USURY: Exemptions and Privileges May Be Erased for Bundled Loans


I frankly never thought the topic would ever be taken seriously. But here we are.

Many loans have extra privileges and rights that accrue to the lender. Usurious rates may be charged as long as its a bank. Student loans may not be discharged in bankruptcy. And investment banks generate pornographic amounts of profit by “trading” in contracts that are loosely referred to as residential mortgage backed securities, including “derivatives” that derive their value from the original “Securities” which are exempt from securities regulation because they are supposedly private contracts.

My point raised in connection with student loans, is that the guarantee for student loans is to reduce or eliminate risk to the lender. Except for the fact that student loans went too far, this was a noble effort to make it affordable for every student who wanted to better themselves. They could get a loan from anyone without the lender having any risk of loss. And because of the presence of a federal guarantee of the loans, the students were barred from discharging those loans in bankruptcy.

BUT what if the lender never had any risk of loss? This is accomplished through bundling of loans into what is loosely called securitization of debt. What if the lender is selling the guarantee and making huge profits without any risk of loss? What if the buyers of that guarantee also have their risk covered because it is further guaranteed by a third party?

Since the guarantee was never intended to be a salable commodity it can and should, in my opinion, be argued that the lender waived the guaranteed rights, and therefore could not sell it, and already protected itself against the risk of loss. That being the case the student loan would be dischargeable in bankruptcy even if the guarantee was issued — unless the subsequent sale was invalidated. In truth the guarantee was never used as anything other than a commodity and not a reason for making the loan, which would have been done anyway — mainly because the enormous profits arising out of secondary transactions or “securitization.”

So that is my theory.

My other theory was that most of the loans over the past 20 years were violations of usury laws. Statutes protect certain lending banks from state usury laws. But once again if you bundle up the loans and originate loans for the bundles and bundlers you are not really offering a loan from a bank that is exempt from usury laws. You are offering a loan from an entity that does not remotely resemble a commercial bank and that does not have any deposit money at isk. That is what the current case is about.

I would only add that nearly all loans in the mortgage meltdown were usurious. First many of them with teaser rates were known to have a very limited shelf life — anywhere from 6 months to five years. Adding the points and closing costs as a cost of the loan to the interest rate that was applied and amortising them over the true and foreseeable life of the loan brings most such loans above the usury threshold.

Second most of them were not originated by banks that qualified for exemption from usury so there is that. And third, nearly all the loans were originated, as above, for the express purpose of bundling them for securitization, which means the intended lender was not a bank. So if the total cost of the loan is amortized over 5 years, and the annual cost is over the state limit for usury you have a violation that could actually result in forfeiture of the entire loan in some states.

Most states have stringent penalties for usurious loans both because they are oppressive and because they are considered immoral. This is one more point that qualifies as a potential achilles heel for the investment banks who were not banks that qualified for any exception to usury laws. Think about it.


2 Responses

  1. Very good point Neil. I will add that student loans, like “mortgages” are sold to debt buyers when there is default. The process is the same for both – sold to contract derivative swap holders. These are contracts that swap collection rights out of the trusts – not securities. Thus, no trustee anymore. I know situations where the student was in default for a long time, and then wanted to pay in full, but they could not find WHO to pay in full.

    The difference between student loans and the “crisis” mortgage loans, is that the securitization for student loans was valid to begin with. Not so with those mortgage loans. The mortgages were internally reported as in default before any borrower defaulted. Thus, this securitization was never valid.

  2. Sounds a lot like the “Credit River” case to me…..

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