What happens to your loans when bank go bankrupt?

[MrB398]

http://www.boston.com/business/personalfinance/articles/2008/04/17/credit_crisis_hits_student_borrowers/

I came across this article today and it got me thinking... what happens to your loans if the bank that owns the loan goes bankrupt?

According to the article, it would appear they just 'dissapear'.

However I'm guessing my student loans that I've already used and are paying back would not just 'dissapear'.

[doghater]

However I'm guessing my student loans that I've already used and are paying back would not just 'dissapear'.

Those only go away if you go bankrupt. And maybe not even then.

[geonuc]

The bank's creditors have an interest in the outstanding loans.

[NEOWatcher]

The bank's creditors have an interest in the outstanding loans.
Kinda...
And more Kinda...
The loan has value, and can be sold to another party. The sale of that loan then becomes an asset that gets divided among the creditors.

So the loan doesn't go away. It just gets sold.

[geonuc]

Kinda...
Not kinda - definitely. Creditors have an interest in all assets of the bankrupt entity.

[NEOWatcher]

Not kinda - definitely. Creditors have an interest in all assets of the bankrupt entity.
But; I don't see how that explains where the loan goes. I'm speaking directly of the loan papers changing hands. Who actually takes over the loan?

[geonuc]

Whoever buys the paper. Same as with the sale of other assets.

[NEOWatcher]

Whoever buys the paper. Same as with the sale of other assets.
How does that differ than what I said? The creditors get the proceeds from the sale. Just like the creditors get the proceeds of that desk that they sold at auction instead of getting the desk.

[geonuc]

How does that differ than what I said? The creditors get the proceeds from the sale. Just like the creditors get the proceeds of that desk that they sold at auction instead of getting the desk.
It differs not whit from what you posted, at least the second part ("And more Kinda ...").

If you re-read above, I was responding to your characterization of my initial post with the "Kinda" remark.

[Gillianren]

Those only go away if you go bankrupt. And maybe not even then.

The great universal truth of life is that student loans never go away. Declaring bankruptcy, according to what I've read, does not help you with your student loans. Consolidating loans does not apply to student loans.

[Fazor]

Yeah, banks don't generally just "dissapear" (I've never heard of that happening anyway). Someone will buy out their outstanding loans, or they will default to whoever gets the banks assets.

Wherever they end up, one thing's certian; someone will still want your money.

[Fazor]

The great universal truth of life is that student loans never go away. Declaring bankruptcy, according to what I've read, does not help you with your student loans. Consolidating loans does not apply to student loans.

Correct. But with the new bankruptcy laws, few of your outstanding debts actually just "go away". I'm not real clear on how the new law works, but I believe you basically just get set up on an interest-free payment plan for all your outstanding debts*, but that they're still there.

*ETA: Which, if I'm not mistaken, student loans are still exempt from. Fincancial institutions basically say, "You wanted to be more educated, so [ @%*! ] you!"

[NEOWatcher]

If you re-read above, I was responding to your characterization of my initial post with the "Kinda" remark.
Fair enough; It wasn't a comment of your explaination, but how it fit with the OP... or from the point of veiw of the signature of the loan.

[aurora]

I've had our mortgage get sold several times, from one bank to a different bank. We just have to send in our mortgage payment to a different place each month, and at the end of the year we get two statements (one from each bank) for our tax statement.

This sort of sale is quite common, and the bank definitely does not ask the borrower's opinion.

It's exactly the same thing if a bank went bankrupt, as others have already said. I just thought I would point out that a loan sale is quite common.

[Fazor]

It's exactly the same thing if a bank went bankrupt, as others have already said. I just thought I would point out that a loan sale is quite common.

Oh, definately. When we insure a house, loan companies require proof of insurance before they'll close on the house. So we start the policy and get them the proof faxed right away for them to close. You'd be suprised how many call the day after closing to change the mortgage clause because they've already sold the mortgage.

In my opinion, that is underhanded business practice. I'm signing my loan with x bank because I want to do business with x bank, when they loan me the money with the sole purpose of immediately selling the loan, I think that is misrepresentation. But, it's perfectly legal and happens all the time.

Of course, since when has big business had to be fair business?

