Banks that lended recklessly - what were the rules and what happens to the banks if

kerryhead

they broke them?

What were the rules in 2007 for the amounts of money that a bank could lend to a couple? Were these rules just internal rules or were they backed up by the Financial Regulator? What happens if the bank broke rules/laws?

A couple earn approx 90k(gross) but one of the couple already has a mortgage from Bank A for 150K.

There are also a couple of smaller loans as well, but nothing big.

Bank B lends a further (circa) €450K by way of second mortgage.

In the very brief circumstances outlined above would it be possible that said couple have any legal recourse against Bank B for reckless lending, did such laws/rules exist at the time?

unclebill98

In short no.

They wanted the money, bank wanted to give it. Bank had due diligence check list(by today's standard was far to low) and the couple meet the banks criteria.

Bottom line, greed on both parts and I'd find it hard to argue otherwise in court.

Questions that could make a great argument depending on answers are,

did the couple make the bank aware of 2nd mortgage and all loans?
What did the bank say if they did?
Did one partner secure a tracker on the first mortgage as a primary resident and that's now rented(this is a big issue for banks) out?

kerryhead

So, at the time (2007), there were absolutely no laws/guidelines set down by the Govt/Financial Regulator as to the amount a bank could lend?

chris85

kerryhead wrote: »

So, at the time (2007), there were absolutely no laws/guidelines set down by the Govt/Financial Regulator as to the amount a bank could lend?

The bank set their own lending terms. The regulator just looks over them and the regulator was crap back then which has been openly admitted by the central bank.

Basically the person/couple still are liable. They agreed on terms also and signed on the dotted line for it.

unclebill98

kerryhead wrote: »

So, at the time (2007), there were absolutely no laws/guidelines set down by the Govt/Financial Regulator as to the amount a bank could lend?

Pretty much.

Jim2007

The regulating authorities set the overall limits as to how much the banks can lend out and ensure that the banks stick to these limits, but they have no role in the banks decision as to who it actually lends the money to. That is up to the bank to decide, which it does via it's lending policies.

Thus the formula in the regulations might determine that based on it's capital and deposit position that a certain bank can lend out €100m. But it is the bank's credit policy that will be used to decide who gets the money.

Whether or not the bank was reckless in it's lending or not is a matter of opinion, it is just as easy to argue that people were reckless in their borrowing! We can all be wiser with the benefit of hindsight, but it is what people thought and knew at the time that has to be considered. The fact is that everyone - banker, estate agent, developer and buyer all seem to believe that the party would go on forever and acted accordingly: the key is that everyone worked on the assumption that the price would always go up, so:

• Bankers were comfortable lending out say 500K on a house, because after all it would be worth a million in no time
• Developers borrowed millions, because they expected to be able to sell the buildings for more in no time
• Estate Agents valued house with a view to their future appreciation
• And the buyer was not too worried about having to pay back the loan, because sure wouldn't the house soon be worth more and he could always sell it!

Of course in the cold light of day we can all ask "How could they have been so stupid?", but that is what always happens in a bubble!

And if you think that the building bubble was crazy, have a read about Tulip mania and how daft the Dutch went! The reality is that once a bubble forms, it is almost impossible to control it.

Jim.

StillWaters

It really is up to people to police themselves. There was cheap credit everywhere, the banks were throwing it around, some people took it, some were more prudent. Our Government at the time were *questionable*.Regulator was impotent. Let a reckless borrower sue their bank... they won't win.

Jim2007

StillWaters wrote: »

It really is up to people to police themselves. There was cheap credit everywhere, the banks were throwing it around, some people took it, some were more prudent. Our Government at the time were *questionable*.Regulator was impotent. Let a reckless borrower sue their bank... they won't win.

Agreed, the case will be judged on what as known then and not what we know now to be self evident!

Jim.

kerryhead

So basically there were no laws/rules.

The banks could be reckless yet there's no come back on them, just the customers?

Always found it strange that Bank B would refuse people a mortgage who applied directly to it yet approve it if they went through a broker.

Jim2007

kerryhead wrote: »

So basically there were no laws/rules.

The banks could be reckless yet there's no come back on them, just the customers?

Always found it strange that Bank B would refuse people a mortgage who applied directly to it yet approve it if they went through a broker.

Based on the conditions at the time how were the banks being reckless? If they were, then by the same token the borrowers were just as much to blame. Also remember that people who took out mortgages, had advice form their solicitor as well, so were they reckless as well?

Also, this idea that the banks were some how winners when they were taken over by the state is a lot of nonsense, but it does sell papers! First of all the investors, the people who actually owned the banks saw their investment reduced to zero and many ordinary bank employees have lost, or will loose their jobs as this thing is gets sorted out.

When the government took over the banks, they did not give a bundle of money to the "bankers" and send them off into the sun set. They took control of the banks and put money into them for future operations not the past.

At the end of the day, we may see a few people getting charged with wrong doing and there might even be a few winners in there too. But overall the downturn spells disaster for almost everyone.

Jim.

unclebill98

kerryhead wrote: »

So basically there were no laws/rules.

The banks could be reckless yet there's no come back on them, just the customers?

Always found it strange that Bank B would refuse people a mortgage who applied directly to it yet approve it if they went through a broker.

I'd agree with jim2007.

As for no come back, bank employees have suffered massively also. Nest egg of shares built up over years wiped put! It's a lose lose situation for a lot of people.

Greed....... Bottom line on everyone's part.......

