Thesis on "Business Law- Corporate Responsibility Irresponsible Lending Practices"
Thesis 8 pages (2263 words) Sources: 3 Style: APA
[EXCERPT] . . . .
Business Law- Corporate ResponsibilityIRRESPONSIBLE LENDING PRACTICES and the MORTGAGE CRISIS OUTLINE
Responsible Mortgage Lending Practices: 2 pages
The concept of credit extension
Types of credit extension
Responsible/Predatory lending to low income earners, students, unqualified borrowers
Due diligence/Responsible borrowing...taking out equity from mortgaged property
Irresponsible spending and American culture
Evolution of Irresponsible Mortgage Lending Practices: 2 pages
Evolution of third-party lenders...car dealers
Implications of third-party lenders on due diligence...motivation by loan #s
Evolution of liquid mortgage securities from non-liquid obligations
The perfect storm the 21st Century American Mortgage Crisis: 1.5pgs
Link between economy and various factors like real property values
Present situation description w/mortgages
Chain reaction of depreciated mortgages and overvalued mortgage securities
Bear Sterns...bank failures
Implementing Solutions for the Future Health of the American Economy: 1.5pgs
Addressing the of conflicts of interests in 3rd party lending and motivation by #s
Increasing legal verification of income information requirements
Penalizing predatory lending...broadening definition...capping interest rates and long- term payoff totals...ret
Continue scrolling to
rospective analysis of default rates and extended principal-only repaying of accountsdownload full paper ⤓
Promoting basic consumer education of borrowers
IRRESPONSIBLE LENDING PRACTICES and the MORTGAGE CRISIS Introduction - Responsible Lending Practices:
During the second half of the 20th century American consumers began to rely on the mechanism of purchasing on credit extended by banks and other lending institutions.
During the next fifty years credit purchases became the norm even for ordinary purchases rather than just for major purchases such as real estate and new motor vehicles. In general, the concept of buying on credit was intended to enable major purchase for consumers whose financial situation and income were strong enough to ensure timely repayment as per a schedule outlined in the credit agreement.
As the credit industry evolved, purchasing on credit became ubiquitous throughout American society, something that many have blamed, in part, for the comparatively irresponsible spending habits of Americans. Whereas consumers in other developed countries tend to reserve credit purchases for major purchases, Americans have developed a habit of using credit purchases as a continual means of living beyond one's financial means. In principle, purchasing on credit allows consumers to pay in small increments over time instead of laying out the entire purchase price for goods at the time of sale. In return for extending the credit and paying the seller in full on behalf of the consumer in advance, the lender charges the consumer a finance fee for that service.
Originally, the lending institutions who evaluated the relative risk (of nonpayment) associated with extending credit to individual consumers had a vested interest in doing so accurately because the consequences on nonpayment were primarily their financial risk to bear. From their perspective, the optimal situation was to extend credit and then receive extended payments that included a premium for financing fees but to limit the relative risk of default by refusing credit to unqualified applicants whose likelihood of eventually paying in full was too uncertain to rely on.
In the late part of the 20th century, a practice of predatory lending evolved, whereby credit issuers purposely targeted low-income consumers with relatively good statistical likelihood of continuing to pay over the long-term (based on other factors such as age and length of employment) but low probability of paying much more than the financing fees on particular loans (Markels 2007). In typical cases of this nature, low income consumers purchased every day goods such as household appliances and furniture and eventually paid so much in finance fees that the principal loan itself remained unsatisfied for many years. As a result, they ended up paying the lender many times the actual purchase price of the goods. Other forms of predatory lending include the purposeful solicitation of college students for high-interest credit cards despite their lack of current income sufficient to warrant credit extension.
Due diligence refers to the process of evaluating potential credit risks on the part of lenders and, at least initially, satisfying its requirements was in the direct interest of the lender. As the credit extension and lending industry became more complex, third-party lenders became more common and the consequences of failing to satisfy due diligence on the part of lenders no longer represented a risk to the original lender but to subsequent purchasers and traders of the lending instrument (Lowenstein 2007).
Evolution of Irresponsible Lending Practices: One of the major acquisitions that purchasing on credit was originally designed to facilitate was the purchase of a home through the mechanism of a mortgage. By borrowing a substantial portion of the value of the real property, borrowers could secure title to a home without paying for it all at once. In theory, banks and other lenders thoroughly evaluated the credit worthiness of prospective borrowers and entered into this type of arrangement only where due diligence disclosed a relatively low risk of default (Halbert & Ingulli 2000). Likewise, in theory, borrowers sought to purchase property that represented a reasonable long-term expense in relation to their income and their other financial obligations.
As the credit and loan industry continued to evolve, the inclusion of third-party lenders became more the norm than the exception. Third-party credit transactions involve the purchase of goods by consumers from a seller who arranges for the credit extension during the sales process. Typically, sellers, such as car dealers, have an established relationship with several lending institutions and once the consumer takes possession of the vehicle, the sale actually terminates the financial relationship between the consumer and the original seller. Instead, the seller receives payment in full from the lender and the lender collects payments on the principal loan amount as well as financing fees from the consumer until the loan is satisfied in full.
