Wednesday, August 20, 2008

Predatory lending - home equity loans to 401(k) debit cards

A sampling of some financial ads from a recent Times article:

'There’s got to be at least $25,000 hidden in your house. We can help you find it.' - Citibank
'Is your mortgage squeezing your wallet? Squeeze back.' - Bank of America
'The smartest place to borrow? Your place.' - Fleet Bank
'Make Dreams Happen: Need Cash? Use Your Home'. - Banco Popular
'You’ve put a lot of work into your home. Isn’t it time for your home to return the favor?' - Citigroup
The past few years have seen American banks pull off one of the biggest frauds in our history. They managed to spin unsavory terms like 'borrowing money' and ‘getting deeper into debt' into such tasty morsels like 'home equity loans', 'equity access', adjustable rates , 'piggybacking first and second mortgages' and 'Equity Source Accounts'. Along the way, accumulating bad debts that one may not be able to pay off was spun off as indulging in a smart move that involved cashing into the equity supposedly 'inherent' in their homes.

In this process, the returns to these banks that had managed to hoodwink gullible public on fixed-rate home equity loans and lines of credit were 25 percent to 50 percent higher than returns on consumer loans over all...

At the same time, the borrower (owing to the fact that s(he) was never in a position to sustain the repayment of these loans) now faced the prospect of falling behind on home payments, defaulting on their mortgages, foreclosing their homes and ultimately finding themselves with blue skies over their heads...

An Ameriquest ad sometime back said “Don’t Judge Too Quickly, We Won’t” and told customers who had essentially bad credit records that their credit records were euphemistically 'less than perfect' and they could tap into money hiding in still unpaid homes. When Ameriquest (now bankrupt) pulled that, they were perpetuating a scam on homeowners who typically did not think through some of the arcane financial details (running into fast easy cash typically stunts the neurons of paupers as well as professors).

Now, prudent thinking might say that this scheme of bilking and hoodwinking might have come to an end with the collapse of the housing market. Not to worry, the bankers have found a new avenue out to make sure that their money spigots are flowing.

Think 401(k). That last resort nest egg stored away by people to count on a normal life after retirement. Well, the enterprising bankers have come out with a new money suction device - the 401(k) debit card, a new form of plastic that lets plan participants borrow directly from their 401(k) with every swipe they make at the store, supermarket or that car dealership.

From a sample advert for a company that hawks 401(k) debit cards:
ReservePlus delivers the most convenient 401(k) loan solution available today. In addition to providing a solution that encourages plan participation, increased contributions and decreased borrowing, this unique, loan servicing product improves efficiencies for record keepers, plan sponsors and plan participants through superior, patented automation
Next time you see a Bank ad, think twice and then run the other way...

3 comments:

Tree said...

Yikes. I thought you had to pay a hefty tax nearly every time you withdrew from your 401k?

JUST COOL DESIGN said...

thats just not right

off to watch my favorite show - americas next top model

Sunil said...

Tree,
Yes, you are right, but to the 'swipe now, pay later' mode a lot of us are in, it is OK, I guess...