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Thursday, June 26, 2008

People being people? Say it ain't so, Joe

Fraud is likely one of the more unappreciated aspects of the sub-prime mortgage meltdown. Both sides of the market are to be blamed, but perhaps more blame should be placed on those who initially lied about their ability to repay loans than on those who failed to detect the lies? Anyway, it seems that in a world of easy money fraudsters are prevalent - in other words, people being people.

From a story in the U.S. News and World report:
A ring of five Seattle-area women has been charged with taking out more than $690,000 in fraudulent private student loans, raising concerns by some federal officials that the kinds of abuses that have hammered the subprime mortgage sector may also be lurking in the student lender field.

I have always said, "where there's a buck, there's a will; and where there's a will, there's a way." In this case, if easy money obtained through fraud risks little chance of being caught, convicted, and punished, then fraud will be a problem. It is a tough dilemma for loan originators. If they delve too far into an individual's finances and ability to repay, they may find that the potential borrower is too great of a risk and will not offer the loan, or the lender will charge a higher interest rate to cover the increased risk of default. This, in turn, makes the loan more expensive than it would otherwise be and thus the lender faces the risk of being accused of favoritism or discrimination.

Perhaps this is a contributing reason why the private market for college loans has signficantly shrunk.

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