OCT 3, 2012

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Compliance Matters

Debtor Prisons Are Back

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Remember the good old days, before the Industrial Revolution when governments threw people in debtor’s prison because they were broke? It seems like a long time ago, but it appears the idea is back.

According to a recent press report from The St. Louis Post-Dispatch, the concept is making a comeback, in parts of Missouri, at least. That’s right. According to the newspaper, certain borrowers in the St. Louis area are being thrown into jail over nonpayment of private debt.

For mortgage professionals, the key phrase here is “private debt.” Also, the outstanding loan amounts tied to incarceration are relatively small. (Can you spell payday loan?)

I decided to write about the issue because, well, it’s absurd. But the outrage should be focused on the new Consumer Financial Protection Bureau. In short, while the cops at the CFPB are going after mortgage bankers (an industry that has been mostly cleaned up) they seem to be ignoring the licensed loan sharking sector of “shadow banking” which includes payday lenders.

Once upon a time, society was appalled at the practice of loan sharking where if you could not pay back your 25% loan you might get a new set of knee caps from someone with a five o’clock shadow and a baseball bat.

In today’s modern society, payday lenders have flourished while mortgage bankers and banks have failed in record numbers. Just take a drive down certain neighborhoods in Detroit, Cleveland, or parts of Prince George’s County in Maryland.

The story in the Post-Dispatch outlines the legal process being used by creditors against debtors after a judgment is obtained against the borrower. In a nutshell, attorneys working for creditor firms are trying to enforce judgments by requiring debtors to appear in court to answer questions about their assets.

Here’s the important part: If the debtor does not show up in court, a “body attachment” is issued by the court which is an order to arrest the debtor.

You would think that if people needed a payday loan the creditor would realize they have no assets to collect from. What kind of volume do you need in this business to break even?

The article outlines the issues involved, including creditors using the court system, police and jail to enforce their debts. The court system, of course, is all funded by local taxpayers. (I guess this is what you call a private/public partnership.)

I first discovered the issue from a legal blog. The comments posted took on two extreme positions: The deadbeats got what they deserved; the poor were being victimized. Who knows? Maybe it’s really a case of both.

Still, I know of no mortgage brokers who double as loan sharks. Typically, LOs help people move forward with their goals and dreams of obtaining a home or making it easier to pay back debts. This “commerce,” created by the mortgage industry, improves the economy.

Perhaps, the good that mortgage bankers/brokers provide can be used as part of a public relations campaign for residential originators. It’s worth a shot. New mortgages are being made at 4%, not 25%. Maybe, finally, the CFPB will notice. When’s the last time a payday lender went to jail?

Comments (10)
Although you so make several very real and valid points regarding payday loans, to say the mortgage industry is mostly cleaned up is a fantasy statement. The mortgage industry, including Loan Officers, continues to use bad business processes and to exhibit unethical behaviours. Payday loans do not put entire families out on the streets. The mortgage industry's sad state of affairs: its not about right or wrong, legal or illegal. Its about what they can get away with: Will the take exceed the fines? If the answer is yes, then go with it. Why care that homeless bodies are left everywhere... some suicidal, some already there, others holding on to sanity. The CFPB was long overdue and very much needed.
Posted by Sandra Newport | Wednesday, October 03 2012 at 6:19PM ET
Even the very worst payday lender did not steal as much money as some of the corrupt practices of mortgage servicing agents like AHMSI aka Homeward Residential aka Ocwen Financial. Should that get them off the hook? No way! The dept of justice should go after those crooks too. The problem with mortgage companies, they just buy and sell to wipe their hands clean.
Posted by justiceisserved | Wednesday, October 03 2012 at 10:07PM ET
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