entitled to the kind of apple-pie moral goodness which dictates that Ellen should be free to hire the neighbor boy to trim her hedges.
The act of lending creates money. Too much money causes inflation. Too much inflation causes bubbles. Bursting bubbles cause economic harm far beyond the sector in which they originated, and that's exactly what happened to real estate. This is why lending needs to be regulated: because of basic economics which have nothing to do with good, evil, or apple pie.
Wells Fargo should be free to offer nearly-bankrupt divorcees all the neighborly help it chooses, secure in the knowledge that Wells Fargo will eat it if they don't repay. I highly doubt Wells fargo would make this kind of loan under those conditions, and that would be a good thing.
June 1, 2008 11:19 AM | Reply | Permalink
Re: If they sold the loan to a securitizer for a fee of $663, why is their loss mitigation department involved? Wells Fargo didn't lose a dime.
If the loan went bad too soon after it was sold, Wells would have had to repurchase it from the security.
June 1, 2008 1:29 PM | Reply | Permalink
If Ellen's description is correct (and at least Ellen's numbers add up unlike Warren's!)--then it's hard to say that the bank was the primary culprit here. The real problem seems to be the woman's credit card debt. Not sure what to do, but Americans need to exercise more self-control when it comes to borrowing. The lenders aren't blameless by any means, but ultimately adults need to act like adults.
But then this is the America that voted for Bush twice.
June 1, 2008 11:43 AM | Reply | Permalink
Soooo, it's OK that this jerk, anonymous jerk, gave out personal information on this woman?
I'm sure they were quite choosey on what info they disclosed as it sure made all of you banking system apologists knee-jerk their same old tired excuse of: blame the victim. For all YOU know the e-husband left her with medical bills or yacht payments and took off to Mexico with his secretary. Maybe she has 6 kids to feed.
The fact is, you don't know enough to make such harsh judgments on the customers "character."
That answer to Ellen was cooly calculated to throw as much mud on that customer as possible.
I don't buy into the "poor little banker" scenario, and I am surprised anyone at TPM wouldn't at least question that type of unethical disclosure from a major bank.
It is disgusting.
I'll give that customer the benefit of the doubt, thank you very much.
Wells Fargo will never get any business from me. Obviously, they care NOTHING for their customers welfare or privacy.
June 1, 2008 8:49 PM | Reply | Permalink
The problem, Workerbee, is that Warren's story makes no sense to anyone who understands the financial math. That's what frustrates me so much about her post. I agree that many lenders are over the top--but distributing a story like this where the facts don't add up only discredits Warren's argument. Whether the email Ellen quotes is authentic or not is uncertain. Certainly, it seems implausible that Wells Fargo would respond to a query from someone about a blog post in the middle of the night. But maybe Wells Fargo has round-the-clock public relations people. (Most of these banks have outsourced their service centers to India, after all.) Or maybe by chance Ellen works at Wells Fargo or Wells Fargo's law firm and knows the case herself and the email is really her own. Certainly, Wells Fargo shouldn't be disclosing information like this to a random person asking for it (like Ellen). But then, the woman's attorney probably shouldn't be telling an activist like Elizabeth Warren details about the case if the woman doesn't want her information publicized. Certainly, the bank has a right to defend itself if Warren and her attorney friend are publishing information that implies the bank is predatory and the bank feels the accusations are unfair.