Jim2007

unclebill98 wrote: »

As for no come back, bank employees have suffered massively also. Nest egg of shares built up over years wiped put! It's a lose lose situation for a lot of people

Here in Switzerland, I have a friend who works as a teller for one of the big banks, he's 54 years old and he has worked for the bank since he joint as an apprentice at 16. Now he is a very nice guy, but he is not a star, he has more or less done the same job for the last 38 years and in all that time he's been promoted once, after 5 years which is like a standard thing rather than on merit.

But in any case, he has been accumulating shares in the bank over the years and the plan was to take early retirement at 60 using the shares plus some other savings to cover the gap until he got the pension at 62. Back in 2007 his shares were worth about CHF170K, so the idea was possible, but that is all gone now, today his shares are worth about 10K. But that is not all, the value of his pension has fallen about 30% as well, so now he is going to have to work for as long as the bank will allow - until 65, if he is to have any chance of a decent pension. You could not live on the state pension here.

Jim.

PS - He does not own a house, he and his wife, rent an apartment, like most people at the income level.

unclebill98

Sad story.

Sure some staff where asked to do a rights issue, in other words we(bank employer) need more money and we will discount you shares, some invested 100k or more, only to loose half in little more than a month and then after a year up to 95% of the initial amount.

kerryhead

Jim2007 wrote: »

Based on the conditions at the time how were the banks being reckless?

But that's what I'm trying to find out - I'm trying to find out what were their conditions and rules, why did they refuse to lend directly to folk but agree the very same mortgage application if it came through a broker?

I'm trying to find out the rules they worked under but can't seem to find them.

unclebill98

Brokers lied..... Simple fact. The hid loans and told applicants how the get the mortgage. Client wanted loan, broker wanted commission and bank wanted business.

It was not rampant but did happen.

steve9859

unclebill98 wrote: »

Brokers lied..... Simple fact. The hid loans and told applicants how the get the mortgage. Client wanted loan, broker wanted commission and bank wanted business.

It was not rampant but did happen.

If you look at the American example, especially California which was the poster child for reckless lending, it is the brokers who found themselves in legal trouble (and a good few have been jailed for fraud). The banks that lent the money were not in breach of any legislation (except arguably in the case of some mortgage securitizations, but that isn't really relevant to this)

So OP, if you are looking at someone to go after here, it is the broker (if they can be shown to have lied). But as unclebill says, the fraud problem with brokers was not as prevalent here

Jim2007

kerryhead wrote: »

But that's what I'm trying to find out - I'm trying to find out what were their conditions and rules, why did they refuse to lend directly to folk but agree the very same mortgage application if it came through a broker?

I'm trying to find out the rules they worked under but can't seem to find them.

What you are trying to gain access to are the internal credit policies of the banks, they are private documents and there is no way they are going to give them out to you or anyone else for that matter! And of course the policies would be different from bank to bank, as would the interpretation of those policies from manager to manager.

When it comes to the brokers, it's a question of experience - after seeing countless applications going through to a particular bank and perhaps even to a certain branch, they would be able to make a reasonable guess as to what works and what does not, so for want of a better word, lets say the suggested to the clients how to fill out the forms to their best advantage.

Jim.

chris85

Jim2007 wrote: »

What you are trying to gain access to are the internal credit policies of the banks, they are private documents and there is no way they are going to give them out to you or anyone else for that matter! And of course the policies would be different from bank to bank, as would the interpretation of those policies from manager to manager.

When it comes to the brokers, it's a question of experience - after seeing countless applications going through to a particular bank and perhaps even to a certain branch, they would be able to make a reasonable guess as to what works and what does not, so for want of a better word, lets say the suggested to the clients how to fill out the forms to their best advantage.

Jim.

Its not up to the broker to decide what works and what does not. Full disclosure is legally required and if they do not do this they could be done for fraud if they knowingly withheld or advised clients to act in a fraudulent manner with their application.

Jim2007

chris85 wrote: »

Its not up to the broker to decide what works and what does not. Full disclosure is legally required and if they do not do this they could be done for fraud if they knowingly withheld or advised clients to act in a fraudulent manner with their application.

I fully agree!

Jim.

Jim2007

steve9859 wrote: »

If you look at the American example, especially California which was the poster child for reckless lending, it is the brokers who found themselves in legal trouble (and a good few have been jailed for fraud). The banks that lent the money were not in breach of any legislation (except arguably in the case of some mortgage securitizations, but that isn't really relevant to this)

Actually it is not the same thing - in the US the brokers had the power to decide on the application as the banks had delegated the authority to them, where as here the banks retained the deciding power.

Jim.

steve9859

Jim2007 wrote: »

steve9859 wrote: »

If you look at the American example, especially California which was the poster child for reckless lending, it is the brokers who found themselves in legal trouble (and a good few have been jailed for fraud). The banks that lent the money were not in breach of any legislation (except arguably in the case of some mortgage securitizations, but that isn't really relevant to this)

Actually it is not the same thing - in the US the brokers had the power to decide on the application as the banks had delegated the authority to them, where as here the banks retained the deciding power.

Jim.

But if the broker flat out lies, it doesn't matter if the bank has retained the power to decide on the application or not. The end result is the same, and the buck stops with the broker

Jim2007

steve9859 wrote: »

But if the broker flat out lies, it doesn't matter if the bank has retained the power to decide on the application or not. The end result is the same, and the buck stops with the broker

It all depends on who signed the application form and I'm betting it was not the broker....

Jim.

chris85

Jim2007 wrote: »

It all depends on who signed the application form and I'm betting it was not the broker....

Jim.

Thats not all it depends on. It is for the contract with the bank and customer. No changing that. Money borrowed and has to be repaid

However the client may have recourse against broker as they are regulated by Central Bank of Ireland. If they have acted fraudulently they have a liability. They are financial advisors and as such they have a duty to advise their clients in the correct manner.