I think this is pretty common in loan agreements but I would guess it's rare to have this actually exercised because usually the change in circumstances is going to be something that's going to make repayment harder (no one is cancelling the loan because you notified them that you now make way more money). Trying to collect the full loan from someone with less money is going to be tough and if they then put them on a payment plan then they didn't achieve anything.
Plus it isn't great for customer relations and poor people are great clients for a bank who knows they can hit them for more and more fees.
Changing the terms of the contract without explicit approval from both sides is beyond sketchy. At minimum, it's an unapproved amendment and therefore doesn't apply. At worst, it's a new contact that at least one side didn't agree to and therefore doesn't apply. It looks like people agreed without understanding the details.
In this case, I'd wager by lowering the payments, less loans were "risky" and therefore their assets look better. That probably was for the benefit of repackaging those "assets" and/or better guarantees from the Fed.
The priorities are different, though. The bank wants to maximize the amount of money that gets paid to them, you want to maximize the amount of money that gets paid to you. While the bank doesn't want you to go under, they also aren't necessarily thinking in your best interest either; getting your loan paid off and never needing another one is almost as bad a result for them as if you went under. This doesn't mean they're bad people, just that the incentives, while not fundamentally incompatible, are also not fully aligned.
DanBC may be suggesting that people can't _completely_ repay the loan, but instead need to keep refinancing it forever. Effectively they would just be paying interest and fees, the total amount of which would dwarf the initial capital, which would never be repaid.
I don't think legal lenders typically do this. It's not nice, and it's not likely to generate positive word of mouth.
Thanks. Sounds like the law was structured this way to avoid exactly this scenario, that people would purposefully avoid paying off what they could, pay only the interest (or the minimum amount acceptable to the loan company) and then stick the government with the remainder.
I'll be honest, this is a shitty situation for this guy, and maybe he was misled, but this does seem to fall under the "if it's too good to be true" category. The idea of trying to game this situation by paying the minimum possible should have set off alarms bells with everyone involved, like, every month. I'm surprised it took so long for the issue to surface.
Student loans, personal loans other than credit cards, business loans, preferred stock, corporate, municipal and government bonds (from the issuer's perspective) all change price/rate in response to missed or late payments on other obligations. (In the latter case, often dramatically so.)
Why shouldn't a lender be a able to offer a contract that allows them to increase their fees when the borrower shows themselves to be a less than ideal credit risk at some point in the future? The borrower signed the terms; if they didn't like them, they could have not signed them, or they can pay off and close the account now. Those are the two (non-bankruptcy) avenues for them to get out of the contract that they now don't like having signed.
I get that generally changing the terms of a loan after everything is signed is sketchy. But in this case it looks like they were trying to do the customers a service:
>The changes, which surprised the customers, typically lowered their monthly loan payments, which would seem to benefit borrowers, particularly those in bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would extend the terms of borrowers’ loans by decades, meaning they would have monthly payments for far longer and would ultimately owe the bank much more.
I guess the devil is in the details, but if they just lowered the minimum payment what's the harm to the consumer? AFAIK the vast majority of loans in the US are simply calculated. If you make your payments as expected on time you wouldn't be effected. If you aren't able to do that, then of course you're not paying off the principle as quickly and the term would be extended. Just like making extra payments will shorten the term.
To be clear: changing the rate? Adding fees? Sure, that's really bad; rake them over the coals. But if it's just changing the minimum payment amount I'm missing the problem.
The most specific allegation is that they extended the maturity of the loan, which as a consequence lowered the minimum payment. Under normal circumstances, and with clear communication to the borrower, this is a change that can only be better for the borrower; they can continue to pay on the old schedule, or pay less on the new schedule over more time without going into default. However, many of the borrowers were in bankruptcy at the time of the change. During this process they were not in control of their own assets; the bankruptcy trustee was paying their bills for them. If the bankruptcy trustee paid the new lower minimum payment, it would result in the borrower paying more in interest than they otherwise might have.
I've never seen loans of that size, but in my understanding a lot of debt is structured so that if a payment is missed the lender can call the entire amount.
My sister took a 20k loan for which she paid the minimum monthy the equivalent of 40k. Now the loan is at 100k and whatever she paid never covered the principal at all. How this is not predatory is beyond me
Because the borrower is out of options, and will have to resort to engaging in an interest based transaction, whereby he is exploited by the lender. It's not really voluntary at that point. Do you think anyone in their right mind wants to be on the paying side of an interest based loan?
I guess it does sort of force a minimum on repayment. Those sorts of things tend to create much resentment. I'd be curious to see if this would be a better solution than the one we currently use.
Easier to sell, borrower is, to the best of their knowledge, complete and not taking on any new loans.
Plus, as mentioned above, it sets the interest rate for all the loans. I'm not sure how often at a more or less favorable rate, and if that's part of the incentive, to consolidate lower interest loans into a large higher interest one. I could definitely see them pushing this at different times, which was also something that came up in the article, that available repayment options were withheld when they were favorable to the banks and servicers.
I got a chuckle out of that... I'd be very interested in hearing if this was ever done in the history of consumer loans (from a reputable financial institution). Don't get me wrong, I've got a 4% mortgage so would totally go for some of that "reduced loan payoff" stuff, but it's not realistic.
Wow, I didn't even think of that. I can totally believe that they're playing with people's ability to make ends meet so they can pay less on their loan's interest.
A bank would be likely unwilling to engage in such a practice, because by doing so they would gain a reputation for being "soft". In particular, anyone who borrows from the bank knows that they can "default" on the loan and pay much less than they originally borrowed.
Your sympathy for people who owe money is misplaced. We already have tax and welfare that transfers money from the rich to the poor. Conditional on a given income, owing money to a bank is a poor measure of your true wealth. Furthermore, it sets up perverse incentives compared to the current taxation system. That is it encourages people to consume now and go into debt, since they know that debt will be (partially) forgiven.
EDIT: The last sentence is wrong: once this proposed measure is introduced, interest rates will adjust. People who choose to (cheaply) default we be subsidized at the expense of people who do not. However, the poster imagined that people who owe money would benefit, and so my point still applies to the impact they imagined this measure would have.
Plus it isn't great for customer relations and poor people are great clients for a bank who knows they can hit them for more and more fees.
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