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Over the last few years, the term “responsible lending” has become a hot button issue across the country. During the financial crisis, poor lending decisions, including subprime loans, were considered the main culprit in the collapse of the financial system. Now, companies all over the country have embraced responsible lending practices. But what does that really mean?
Fair and Responsible Lending
The first thing you should know about responsible lending is that it tries to be fair to all borrowers. Most lenders call themselves fair, which usually sticks to generic lending practices like prohibiting discrimination, or not using fraudulent lending practices.
However, to truly be responsible, lenders need to take it to the next level. This means making sure that customers truly understand their loan – including interest rate, pricing, payment schedules, terms, and all other features of the loan. This also means choosing a lending product that makes sense based on their unique situation, not just a generic loan.
Also, fair and responsible lenders typically avoid exotic loan products, such as adjustable rate loans with unique payment options, or interest-only loans with balloon payments. It also means that lenders will do diligent research on the borrowers, including credit checks and income verification. No more “no doc” loans for responsible lenders.
Informed Borrower Choices
A big part of being fair is making sure that lenders give borrowers informed choices. This means presenting all the options available to them, and what the different characteristics of each cash loan really mean. It also means disclosing how the lender gets paid, so that there is no hint that the borrower is being steered to a certain financial product based on commission instead of what is truly best for their financial situation.
Being informed also means teaching customers the terminology and language associated with the lending and escrow process, and what it means for the borrower. It also means telling the borrower what to expect after the loan closes, including how to pay off the loan.
Ensuring Help is Available
Finally, responsible lenders usually have help available to their borrowers should they face payment challenges or other hardships. Responsible lenders will make these options available to their borrowers without making them jump through hoops, and will genuinely try to help them through whatever hardship they face.
Responsible lenders understand that it is in both their best interest, and the borrowers, to work together to make it work. Both sides can lose a lot of money if they can’t agree to make it work, and responsible lenders will be innovative in developing a wide variety of support programs for their borrowers.