This process changes the relationship between the dealer and the purchaser in a very fundamental way. Previously, the risk of nonpayment was borne exclusively by the seller; this, by itself, was considerable reason for being selective in terms of evaluating the risks associated with selling on credit to particular purchasers. Once third-party lenders began taking over this risk, the seller no longer had as much incentive to avoid extending credit to unqualified or otherwise high-risk loan applicants.
Ordinarily, the loan instrument is a non-negotiable, or "non-liquid" commercial paper that merely represents the obligation of the consumer to the lender and documents the formal and legal elements of their agreement. In the late 1970s, an investment banker named Lewis Ranieri at Salomon Brothers realized that by combining the collective value represented by those non-liquid obligations, it was possible to transform individual loan documents into a tradable commodity (Lowenstein 2007). In that regard, real property mortgages were particularly valuable, because they involved the largest extension of credit, and therefore value, monetarily.
At least in theory and original design, mortgages required the greatest efforts in the realm of due diligence at the time of the original transaction, making them both high value and low risk in relation to other types of lending transactions. The fact that mortgage loans were now being extended by lending institutions who were no longer at risk of default in the long-term combined with the fact that the third-party lenders also planned to relinquish their role as creditors through the process of selling mortgage obligation to be repackaged as tradable commodities on Wall Street removed much of the incentive formerly recognized by lenders to ensure that they extended credit only to consumers with high credit worthiness.
As a result, the lending industry began rewarding raw numbers of sales by brokers. In a cultural environment where living beyond one's means and overvaluing material possessions as a measure of self-worth is more the norm than the exception, these factors combined in a "perfect storm" in the form of the American mortgage crisis that developed in the first decade of the 21st century.
The 21st Century American Mortgage Crisis:
In general, real estate values are linked to the other complexities of the national economy including the interest rate, the strength of the commodities market on Wall
Street, and the value of the American dollar worldwide. During the late 1990s, the American economy was particularly strong, resulting in a booming real estate market in many areas, and an increase in relative consumer purchasing power. During this time, many prospective homeowners sought to purchase homes that were likely to increase in value over time, particularly in those areas of increasing development (Markels 2007). In most cases, they mortgaged most of the value of those homes, even taking equity out through second mortgages.
The problem was that many of those homeowners were actually unqualified, according to traditional sound financial analyses, either for the high value of the properties involved or for the amount of the mortgage loan; in many cases, they were completely unqualified on both counts. By that time, both real estate brokers and the initial lenders focused more on the numbers of sales and on the commissions they generated, a natural incentive developed to ignore the actual risk of non-payment and eventual default by unqualified borrowers (Lowenstein 2007).
The problem was… READ MORE
Quoted Instructions for "Business Law- Corporate Responsibility Irresponsible Lending Practices" Assignment:
Laws are society's attempt to solve its problems. You could explore a topic through research, identify a problem (harassment, crime, scams on the internet, etc), discuss solutions, and evaluate the solutions to see if they are effective. Make suggestions of your own. I want to know what you think. Most topics will follow this format but you are not bound to it.
Paper should include an outline, seven to ten edited pages with parenthetical references or footnotes, and a list of sources at least one internet and one hard copy (a works cited page or a bibliography). Paper should be double spaced.
How to Reference "Business Law- Corporate Responsibility Irresponsible Lending Practices" Thesis in a Bibliography
“Business Law- Corporate Responsibility Irresponsible Lending Practices.” A1-TermPaper.com, 2008, https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876. Accessed 5 Oct 2024.
Business Law- Corporate Responsibility Irresponsible Lending Practices (2008). Retrieved from https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876
A1-TermPaper.com. (2008). Business Law- Corporate Responsibility Irresponsible Lending Practices. [online] Available at: https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876 [Accessed 5 Oct, 2024].
”Business Law- Corporate Responsibility Irresponsible Lending Practices” 2008. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876.
”Business Law- Corporate Responsibility Irresponsible Lending Practices” A1-TermPaper.com, Last modified 2024. https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876.
[1] ”Business Law- Corporate Responsibility Irresponsible Lending Practices”, A1-TermPaper.com, 2008. [Online]. Available: https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876. [Accessed: 5-Oct-2024].
1. Business Law- Corporate Responsibility Irresponsible Lending Practices [Internet]. A1-TermPaper.com. 2008 [cited 5 October 2024]. Available from: https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876
1. Business Law- Corporate Responsibility Irresponsible Lending Practices. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/business-law-corporate-responsibility/213876. Published 2008. Accessed October 5, 2024.
Related Thesis Papers:
Ethics and Morals - Business Research Proposal
Ethics & Morals - Business Ethics
Business ETHICS FAILURES and the CURRENT ECONOMIC CRISIS
Background, History, and Evolution of the Problem:
During the 20th century, the United States emerged as… read more
Research Proposal 10 pages (2860 words) Sources: 8 Style: MLA Topic: Economics / Finance / Banking
Sat, Oct 5, 2024
If you don't see the paper you need, we will write it for you!
Established in 1995
900,000 Orders Finished
100% Guaranteed Work
300 Words Per Page
Simple Ordering
100% Private & Secure
We can write a new, 100% unique paper!