[jfribrg]

IIRC, about 20 years ago there was a movie about a 20th century robin hood type of character, who instead of robbing banks, simply blew up the filing cabinets that contained all of the loan documentation. If the big evil bank doesn't know who it lent money to, then the poor struggling farmers and other innocent debtors would not have to pay. As I recall, it didn't get the best picture nomination.

[sarongsong]

The great universal truth of life is that student loans never go away...Never say never...March 5, 2008
...Starting in July, a federal program will be available to forgive student loan debt after 10 years of making payments if you work in the public sector and after 25 years if you work in the private sector.
"They've recently come up with a program if you have education credentials or public servant then your loans can be forgiven," says Alex McMahan of Troy University Financial Aid...to see if you qualify for the new federal program to forgive some portion of your loans you can visit www.finaid.org.
WTVY (http://www.wtvynews4.com/news/headlines/16306986.html)...To entice nurses to come to these areas and work, these government agencies are offering to pay back or forgive student loan debt. Details vary, but generally one year of student loan debt is forgiven or paid back for each year the nurse agrees to serve in the area...
nursingjobshelp (http://www.nursingjobshelp.com/paying_for_nursing_school.htm)

[doghater]

In my opinion, that is underhanded business practice. I'm signing my loan with x bank because I want to do business with x bank, when they loan me the money with the sole purpose of immediately selling the loan, I think that is misrepresentation. But, it's perfectly legal and happens all the time.

At least in the cases I've dealt with, the loan papers have been quite up front about the possibility that the loan could be sold. I suppose I could demand that they not do so, and the lender would then either be willing to agree to the loan or not, or perhaps agree to it on different terms.

Of course, since when has big business had to be fair business?

I guess I'm not clear in what way you feel you have been victimized here. How are you worse off because the loan has been transferred?

[Fazor]

At least in the cases I've dealt with, the loan papers have been quite up front about the possibility that the loan could be sold. I suppose I could demand that they not do so, and the lender would then either be willing to agree to the loan or not, or perhaps agree to it on different terms.

If by quite upfront, you mean it's buryed in the terms and conditions of the loans, on page 10 subsection 3 e) ii. :-P
The part I disagree with is that I, for one, take customer service and ease of service (i.e., local bank > some bank with no in-state branches) into consideration when chosing to do business with someone. The "possibility" of loan sale is much different than "as soon as the ink dries, we're giving this to someone else". I have yet to see a loan agreement that says "As soon as you sign this loan, we're selling it to company Y"... but if the loan is sold within hours of it's closing, then obviously they knew ahead of time they were not going to keep the loan. It's a difference between "possibility" or "we can sell" and "we are going to sell".

[doghater]

If by quite upfront, you mean it's buryed in the terms and conditions of the loans, on page 10 subsection 3 e) ii. :-P
The part I disagree with is that I, for one, take customer service and ease of service (i.e., local bank > some bank with no in-state branches) into consideration when chosing to do business with someone. The "possibility" of loan sale is much different than "as soon as the ink dries, we're giving this to someone else". I have yet to see a loan agreement that says "As soon as you sign this loan, we're selling it to company Y"... but if the loan is sold within hours of it's closing, then obviously they knew ahead of time they were not going to keep the loan. It's a difference between "possibility" or "we can sell" and "we are going to sell".

I don't know what anyone else's experience has been, but I recall having signed papers that state I understand the loan may be sold to another party.

The customer service aspect pretty much means nothing to me - I mail a check (or make a payment electronically) - who gets it, I don't care. If it's important to you, then I think you can certainly demand that it not be sold, and a particular lender will be willing to accommodate you, or not. But in any event, I don't see anything inherently unethical about this, anymore than I see it as unethical for a grocery store to sell me food that they don't grow themselves, but bought from someone else.

[Jens]

The great universal truth of life is that student loans never go away. Declaring bankruptcy, according to what I've read, does not help you with your student loans. Consolidating loans does not apply to student loans.

Actually, I can think of one way to make them go away. Wouldn't recommend it, though. :)

[doghater]

Actually, I can think of one way to make them go away. Wouldn't recommend it, though. :)

So you are thinking of something other than "pay them"?

