Has the American consumers’ attitude toward credit and their view of personal responsibility for debt fundamentally changed? At least for a significant percentage of customers it has. However, many analysts would say the same failure to step up to financial obligations is true for the banking industry itself, particularly related to recent activities tied to Freddie and Fannie. The industry has to be careful not to contribute further to the already high level of industry distrust that exists within the customer base.
Debtors used to expect to pay.
About 15 years ago, Martin Mayer in The Bankers: The Next Generation wrote about the credit quality of the American consumer and their reliability as debtors, even during the Depression. He wrote: “The American consumer has been an excellent credit risk: in the worst years of the Great Depression, Household Finance never saw credit losses greater than its interest income, and as the economy recovered, people came through the door to pay their old debts.” Mayer quotes a Citibank executive of that era expressing confidence in the creditworthiness of the average consumer, stating: “The clerk is a better risk than the boss, and the boss is a better risk than the company he works for.”
Consider how far we have traveled since the Great Depression. Last week The Washington Post reported that “a top Senate Democrat [Richard Durbin] took aim at the private student-loan industry Tuesday, calling for new rules that would allow educational debts to be wiped away during bankruptcy.” The article goes on to state that student loan debt is about $870 billion with a quarter of borrowers with past-due balances. In some cases these loans involve for-profit schools. Durbin commented: “It is clear too many students have been steered into loans that they will not be able to repay and that they will never be able to escape.”
Today, many debtors expect forgiveness.
Durbin would allow only private school loan debt, not federal debt, to be discharged in bankruptcy, a slap at banks and other lenders. The National Consumer Law Center goes even further and proposes allowing all student loans to be discharged, saying “The government can come after people forever – until they die.” Some who were less sympathetic might comment that, alternatively, these people could pay off their loan like most people do.
Student loans provide just the most recent instance of consumers, aided by politicians and special interest groups, rejecting the legal and ethical bond that should exist between a borrower and lender. Of course the mortgage situation is even more shocking with either feckless or stupid borrowers taking in more debt than was reasonable. Were some homeowners, and for that matter students, deceived by salespeople who were hyping the value of their home or the value of their schooling? Absolutely. And, in a minority of cases, criminal intent probably did exist. However, in even more cases an unwise or profligate borrower decided to make take money out of his house and run away (sometimes literally) without fully considering the consequences. The bank did not force a customer to refinance.
Banks expect forgiveness too.
Monday’s Financial Times raises the issue of whether some banks share with customers the desire to have the government take them off the hook for debt obligations. Apparently, “big US banks” are pushing Fannie Mae and Freddie Mac to forgive some principal on mortgages they own or guaranty. Says the acting director overseeing these agencies, “Doing principal forgiveness is what would protect the big banks.” This would amount “to a transfer of taxpayer wealth to the lenders, whose second mortgages are subordinate” to that debt. In other words, this involves another taxpayer bailout.
We grew up thinking that a loan was a contract. If you entered into it, you paid. Today, paying is just an option for many in our victim society. Visiting the Occupy Wall Street event in downtown New York several months ago, I was struck by the number of young people who had signs with slogans stating that since the banks were bailed out, students should be bailed out too. Unfortunately from a student’s perspective and given the actions as described in the FT, that is not an unreasonable argument.
The industry has to reestablish trust.
As reported in The Financial Brand, the Edelman PR firm recently conducted a survey that showed “Less than half of the public trust banks to do what is right, making financial services the world’s least-trusted industry.” Another survey found that “banks were trusted by less than 8% of those surveyed in the U.S. and the U.K.” These are horrible numbers for the industry. Given the bankers I know and work with, this negative PR image is also inappropriate.
Banking cannot survive being “the world’s least trusted industry”, and most banks do not deserve to be painted with this black brush. The 7,000+ regional and community banks should be working together to demonstrate they are customer focused rather than positioning themselves for the next bailout.