History is a good thing. Sometimes it comes too late and it is hard to remember or relate to the issues that occurred during history. I am hoping that you will find this bit of history enlightening – my comments thought provoking and at times snarky (because at this point in history, snark fits sometimes and I've been told crying on my keyboard is not good for my keyboard).
Snips from the ALEC article with comments and sometimes, snark – below the fold.
The American Legislative Exchange Council (ALEC) has a habit of putting this disclaimer on the materials that they distribute to your legislator.
Founded in 1973, The American Legislative Exchange Council (ALEC) is the nation's largest individual membership association of state legislators, with some 2,400 members nationwide. ALEC is a 501(c)(3) nonprofit educational and public policy association. Nothing contained herein should be construed as an attempt to aid or hinder the passage of any bill in the U.S. Congress or any state legislature.
The last line is put in there to protect their 501c3 status – but as a smart person you know –like I know that they say what they mean and they mean what they say.
That is why an article I found just stood out as something that needed a larger audience than ALEC members.
“Left with Nothing: The True Predator Behind Subprime Lending” was written in 2001 by Morgan Long and distributed to ALEC members in the ALEC Policy Forum Report as part of their “consumer” series in the winter of 2001/2002.
Little did they know how telling that title would be ten years later. But anyone that pays attention to ALEC would have realized at the time that what they were “educating” legislators on in this article in 2001/2002 would turn out to be a disastrous ALEC experiment like so many ruinous experiments that ALEC legislators perpetrate on the American public.
Markets develop to fill demands. Subprime lending is an excellent example of a market that developed through the advancement of technology to answer sub par credit borrowers’ demand for money.
And with ALEC - it is all about the "market" - the "free market" and ALEC's pro-business agenda.
So how would an ALEC member view subprime lending? If they were to be swayed by the article, according to this article ALEC legislators shoul look at subprime lending this way:
This is not a predatory practice, but rather the reality of financial allocation.
Would you rather have access to nothing?
Well that is what happened to many – after they had paid a huge subprime price.
Subprime Lending - Good
On to the guts of the article and how ALEC wanted your legislator to view subprime lending.
A poor credit rating can limit or hamper the buying power of individuals or business ...
Sounds like a logical thing to say and do, but ALEC doesn’t say and do logical things.
Their full quote was
A poor credit rating can limit or hamper the buying power of individuals or business, BUT (my emphasis) subprime lending opens the door for new financial opportunities.
The ALEC article goes on to say:
But rather than recognize these lending market accomplishments, consumer advocates are demonizing subprime lenders.
In other words we should be applauding the “lending market accomplishments” that could be accomplished through subprime lending.
They go on to further recognize these “lending market accomplishments" by saying:
Subprime lending – loans made to individuals with troubled credit histories who are unable to obtain credit at the prime interest rate – has lead to the realization of the American dream for many people who thought they would never own their own home, rebuild their credit or have other financial opportunities.
The American Dream – really???? For most of these folks it was the American NIGHTMARE!
But wait – they hang onto that thought – there is more!
Access to subprime loans has resulted in the fulfillment of the American Dream to many who thought they were closed out from such opportunity.
Opportunity! Really? It’s kind of amazing that if you open your thesaurus in Word – the very first synonym for the word opportunity is “chance”.
After further pushing the wonders of technology as a mover and shaker of the American Dream they go on to say:
The result has increased competition and choice in the subprime market, greatly improving the allocation of financial resources to those borrowers who were formerly turned down.
Absolutely, competition was enhanced in the private sector and there were a hell of a lot of choices for subprime loans but in the end it wasn’t the borrowers who experienced “improvements” over the long-term.
But why is this important – why must the ALEC legislator be aware?
Because - Regulation is Bad
It is because of the dreaded “consumer advocates”.
Why is it that self-appointed consumer advocates have so little regard for consumer?
REALLY?
In their world, it seems that consumers are misguided dupes in constant need of protection from the marketplace.
So what are consumer advocates guilty of?
… consumer advocates and their allies are advising city council leaders, state legislators and Congress to impose new regulations on lending practices in the subprime market – in an unsolicited effort to protect borrowers from themselves.