[Gillianren]

To be fair, I've been getting bills for $0 for my student loans. Since I'm disabled, I don't have to make the payments. But the loan itself is still sitting there, being owed.

[doghater]

To be fair, I've been getting bills for $0 for my student loans.

Do you write a check for $0 and mail it in?

[Jens]

So you are thinking of something other than "pay them"?

No, I was thinking of "die". :)

[Chuck]

If the bank can sell my loan then it's only fair that I be able to sell my debt. In that case, I would pay someone else a flat fee to owe the money for me and then report to the bank that someone else now owes them the payments.

[Vanamonde]

I had a mortgage sold to a different lender - there was no notice, no indication that I heard my original lender had problems, just a notice in the mail telling of my new lender and the new address for the payments.

As far selling your debt, I believe that is usually known as refinancing. It is certainly to your advantage if, for example, your adjustable rate mortgage with hitting the sky and someone else will give you an attractive fixed rate instead.

[Vanamonde]

Do you write a check for $0 and mail it in?

Me, I would go ahead and make for $1 - just to be safe. It will should get the attention of a human being. I dunno, but it seems a check for $0.00 could be a problem and hey, given the value of a dollar, it would be very cheap insurance.

Oooo, this is my eleventy-first post! Any wizards about with a cart of fireworks?

[Jens]

I think it would be different from refinancing. Refinancing I think means taking out a new loan to pay back an old loan. So the lender changes. What Chuck was mentioning was having the lendee change. In other words, I would pay a new lendee to take on my loan.

It's an interesting issue, but in the real world I don't see why it would ever happen. After all, if you have enough money to pay Bill to take on the loan for you, then you might as well just pay back the money to the bank. Another thing to think about is that taking a loan implies an obligation from the debtor to the creditor, not the other way around. The creditor doesn't actually have an obligation to accept the money back at all. But the debtor does have a responsibility to repay it. So it's not an equal relationship in the first place.

[doghater]

No, I was thinking of "die". :)

I understand now :) Best to avoid that if possible :)

Me, I would go ahead and make for $1 - just to be safe. It will should get the attention of a human being. I dunno, but it seems a check for $0.00 could be a problem and hey, given the value of a dollar, it would be very cheap insurance.

I would like to write a $0 check sometime, and see if it shows up on my bank statement :) I have thought of this many times, but have never actually done it.

Oooo, this is my eleventy-first post! Any wizards about with a cart of fireworks?

You're not about to disappear, are you?

If the bank can sell my loan then it's only fair that I be able to sell my debt. In that case, I would pay someone else a flat fee to owe the money for me and then report to the bank that someone else now owes them the payments.

I guess I would take the attitude that if you don't think an agreement is fair, don't enter into it. But, with loans like mortgages, normally the borrower can pay them back at any time, without penalty. Do you think the lender should be able to call the loan in at any time also, out of fairness?

[geonuc]

I think it would be different from refinancing. Refinancing I think means taking out a new loan to pay back an old loan.

I believe that's the only way for a debtor to initiate a change in lender.

So it's not an equal relationship in the first place.
It's equal - the lender had a contractual obligation to give you the money in the first place.

[NEOWatcher]

I believe that's the only way for a debtor to initiate a change in lender.
I read the original comment by Chuck to mean a change in debtor. Which actually is possible. Assumable mortgage.

[Chuck]

The lender should be able to call in a loan at any time only if I agreed to it in advance and I should be able to pay it off early only if they agreed to it in advance. If they can take unilateral action such as selling my mortgage to someone else then I should have similar rights to pay someone to take on my debt.

What if I used to work for the company that buys my mortgage and they had fired me for my bad behavior and got a restraining order prohibiting me from contacting them or any of their employees in any way? I wouldn't be able to legally send them payments so they could then foreclose on my house.

[doghater]

The lender should be able to call in a loan at any time only if I agreed to it in advance and I should be able to pay it off early only if they agreed to it in advance. If they can take unilateral action such as selling my mortgage to someone else then I should have similar rights to pay someone to take on my debt.

So then, are we to understand that if the loan contract permits them to sell the loan, you have no problem with that? A lot of them do have such provisions.

