Whether you are a high risk or a low risk borrower, it is not desirable that you pay high cost of the loan you want to take on and then fall into the debt trap. It is for this reason that the government has formulated the debt laws and continuously makes amendments in it to provide the best support and protection to the creditors but more specifically to the consumers.
As for the creditors, they need to make sure that the risk, high or low, incurred while granting a loan is adequately covered and compensated should a customer default at any point of time. This they can do in three specific ways such as:
- Raising the rate of interest on the loan
- Raising the size of the down payment t be made by the customers while taking out a loan and
- By adjusting any other terms of the loan contract.
Apart from the laws that govern the debt process, the creditors also must focus on the collection aspect at present to deal with a situation in the future when a customer defaults or falls behind their payment. For this they must know and abide by the regulatory restrictions on debt collections as well. These restrictions however have a few specific features such as:
- These take the form of mandatory rules and these cannot be altered by the parties in the contract.
- Even if the borrower agrees to permit an access to a specific remedy for example an exchange for a lower rate of interest, they would be prohibited from performing such acts.
- There are stricter regulatory limits on the creditors’ remedies associated with the reduction in access to any unsecured debt and
- These limits however typically do not have any effect on the secured debts obtained by a borrower from any given and registered source.
In short, these restrictions offer a consistent and desired control over the creditors as well as any other debt relief service providers such as Nationaldebtreliefprograms.com and its likes. It is well complaint with the theory that access to creditor remedies is more important for the unsecured debts rather than for any secured debt.
The substitution effect
However, in spite of all these regulations laid down by the federal Trade Commission, there is no direct test for a substitution effect that will show the relation of these regulations with the unsecured debts as well as the secured debt. The primary reason for this lacuna is that when the changes in auto loans and mortgages are examined, neither of these two seemed to have any close substitutes for a credit card debt when it is compared with other products such as a Home Equity Line Of Credit or HELOC, which ideally appears to be the closest substitute.
This means that it is not clear from the facts and findings of different tests as all of the results are inconsistent and cannot predict the effect a loan product will have due to an increased substitution to a secured debt over time.
Considering the sensitive consumers
Therefore, as a result, the debt laws have to consider the consumers who are more sensitive to intensive debt collection practices. There are several good reasons for such consideration and a few of these reasons are:
- These sensitive customers are more likely to be compelled to subsidize their choices and preferences
- It is required to consider the extent of their willingness to pay for these restrictions
- To make sure that the restrictions takes care of the higher subjective willingness to default that is reflected by the status of the consumer.
These regulatory restrictions therefore limit the capability of the comparatively low risk borrowers as well. These regulatory restrictions help to signal their creditworthiness and thereby create a steady and more promising pooling equilibrium.
This equilibrium is however maintained throughout among the higher risk borrowers and those who are comparatively lower risk borrowers. As a result, the low risk borrowers subsidize the high risk borrowers.
Moreover, as a consequence the limitation provided by these regulatory restrictions on the ability of the low risk borrowers can drive them out of the pertinent market. There are two specific reasons for it such as:
- These regulatory restrictions will signal their comparative creditworthy status and
- It will reflect the feasibility of these low risk borrowers of being rewarded with a lower cost of borrowing.
In short, they will substitute to other products such as a secured debt because the distorting effects of the regulatory restrictions will not be as costly as before.
Ensure responsible lending
Therefore, these regulatory restrictions are very useful aspects of the debt law that will ensure responsible lending. The law will oversee that the lending policies, concept and context are followed because “Responsible lending” as such is a policy term. The features and aspects of it are:
- This is used to signify a whole wide range of regulatory tools or measures that are in effect
- It also signifies the desired goal that the regulators and the legislators want to achieve
- It helps in focusing primarily on the inducing the responsible behavior of the market participants
- It looks at the bigger context of fiscal sector management
- It helps the policy makers in this segment to balance the varied policy objectives of the financial sector that includes financial inclusion
- It helps in maintaining stability in the financial sector
- It ensures integrity of the debt relief and other financial services providers and
- It ensures financial consumer protection.
With response to the recent financial crisis the government wants to and has done a good job in contributing to the stability of the money market with these restrictions in place. It has ensured that the behavior of the lenders and all the intermediaries and more responsible to provide a high level of consumer protection.
The more concrete regulatory tools offer a consistent approach by all participants in the financial market including both lenders and the borrowers. However, the laws have specifically removed the over-indebtedness of borrowers, thanks to the different regulatory mechanisms.