One of the oldest maxims in commerce is caveat emptor: let the
buyer beware. Sadly, this is often interpreted as a condemnation of
businessmen, a suggestion that they are out to cheat their
customers. But the real wisdom of the phrase is nothing so trite.
It commends the buyer to check all aspects of a potential trade to
avoid unpleasant surprises. A good translation of the phrase,
depending on the context, is: “Read the small print.”
This phrase is of particular resonance to me at the moment.
After getting stuck with some very high mortgage rates when my wife
and I bought our home early last year, we refinanced this year to
consolidate our loans. It was important to us to avoid Private
Mortgage Insurance (PMI), and the bank we worked with, which has
provided excellent service in other areas, assured us that the best
loan for us would not include PMI. It didn’t — but it included
instead a “Low Down Payment Fee,” which we assumed was a one-off
payment. As it turned out, this was an ongoing charge that amounted
to the same cost as PMI but is actually harder to remove. We had
combed the loan documents looking for references to PMI but had not
properly read the parts relating to the fee. Caveant emptores; next
time we refinance, which will be soon, we shall ensure that a
trained professional alerts us to all such clauses in the
documents.
We learned our lesson. The bank contends that the fee is spelled
out in the documents we initialed to signify we had read them. That
is true; it’s our own fault for not doing our homework. Yet it is
telling that our first thought was that the bank might have done
something illegal. And there are groups that want to make such
loans illegal. But that would be a step too far and disastrous for
others worse off than ourselves.
A leader in the fight against what it calls “predatory lending”
is the Center for Responsible Lending (CRL), part of the Self-Help
group of non-profits run by Martin Eakes in North Carolina. CRL
wants to outlaw all sorts of financial products from the portfolio
currently available to the “subprime” market, i.e. those with weak
or bad credit. Among those it wants to ban or restrict:
* “Predatory” mortgage lending — refinancing loans with extra
fees.
* Payday lending — lending money against a check postdated to
payday.
* Overdraft loans — secured overdraft facilities financed by
bounced check fees.
* Tax Refund Anticipation Loans — lending money against an
anticipated tax refund.
* Car Title Loans — lending money with the borrower’s car title
as collateral.
* Rent-to-own Contracts — whereby a purchaser takes home an
item and buys it on installments, which count as rent until the
full purchase and finance charge is paid.
Yet all these instruments are valuable to the “subprime” market,
which consists mainly of the poor, immigrants like me, and other
minorities. Indeed, many of them are standard practice in the
United Kingdom. I could not have survived as a student and then
struggling civil servant in London without an overdraft facility.
Nor could my family have purchased major furniture items or
appliances without rent-to-own contracts — known in Britain
colloquially as “the Never-Never” (referring to the fact that it
seems as if you will never pay them off; but you do).
CRL has had some local success in its campaigns. North Carolina
has passed a law banning certain “predatory lending” practices. The
result was entirely predictable: The poor have been denied access
to credit. The Georgetown University Credit Research Center found
that, “The number of subprime mortgage originations [has] declined
by 14%…Significant declines occurred only in North Carolina and
only among lower-income borrowers.”
It is ironic that CRL is part of the “Self-Help” group. The
best-selling book of that title, written by Samuel Smiles in 1859,
says in it opening paragraphs, “In all times men have been prone to
believe that their happiness and well-being were to be secured by
means of institutions rather than by their own conduct. Hence the
value of legislation as an agent in human advancement has usually
been much over-estimated.” Yet CRL has recently purchased an office
block in Washington for $23 million to move it closer to the
federal government. A recent study by the Capital Research Center
suggests that the Self-Help group has received large grants from
left-leaning groups to pay for its lobbying activities.
If CRL were truly committed to the idea of self-help, it would
encourage borrowers to recognize their personal responsibility.
Instead, it is cutting off sources of credit that have helped many
out of poverty and into the middle classes. If as citizens we are
consumers of legislation, then in this case we must be especially
wary.
