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More Evidence Banks May Be Starting Another Race to the Bottom

Cindy Johnson
June 7, 2011

Less than a month ago, your Foolish servant reported on easing lending standards at banks. Now the American Bankers Association says some banks are making loans to people who recently defaulted on a mortgage. Yikes!

Almost 40% of these borrowers got an auto loan or a personal line of credit. The majority got credit cards. Repossessing an auto is costly but doable. Personal lines of credit and credit cards are tougher to recover assets against. Still, some banks seem to think that if a borrower didn't default on anything but a mortgage they're a reasonable credit risk.

If a borrower didn't default on anything but a mortgage in the last few years there is an argument to be made that they're a reasonable credit risk. Many borrowers lost their jobs and depleted their savings during the worst recession in decades. There is reason to believe many mortgage borrowers were misled by mortgage brokers and/or banks and didn't understand their mortgages. Other borrowers, seeking a mortgage modification, were allegedly advised by their banks to miss at least one payment. 

On the bright side
Wells Fargo
(NYSE: WFC  ) says it won't extend credit to such a borrower unless it believes he or she is willing and able to repay. (Gee, that's what banks were supposed to do all along ... before abandoning prudent lending practices and leading us into the greatest financial crisis in almost a century.) The bank says it also considers the depth of