How the woman got into financial trouble is a different story--and it may be a tragic one. Plenty of Americans are in debt and even bankruptcy because of illness, loss of job, a messy divorce, or other factors that are beyond their control. What's problematic in Warren's story, however, is that the woman's misfortune is implied to be the result of the bank increasing her debt from $24K to $49K. But it's not explained how the bank did that. Warren tells us about a fee of $1.3K and a cash payment of $4.8K, but that still leaves about $19K in increased debt unexplained. Ellen's story (true or not) provides an explanation--the $19K was used to pay the woman's credit card balances. If that's true, then it's hard to argue that Wells Fargo drove the woman to bankruptcy. The problem, in this case, is the woman's debt load, which was too high for her to support. She may have acquired that debt because of tragedy and not irresponsibility, but it's hard to say Wells Fargo did anything terrible in giving her a loan. Sure, the loan wasn't a great one--but banks aren't charities. In the past they simply would have refused to give such a risky borrower a loan and left her to the mercy of her credit card companies and Volkswagon's finance company. Now banks are willing to give the high-risk loans, but only in return for high fees and interest rates that make the risk more palatable to the banks. I'm not sure that's all bad--sometimes a high-interest loan can be a stop-gap measure to provide the cash flow necessary to stop bankruptcy. Maybe for some people, having access to that kind of credit in tight situations can save them from worse financial problems. Certainly, if Ellen's version of the story is correct, the loan reduced the woman's monthly payments and therefore improved her current cash flow, which would have helped her stave off bankruptcy in the near term, even if the loan had a large long-term cost. It's not an ideal solution, but maybe it's not quite as predatory as Warren wants us to believe.
On the other hand, if Wells Fargo did something deceptive--and really bilked the borrower out of $20K--that would be a different story. But Warren's story doesn't give us enough facts to know. And that leads me back to my original point: Warren's story is intensely frustrating because it makes a serious accusation but doesn't give us all the facts we need to judge the accuracy of the accusation. In some ways, Warren's approach is extremely condescending. It is almost as if she assumes we are all financial idiots and can be dubed by fuzzy math as easily as she accuses the banks of duping us when they lend us money. But some of us actually understand finance reasonably well and want to see all the numbers add up. Ellen gave us the numbers and because of that her story, true or false, is more credible than Warren's. If Warren wants to convince us, she'll need to update her post and let us know exactly where the missing $19K went. Until she does that, Ellen seems to have a better story and Wells Fargo isn't looking quite so nasty.
June 1, 2008 11:54 PM | Reply | Permalink
The problem, Workerbee, is that Warren's story makes no sense to anyone who understands the financial math.
How utterly condescending.
Maybe I get that this story wasn't about the numbers. It was about ethics. Perhaps you could look up the word? To 'some of us' it means something. To some 'others', it means nothing. An example of those 'others' would be the numbnuts that disclosed just enough personal details about that customer to make her look like the bad character in this scenario. If you want to be led by the nose, that's fine. Don't expect me to be.
An equity loan on a car at 21% is altogether evil.
I "get" that.
June 2, 2008 2:44 AM | Reply | Permalink
Maybe it's Warren who's leading you by the nose? Maybe it was she who disclosed just enough to make the loan look bad (and failed to disclose the refinanced credit card debt that made the loan look not quite so bad)? As I said, I sympathize with Warren's general point. But--if we're going to discuss ethics--I find something unethical about disclosing partial information in order to make a bank look worse than it may indeed be. That's dishonest and, worse, it undermines Warren's legitimate complaints about the truly bad lenders and damages her overall credibility. It's important to point out lenders' abuses--but it's also important to play fair. I don't believe Warren, by spreading this story without getting all the facts straight first, was acting ethically or responsibly.
June 2, 2008 7:31 AM | Reply | Permalink
One other point: one of my pet peeves is when people write about financial topics without getting the facts straight and complete. One of the primary reasons we have the financial problems we have in America today is because Americans don't understand finance. And when someone like Warren writes a post that provides inaccurate or incomplete information it only perpetuates the problem. Knowledge is power--and Americans need financial knowledge to get back in control over their financial lives and the financial institutions that too often dominate those lives. Inaccurate accusations against lenders don't increase understanding--they increase confusion and fear. And that's not helpful. Knowledge and confidence are ultimately what will protect us best from the sharks. The first step in building knowledge and confidence is providing complete and accurate information. Warren failed to do that and therefore in my mind became more a part of the problem than a part of the solution.
June 2, 2008 8:02 AM | Reply | Permalink
Does Wells Fargo have any information on who they stuck with this soon to be worthless debt? I certainly hope it wasn't my pension fund.
June 1, 2008 1:43 PM | Reply | Permalink
Being a skeptic by nature, I am skeptical of the authenticity of the email. I'm having a hard time believing that anyone at WF would respond to an internet posting and that a response to Ms. Warren would be sent to someone else.
