As the economy slowly claws its way out of the financial crisis and the deepest and most prolonged recession since the Great Depression, it is good to know that some of the lending practices that contributed to the collapse are once again being deployed. As Jessica Silver-Greenberg and Tara Siegel explain in today’s NYT:
as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.
Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.
But I thought the new regulations were going to put an end to these practices? No, in fact, they have stimulated their return:
The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.
Thankfully, “the push for subprime borrowers has not extended to the mortgage market, which remains closed to all but the most creditworthy.” My guess: it is only a matter of time until these practices revert to the old normal.
As most accounts of the financial crisis suggest, moral hazard was a significant problem. Financial institutions assumed that they could act with reckless abandon and assume risk but the costs, should things collapse, would be socialized by the government. The events of the past few years have only reinforced this assumption.
As Solomon remarked:
“As a dog returns to his vomit, so a fool repeats his folly.” Proverbs 26:11