There is no "Know Your Lender Act Of 2011" but the great and ongoing discussion at Dr. Cleveland's suggests to me that we badly need one, especially in the current environment of securitization and trading not just of mortgages but of all consumer debt including student loans, car loans and credit cards balances.

One of the reasons that credit functions as a form of financing is that the borrower and creditor share some interests.  The borrower wants to repay in full and on time to preserve access to future credit and to free up current assets.  The lender wants to be repaid.  The lender charges interests which some describe as the "cost of the loan" but that I look at as compensation for the job of lending.  Getting the principal plus all the promised interests generates the maximum return for the primary lender.  When things go badly for borrowers, lenders can fall on hard times.  Sometimes it's in the lender's interest to negotiate.  Better 90s cents on time than 50 cents or nothing later.  Better to give up half the interest and make some money than risk losing it all.  So long as these deals can be made, credit can function even in bad times.  Optimally, a lender gets everything promised.  Practically, they sometimes take a little less.

The next step is for a lender to say, "Shoot, I loaned this guy $100 but I think he's only going to pay back $50."  Another guy shows up and says, "I bet that guy will actually pay you $60."  So our lender complains, "I'd still be out $40!"  So the third guy says, "Look, I'll save you the hassle.  I'll give you $60 now.  You eat the loss immediately and I'll get what I can out of the borrower."  Our third guy makes money for every penny he collects over $60 while the lender would lose for any penny he misses under $100.  I know this is simple stuff but bear with me.

If the borrower knew about this transaction and had $80, the borrower could contact the third party and make an offer to settle the debt for $80.  Our original lender might be ticked but the actual owner of the loan, our third party, should be very happy with this substantial return.  Our borrower should be happy to have paid what he could to have the issue settled in full and his reputation restored (maybe not with the first guy but with the system).

What I propose is that any borrower should have the right to: 1) know the current owner of their debt and 2) know the price paid for that debt and 3) the right to deal directly with the owner of that debt (not, of course, the right to have their offers accepted but at least the right to have their offers heard, responded to and recorded).

You know who enjoy all of these rights that you don't have?  Did you guess corporations?  It's corporations.  Corporations know who owns their debt or can find out quickly.  Corporations negotiate with their debt holders all the time (I don't have any money, how about some stock?) and corporations keep careful records of what they've offered and how their lenders have responded because bankruptcy judges would like to see that some efforts were made before everyone wound up in Chapter 11 causing the bailiffs to miss a World Cup match that afternoon.  Bankruptcy judges might well frown on borrowers who made lowball offers that no creditor would accept but they also frown on debt holders who refuse reasonable offers that might have kept business humming.

The foreclosure scandal we've been writing about highlights the lack of transparency in these debt markets when individuals are involved.  The secondary market for debt securities is not like the stock market.  Transactions don't happen on an exchange, they're private and then reported to databases that bond traders and brokerages use so they can price their own securities.  That is clearly no longer sufficient.  If you borrow money you should have the right to know who you're borrowing from and the market price of your loan, both of which can change.