Most such agreements also describe what rights the other party has if one party violates the conditions; they don't just leave it up to the unilateral judgment of the aggrieved party to decide what's right.

What if I used to work for the company that buys my mortgage and they had fired me for my bad behavior and got a restraining order prohibiting me from contacting them or any of their employees in any way? I wouldn't be able to legally send them payments so they could then foreclose on my house.

Well, I guess you'd better not enter into any loan agreement that permits resale of the loan if that's what got you worried. . .

[Spock Jenkins]

The vast majority of loan contracts have fine print all over them detailing just about every possible scenario that people are bringing up. Part of the problem is, most people don't read the contract they are signing so they are surprised when the Bank exercizes a provision indicated in the contract. The other part of the problem is that many Bankers are so focused on the sales aspect of their job that they don't bother learning about the products they are selling.

I really don't care who I have to make my payment to as long as they honor the original interest rate as well as other terms (no pre-payment penalty, etc.) and release the lien once paid in full. The rest is just details.

[Chuck]

But can my loan be resold if the agreement says nothing about it? Contracts could become excessively long if they must specify everything that can't be done.

[Spock Jenkins]

But can my loan be resold if the agreement says nothing about it? Contracts could become excessively long if they must specify everything that can't be done.

I would guess that it says something somewhere. Unless it's something that has to be spelled out that it can't be sold (if that makes sense). Assets can be sold. A loan is an asset to a Bank. People find it much more difficult to sell liabilities. Not much demand for those.

[Chuck]

I would expect to have to pay someone to take on my liability. From his point of view, it would be like I'm lending him money that he must pay back to someone else. I doubt that my creditor would approve of this unless my agreement with him specifies that I can do it.

[doghater]

I really don't care who I have to make my payment to as long as they honor the original interest rate as well as other terms (no pre-payment penalty, etc.) and release the lien once paid in full. The rest is just details.

I really don't care who gets the payment either. If other people do, that's their choice, and I certainly support their right to be able to enter into a loan that prohibits transfer of the processing. Why anyone cares, I don't know, but they probably wouldn't understand some of the things that are important to me either.

I would strenuously object, however, to any wholesale ban on the practice. If someone wants regulation saying, for example, that processing of a mortgage loan cannot be transferred unless the parties agree in advance that the lender has the right, I guess I don't have a problem with that. Then such regulation is simply specifying the default, which can be overridden by agreement of the parties.

But can my loan be resold if the agreement says nothing about it? Contracts could become excessively long if they must specify everything that can't be done.

I don't know the legal principles involved, although specifying the manner in which payments are to be made is a pretty central feature of a loan agreement. Every loan agreement will say that the lender will provide X, and the borrower in exchange will make payments of Y at a certain frequency. Who pays whom is specified - if the lender makes no explicit claim of the right to assign payments to a third party, I think that would mean no such right, but I'm just guessing - can any lawyers confirm or correct me?

There is also the possibility of transfer of the cash flows from the mortgage, without transfer of the processing - that is, the original lender accepts and processes the payments, but those payments are transferred to a third party. I don't see how the borrower would even know that this is happening, or care if it did.

[doghater]

People find it much more difficult to sell liabilities. Not much demand for those.

I don't think the problem is demand, but supply - no creditor lends anyone money with a blanket right to transfer the obligation. "Buying" a liability (which would have a negative price) is simply taking out a loan, and there's plenty of demand for that.

[geonuc]

I read the original comment by Chuck to mean a change in debtor. Which actually is possible. Assumable mortgage.
True. I misread his post. Thanks for catching that.

[Spock Jenkins]

I don't think the problem is demand, but supply - no creditor lends anyone money with a blanket right to transfer the obligation. "Buying" a liability (which would have a negative price) is simply taking out a loan, and there's plenty of demand for that.

I'm speaking of transferring an existing liability, not new loans. Lenders typically won't let borrowers transfer a loan to another borrower because the lender isn't in a position to evaluate the person that the obligation is being transferred to as a source of repayment. The lender might issue a new loan to a different borrower and use the proceeds to repay the existing obligation, but they won't typically transfer an existing obligation to a new borrower.

