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I figured it might be helpful to describe the structure of the loan origination process used in my previous post. Understanding 1990s era subprime loan origination offers a baseline for comparison with subprime offerings over the last few years.
This example was typical of actual lending at The Associates (TA) during the mid to late 90s. TA, the largest publicly traded finance company in the U.S, was acquired by Ford in the late 80s and then spun off again in the mid-90s and was then acquired by Citi in 2000. http://www.citigroup.com/citi/corporate/history/associates.htm
Account executives, commissioned employees of TA, solicited deals from independent mortgage brokers. The brokers found borrowers (the end consumer) through a number of channels including bulk mail, cold calls, advertising, etc. The broker worked with the borrower to structure a deal – this involved gathering the necessary information to meet the requirements of a particular loan type (financials, debt, etc). The deal was then shopped around to different lenders (TA account executives routinely visited the brokers to keep them up to date on products and rates. The account executives could also do pre-approvals in the broker’s office). If TA was selected; the deal was then submitted to TA for underwriting. The underwriters were located in a small number of centralized, regional offices.
Brokers are independent operators and they get paid a commission when a deal closes and therefore have a financial interest in the deal closing. Account Executives, as TA employees received both a salary and commission based on deal volume and meeting sales goals, as such they also had a financial interest in deals closing. The underwriters were salaried TA employees who did not get compensation based on deal volume. There was a running battle between sales and underwriting – sales pushed for deals to be approved while underwriting pushed back as they were the gatekeepers and charged with maintaining deal quality. Senior management had to balance the often competing objectives of meeting sales goals while maintaining quality standards.
These TA loans were considered subprime and non-conforming as the borrowers had credit problems, excessive debt and other credit-worthiness issues. Most of these deals did not meet the GSE (Fannie/Freddie) underwriting requirements. Once the deals closed they were held by TA and serviced in-house. (As far as I know, and this is by no means certain, these deals were not being packaged and sold as mortgage backed securities.)
Also, it is my understanding, that underwriting was taken seriously. The underwriters were professional, they were aware of fraudulent activity and they actively sniffed-out questionable material. Deals that did not meet underwriting standards were turned down. I don’t know about the soundness of the TA risk models but the interest rates on these subprime loans were several percentage points higher than prime loans – meaning the risk of the loan was expressed through higher interest rates. (I mention this as underwriting standards and interest rate spreads play a significant role in the future meltdown – I will get into this later.)
I learned most of this from a family member working in operations for TA. From my vantage point, TA was a legitimate company providing a needed service to credit-challenged people in a fraud ridden environment. My understanding of predatory lending and all of the associated ills and issues developed much later. (I will get into more fraud issues later.)
The following links provide a rather different portrayal of TA:
From Tearing Down the Walls by Monica Langley:
After Citi acquired TA – they suspended 3,600 independent brokers of subprime mortgage loans – about 60 percent of the Associates’ contractors-for having inadequate licenses, using questionable tactics, or failing to sign a code of conduct…
Google Books p. 367-369 http://tinyurl.com/5r7wlh
Shareholder Resolution Follows Associates First Capital to Citigroup
Citigroup Settles FTC Charges Against the Associates
Record-Setting $215 Million for Subprime Lending Victims
FTC subprime lending cases since 1998
Last 5 posts by Rick Pollack
- Open Fabrication - Part III - November 12th, 2009
- Open Source Digital Fabrication - Part II - August 11th, 2009
- The Desktop Manufacturing Revolution (Fast Company) - July 15th, 2009
- Would you like to be able to do this? - July 14th, 2009
- Open Source Digital Fabrication - July 9th, 2009