More Lenders Are ‘Garnishing Wages’ To Get Paid Back

[badtoworse]

68. You're overlooking a few points

First and foremost, the borrower took out the loan and agreed to pay it back under the terms of the agreement. That last part is important for two reasons: First, the agreement defines the consequences if the borrower defaults on the loan. By agreeing to those terms, the borrower agrees to pay the stated fees and penalties in the event they default. Secondly, under the agreement, the lender would reserve the right to assign the loan to a third party under whatever terms are agreed to by the lender and the third party. As a result, the borrower's obligation to repay is intrinsic to the loan itself and does not depend on who is holding the loan. In addition, the lender does not need your approval to assign and the terms under which the loan is assigned are none of your business. That's the deal. If you don't like it, then negotiate a different deal (good luck with that) or don't borrow the money. If you do agree to those terms, don't whine about how unfair it is if things go sour for you. Borrowing money is a big deal. If you don't understand the terms of the loan, you shouldn't agree to it and you are pretty stupid if you do so.

Let's consider who gets hurt in a default situation. Regardless of who is holding the loan, whoever eats the loss in a default situation is going to write off that loss on their taxes. If you default on a $100 loan and the holder of the loan writes it off, that is $35 in federal income tax they don't pay, so we all take a hit on that. If a Credit Default Swap is triggered, the swap counterparty pays off the loan to the bank and gets the defaulted loan in return. The bank is kept whole, but because it no longer holds the loan, it can't be paid back twice. The swap counterparty still eats a $65 loss which it makes up with the swap premiums. Who pays the swap premiums? Initially banks do, but ultimately, borrowers do in the form of higher of higher loan or credit card fees.

Let's say the holder of the loan sells it to a collection agency for $0.03 on the dollar. That $0.03 value is based on the cost of pursuing collection as well as the likelihood of collecting anything. In this situation, the bank or swap counterparty would write off a little less and the collection agency would pay tax if they make any money on the loans. That $0.97 loss in the value of the loan was triggered by the borrowers failure to honor the contract. There is no basis to argue that the borrower's obligation to pay off the loan should be reduced to $0.03 nor would there be any fairness if that were to happen.

I don't see any racket here. Banks and credit card companies are in business and that means they are going to protect their own interests and structure loans in a way that does that. If the penalties for default are too severe, then the fix is set reasonable legal limits; not let the borrowers off the hook because the lenders are protected. No one forced the borrower to take out the and in the end, we're the ones who get burned by the ones who default.