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Debtor Prisons Are Back

OCT 3, 2012 4:04pm ET
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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 N | 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 | Wednesday, October 03 2012 at 10:07PM ET
The thief says 'at least I dont kill" the murderer says "at least I dont rape" the rapist says "at leat I dont rape children" the pedophile says "at least I not a cannible' and so on and so on......

They are all jackels and vultures! We should focus on consumer financial literacy so people aren't prey. What about the 13th ammendment?
Posted by | Thursday, October 04 2012 at 10:47AM ET
Sandy, Please provide specifics supporting your position. I find your statement to be impossible under current legislation. The CFPB continues to chasing down Loan Officer compensation which the US Bureau of Labor Statistics states median pay for LO's in 2010 was $56,000, hardly a king's ransom, while CEO's and management of banks rake in multi millions. Reducing the compensation of the little guys on the front line will only increase the income available to the top dogs, increasing the disparity in this country...maybe you are in support of the top dogs getting more...maybe you are a top dog?

More worrysome is that there is no data, survey, report, or study that makes a case that controlling LO compensation is even needed...none! Maybe the compensation for your job should be controlled, only makes sense if were all the same...soon enough they'll be coming for you too!
Posted by | Friday, October 05 2012 at 5:37PM ET
In each and every profession there are the "good guys" and the "bad guys". NO profession is exempt. As for the CFPB, when they are making rules and regulations for businesses and they don't have anyone on staff that is qualified to do so it ends up making more of a mess. They had to send their lawyers to mortgage 101 classes to learn the ins and outs of mortgages as they did not have a clue. Are these really the people you want looking out for you? If you looked into some of those people's back rounds, you might also find things that you would ask how in the world? Corruption is everywhere and that is a very sad fact.
Posted by | Friday, October 05 2012 at 6:05PM ET
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