I think the scenario Chuck and others are referring to is as follows:

Bank makes a loan to Joe Goodcredit who has a stable job, 750 credit score, and a long history with the Bank as a customer. For a fee Joe gives the money to Jim Badcredit who is unemployed, has a 550 credit score, and can't even open a checking account on his own. Joe tells Bank that they need to talk to Jim if they want to be repaid because he sold the loan to Jim and now Joe claims to be off the hook.

I think when it's laid out like that it becomes pretty clear why the party receiving payment can be transferred while the party making payment can't.

[jfribrg]

The lender should be able to call in a loan at any time only if I agreed to it in advance and I should be able to pay it off early only if they agreed to it in advance. If they can take unilateral action such as selling my mortgage to someone else then I should have similar rights to pay someone to take on my debt.

This all depends on the terms of the loan and any applicable statutory law. This appeal to fairness doesn't really work. The bank is not willing to lend to just anybody. They loaned you the money because in some way you appear to be credit worthy. The person you sell the loan to may or may not meet the bank's credit standards. On the other hand, whoever owns the receivable has a right to be paid. Yes they probably checked your payment history (maybe even your credit score) before they bought the loan, and the amount they paid for the loan was based in part on your propensity to make timely payments.

In every contract, there must be consideration given and received. In other words, something of value must be given to each party, and something of value must be received in return. It doesn't have to be a "fair" trade, which is why you sometimes see buildings sold for a dollar to a charity or some such. If it wasn't for the dollar, it would not be a legal contract. In the standard loan contract, the creditor gives money, and in return gets a timely repayment with interest. The terms of the contract may also state that the creditor is giving the debtor the privelege of borrowing in return for the debtor agreeing to never sell the loan. These terms may or may not be overridden by the Uniform commercial code and /or the statutes of the state in which the contract is in force ( If this is in a different country, the the statutory environment may be different, but in all likelihood, the result would be the same: you can't just sell a loan to someone else and be free of the debt. If you sell the loan and the person you sold it to defaults, the bank would surely come after you for the money.

[SeanF]

The bank is not willing to lend to just anybody. They loaned you the money because in some way you appear to be credit worthy.
I think Fazor's concern (he's the one who originally objected to the selling of loans in this thread) was that he is not willing to borrow money from just anybody, and if he chose to borrow from a particular bank he wants the loan to stay with that bank.

It's kind of like ordering a computer from Dell and being delivered an identically configured machine from Gateway. The hardware is essentially fungible (not exactly, I know, but...), but you're possibly going to have to deal with customer service down the road, and if you prefer Dell's over Gateway's, you don't want the switch.

[Musashi]

I guess the other option then, for a loan company going bankrupt, is to call in the loan? Sell the property? The loan either has to go somewhere else or cease to exist, right?

[Trebuchet]

I'm a little surprised that no one has pointed out that selling the loan is not necessarily the same as selling the loan processing. I think most loans are sold right away to organizations such as Fannie Mae or Freddie Mac, but the originating lender keeps the processing.

About twenty years ago the bank which originated our loan (and had sold it immediately to Fannie Mae) sold the processing to some outfit in Florida, which was then known for unethical mortgage processing companies. In the six months or so before we managed to pay off the mortgage altogether, this place had three different addresses and never once managed to get the bill to us prior to the Past-Due date. I wrote notes with the payment each time and to my surprise they never did stick us with a late fee.

We took all our money out of the originating bank and told them why.

[SpaceShot]

The problem is that lots of people want loans, and most don't think or care that the bank they are doing buisness with is going to sell their loan. So boilerplate language ends up in the contract saying they can sell your loan.

My federally mandated disclosure documents told me that my bank can sell my loan and the percentage of loans they sell historically.

But since everyone else just signs and doesn't insist the language is removed, I have a problem. I can't insist on the language being removed... at least, not without risking the bank folding its arms and saying "nah, go borrow from someone else, then."

There is a lack of leverage. I can take my business elsewhere, but everyone other lender is going to do the same thing. I can just refuse to buy a house, but that seems extreme.

(Disclaimer: I didn't actually try to insist, and I don't know if banks are quick to remove this language or stubborn about it.)

[doghater]

I'm a little surprised that no one has pointed out that selling the loan is not necessarily the same as selling the loan processing.