How about posting a copy of the email?
June 1, 2008 4:44 PM | Reply | Permalink
Bingo.
This is absolute BS. There is NO WAY Wells Fargo would send a random poster on TPM this sort of information.
June 2, 2008 4:32 PM | Reply | Permalink
Usury used to be illegal.
May 31, 2008 10:35 PM | Reply | Permalink
As was wearing velvet if you weren't in the right class of people.
May 31, 2008 10:45 PM | Reply | Permalink
You are so funny.
May 31, 2008 11:14 PM | Reply | Permalink
sea,
Reagan allowed the sharks in the water and they have been growing in numbers ever since.
June 1, 2008 7:48 AM | Reply | Permalink
As long as banks have little risk in making such outrageous loans they will continue to make them. The bank makes its profit on what they charge to write the loan, so good loan, bad loan, it makes little difference to them. If the borrower defaults, the bank is not limited to just the collateral when they seek to recover the loan.
That all suggests to me that loan origination fees need to be regulated, so banks don't make the bulk of their income from those fees. Bank income should come from interest, not fees. Then, banks should be limited in recovering from loan defaults to the collateral for the loan only. That will cause them to stop overvaluing whatever is used for collateral.
There is a chance, starting next January, that some reasonable bank regulations can be reinstated. It can't happen too soon. And, usury laws should apply to banks, not to individuals as they do today.
June 1, 2008 12:27 AM | Reply | Permalink
There seems to be in this instance a fundamental violation of an obvious nature having to do with the simple notion of right and wrong. No amount of legalese alters this most obvious circumstance. It is with great concern that our lawmakers permit the drawing of contracts that so thoroughly dismiss consumer protections while simultaneously allowing flagrant abuses to become part of the lexicon of credit agreements.
It's fair to say that this circumstance is allowed because our lawmakers have been inappropriately influenced by business to create laws which are harmful to citizens. Until citizens demand an end to this arguably conflicted and most probably unlawful association we are stuck with the repercussions. And I say unlawful because the existing condition is marred by unequal representation and the undeniable appearance of sanctioned bribery of our public officials. This is a duck for sure. Quack! Quack!
June 1, 2008 5:19 AM | Reply | Permalink
lemme see here
you say she got less than $5000, and her loan principle went from $23,000 to $48,000
so she paid $25,000 to borrow $5,000 for 7 years
did she use the money to buy a bridge in brooklyn or something ???
how stupid is this person ???
that's the only question to be decided
we can't legislate away all of the problems of the incompetent and pathetically foolish
June 1, 2008 7:48 AM | Reply | Permalink
I wonder if the $4,800 was used to pay the domestic relations lawyer the balance of his fee? If so her domestic relation's lawyer just might be the real villain of this story. No doubt the divorce attorney thought he was making a wonderful deal for his client. In exchange ex-hubby making half the mortgage payments he would stay on the title forcing an equity split down the road. What her domestic attorney failed to realize is that his client might need to take some money out of her half of the equity sooner than later. He might have been better off negotiating an appropriate alimony award, removing ex-hubby from the title and, if the ex-hubby insisted, refinancing the house to relieve him of any exposure should she fail to pay her mortgage payment.
Elizabeth, just what were those embarrassing bills anyway. You ought to have lunch with the divorce lawyer.
June 1, 2008 8:56 AM | Reply | Permalink
Thank you Ellen. I was wondering how "the total amount of the debt went from $23,649 (the amount owed VW on the original car financing) to, hold on to your seats, $48,852!" when fees were only $1,300 and the cash received was just $4,850. The numbers didn't add up.
I agree with Warren's basic point that the lending industry is overly aggressive in loaning money to people who can't afford the loans, but I wish she wouldn't give us half the facts. It's dishonest argument and it undermines her broader point.
June 1, 2008 11:19 AM | Reply | Permalink
Just should add, if the email Ellen quotes is correct, the woman's monthly payment on the loan would have been $1,066 or $194 higher than her prior car payments and probably (as the bank claims) lower than her monthly car payments plus her minimum credit card payments. Finance charges were high with the increased interest rate, the loan fees, and the extended time period--but from a cash flow perspective the loan isn't what drove her to bankruptcy. The woman probably would have been better to keep her car loan and try to work out a payment plan for her credit card debt. But she was probably headed for bankruptcy anyway thanks to the overall high debt she was carrying.