As history has shown – it was not protection from “themselves” – it was protection that was needed from the ALEC privates sector / corporate enterprise members.
… regulation advocates have portrayed lenders as predatory sharks, tricking the less advantaged with lending schemes and forcing them out of their homes.
This was written in 2001 – it was if the author of an article distrbuted to ALEC members knew what the end result would be – yet chose to ridicule the end result, so that the reader would not take it seriously.
So if consumer advocates are seeing subprime lenders as “predatory sharks” what were consumer advocates doing about it in 2001, when the article written?
[consumer advocates] … “ seem to glaze over the increased access to credit, in favor of painting the subprime market as loan sharks feeding on the uneducated and the elderly. … advocates are demanding legislation to protect those in our communities “who need it the most”.
Oh those nasty consumer advocates!
So what is happening according to this ALEC article in which “Nothing contained herein should be construed as an attempt to aid or hinder the passage of any bill in the U.S. Congress or any state legislature”?
Just short of calling these individuals too unintelligent to manage their own financial decisions, policymakers have launched a campaign to strangle the subprime market, which will cause irreparable harm –
Policymakers – oh no – legislation and regulation. By god! We can’t have that happen to the ALEC private sector / corporate sector members.
And what does irreparable harm look like?
Demanding the elimination of prepayment penalties and the reduction of interest rates for sub par credit borrowers … establishing price caps on interest rates and fees, bans prepayment penalties, and restricts credit terms … demanding more regulation.
Oh no – not more regulation on the markets and the marketplace. Oh no – we must look out for the ALEC private sector / corporate enterprise members. Oh no! The ALEC free-market concept must be left whole.
But you would think that prepayment would be a good thing? Right? Well not in the world of ALEC’s free market
Prepayment risk is just as damaging to the survival of the lending institution as a loan defaulting. … each payment pays part of the debt and part of the service cost associated with the loan.
Oh – you mean interest? The service cost is interest? The downside for the lender is loss of interest? Oh my god! Why didn’t you tell me that this article was about making money for the lender? Why didn’t you tell me that this article was about making money for the ALEC private sector / corporate enterprise member? Oh, there it is two sentence later …
Prepayment results in loss to the lender. … revenue is lost by prepayment.
And if we take away prepayment what happens?
… lenders will have to “frontload” the cost of the loan
Yeh – like they don’t do that already.
But wait, those awful consumer advocates that think people are stupid aren’t done yet –
Another cry of injustice is the higher interest rates charged to subprime borrowers.
Well what does this author of an article distrbuted to ALEC members think would happen if caps were put on interest on subprime loans?
… demand would exceed supply. … Access to money … would disappear, removing their opportunity to purchase homes, buy cars or obtain other high-ticket items.
Oh yeh – we’re not talking enough money here to make it to payday (which is another ALEC focus) – we are talking high-ticket items – with high ticket interest – for high ticket profits for the lenders.
What was one of the horror stories that they quoted about regulation of subprime lenders –get ready folks.
Countrywide Home Loans, Inc. is among the first financial lenders to withdraw from the subprime lending in North Carolina since the predatory lending legislation was passed. Originations of subprime mortgage loans in North Carolina have plummeted after the passage of law –
Oh my god – subprime mortgages plummeted and Countrywide Financial left – we better give the person who introduced that legislation a gold star – North Carolina should name a street after them – or give them a special honorary day.
But they continue to chastise North Carolina for implementing legislative regulations stating:
The justification by policymakers for limiting borrowing because the cost is more than some observers would willingly pay, or the amount borrowed strikes some as being too high, is ludicrous.
Ludicous? Really - ludicrous? Again we need a street named after “some observers” and a North Carolina day of honor for “some”.
So what is the final word? What is the conclusion, the epilogue, the “Nothing contained herein should be construed as an attempt to aid or hinder the passage of any bill in the U.S. Congress or any state legislature” that was sent directly to your ALEC legislator to read and ponder?
By hamstringing the subprime market, policymakers will have to face a series of unintended consequences.
The result: credit challenged individuals and businesses will be left with nothing.
And that is exactly what happened – but not because of over-regulation.