I am not no one! :)

[Trebuchet]

I am not no one! :)

I'm sure you are not. With that nickname, you could be a cat! Cats are always Someone, just ask one. Now I'll have to look through the whole thread again!

[doghater]

I'm sure you are not. With that nickname, you could be a cat! Cats are always Someone, just ask one.

There was a nasty incident involving my girlfriend's dog the day I signed up.

Now I'll have to look through the whole thread again!

End of reply #39. No big deal :)

[mugaliens]

Dsclaimer: I didn't actually try to insist, and I don't know if banks are quick to remove this language or stubborn about it.

Nearly all banks have the same clauses, so shopping around won't accomplish much. Yes, they have the right to sell your loan, and most do (that whay they make money up front and limit their liability in case you default)!

The new owner is, by federal law, subject to the same terms of the original contract. Usually, companies that buy up existing loans are much better at hunting down those who default and putting the muscle on them to pay up. More the mafia type... :shifty:

[doghater]

Nearly all banks have the same clauses, so shopping around won't accomplish much. Yes, they have the right to sell your loan, and most do (that whay they make money up front and limit their liability in case you default)!

These things are (or at least ought to be - maybe recent events in the united states argue that they weren't) incorporated into the price they get when they sell the loan.

A major driver for this practice is risk management. The savings and loans in the united states were largely wiped out when interest rates rose around 1980. Their deposits were short term, and they had to pay high interest rates to keep them, but their loans were long term, and their values plummeted as interest rates rose. Many banks have the same problem - their customers want to make short term deposits, but take out long term fixed rate loans. The practice of selling the loans allows them to protect themselves against destruction in the event of higher interest rates. Of course, that risk doesn't disappear, it gets transferred to someone else.

If you are quite insistent that you don't want your loan transferred, I'm not sure how successful you're going to by finding a lender who will accommodate.

[Spock Jenkins]

Let's not forget either that a lot of people couldn't get loans if the banks didn't have the right to sell them. They would be far more selective about who they lend money to if they weren't able to bundle and transfer the risk. Given the recent subprime mortgage issue facing the nation, a bit more scrutiny wouldn't be a bad thing. At the same time, I don't think anyone is clamoring for a return to the days of requiring 20% down minimum, a strong credit history, proof of stable employment, providing tax returns with a mortgage application, leaving a urine sample, drawing blood, and pledging your first born. There is a happy middle ground that involves allowing lenders to transfer risk. That being said, the mortgage and real estate industry as a whole could use far more oversight from third party regulators. Many states have no licensing or education requirements to become a mortgage lender, whereas other financial industries require licensing and continuing education for their representatives.

[doghater]

At the same time, I don't think anyone is clamoring for a return to the days of requiring 20% down minimum, a strong credit history, proof of stable employment, providing tax returns with a mortgage application, leaving a urine sample, drawing blood, and pledging your first born.

Some people are, but give it to them and they'll immediately clamor for it to be taken away again :(

[SpaceShot]

I know there is no way I can expect my bank to keep my loan. The disclousre showed very clearly that they don't keep that many. It is their right. As with most things, the bad apples all over the place who took out loans that they couldn't afford to make these clauses mandatory, and I have to suffer. I like the servicing I get now and I may get unlucky and get bad servicing in the future.

Right now I can pay online, change payment frequency online, and the cash is applied to principal almost immediately, which is actually, albeit very slowly, reducing the long term amount of interest I will pay. I like that, but I think if I understand things correctly the rug could be pulled out from under me tomorrow when the bank sells the loan.

I guess as with most of my points I am disappointed that the rotten behavior of everyone else means I can't make quality deals. Banks have to be skeptical. I don't blame them. Heck they put their microscope way up on me being a first time homebuyer and buying this winter. Yet, they still felt I was a good risk... and I am. They'll get their money early every month. But in return I like how I get it applied fast to principal. It's a win for me, but probably a "meh" for the bank.

Yes this is in the US.

[Trebuchet]

When we got our current loan, the loan officer made it pretty clear that it WOULD be sold, but that their policy was to keep the processing. He also made it clear that the policy was subject to change without notice. So far, so good.