June 1, 2008 12:42 PM | Reply | Permalink
I think you're right -- her cashflow was improved.
Here's where I object to Wells Fargo's behavior: As her fiduciary her Wells representative should have said, "You know, this loan will improve your immediate circumstances but it's costly and you'd probably be better off negotiating with your credit card lenders to see if you can get a better deal."
The issue shouldn't be "this loan should be illegal," the issue should be that if Wells was a fiduciary it owed her better advice.
June 1, 2008 12:56 PM | Reply | Permalink
You're right, Destor, that the loan officer should have steered her toward a better solution. Honestly, though, the borrower didn't have many good options, and the option Wells Fargo offered her, while costly in the long run, was not a bad short-term measure if the woman could have swung the $194.
To solve the problem, we would have needed to get to this woman earlier--before she had built up $20K in credit card debt and $40K in total debt. Maybe we need limits on both borrowing and lending. We could, for instance, make it illegal for an individual to borrow more than x% of his or her income (or net wealth) in unsecured debt and y% in secured debt. We could also make it illegal to lend to someone if the loan would force them over these limits. And we could limit interest rates and have stricter regulations governing loan terms and disclosures. All this would help us avoid these kinds of problems. But a lot of people would be forced to cut back their spending, particularly in the middle class. And some people who could have managed higher debt loads responsibly would be hurt. This seems like a Draconian solution--but maybe debt, to Americans, is like heroin and we just can't control our addiction without prohibition.
June 1, 2008 1:15 PM | Reply | Permalink
George Soros is arguing something like what you're suggesting -- he says that the creation and use of credit needs to be regulated.
The drawback is that credit creation really is an engine of economic growth. Soros says we've gone too far and that it can't be a growth driver any more.
Funny thing is, Soros got rich making leveraged bets. He is, on a massive scale, one of the types you talk about -- a person who can manage more debt effectively.
Thing is, whether your Bear Stearns or a credit card borrower, debt really is dangerous. It can turn a setback like a divorce of job loss into a real tragedy.
I don't know what the answer is, though. Professor Warren seems way too willing to just cut people off and to make certain types of loans illegal. Unfortunately our bankruptcy laws are now so draconian and anti-borrower that a mroe lassez faire approach, which I'd prefer in principle, just isn't wise.
Maybe that's the answer: Either more borrower friendly bankruptcy laws or personal and corporate leverage limits.
June 1, 2008 1:37 PM | Reply | Permalink
Looks like a bad deal but I'm against limiting people's access to credit.
Professor Warren needs to respond to Ellen on this because Wells is really challenging Warren's credibility here.
I think there's no doubt that Wells sold this woman a bad loan, though. As a fiduciary, Wells should have talked this woman out of taking the loan. But, as others have pointed out here it was the woman's other debt that caused the trouble. This basically extended her repayment terms, gave her some cash and staved off bankruptcy. All at a ridiculous cost but it did have some legitimate purpose.
I'd also argue that the woman wasn't necessarily stupid for taking it. As a way of financing an entire life, this won't work. But if it was stopgap, to get her through a rough time caused by the divorce, it's not entirely unreasonable to say "I'll take some high cost debt now with the plan of repaying it before the terms are up when I'm back on my feet in a year or two."
Problem is, this loan might have been so badly priced that it would prevent her from ever getting back on her feet. I guess it's an open question about whether the high cost loan was more dangerous to her financial security than the credit card debt that she paid off with it.
June 1, 2008 11:58 AM | Reply | Permalink
As a fiduciary, Wells
If so, then yes.
But they are not, under the present state of the law, fiduciaries to their borrowers--only to their depositers.
(Loathe though I am to oppose any expansion of the reach of tort litigation, I think we might want to think this through completely before imposing this burden on lenders as a blanket proposition.)
June 1, 2008 4:15 PM | Reply | Permalink