What determines whether you can get a loan? Bankers traditionally have taken into account the five C's of lending: capacity, collateral, capital, conditions and character. When dealing with a community-based bank, the last is especially important.
Perhaps you're going through a hard time (as all of us occasionally do), one of those crises that creates the need for a loan. Maybe the business your family has run for 50 years has short-term cash problems. Maybe you need a car loan so you have reliable transportation to that great job you've finally landed after three months without work.
Even if your official credit score may not look so good, a local lending institution that knows you well might still provide a loan.
The trouble is that true character isn't easily measured on a 300-850 scale or on any of the rubrics the financial institutions use. Loan decisions (even character loans) have to be made strictly by the numbers - with, in individual cases, rather absurd results.
My oldest son has a well-paid, secure job. He and his wife are frugal people. They always pay their bills on time. No credit card debt or any other kind of debt. If they want something, whether it's a new refrigerator or a car, they save their money and pay cash.
But for one major purchase, they did want a loan. As housing prices fell, it was obvious to them that buying a home was going to be a much better deal than renting. They went through the process of prequalifying for a home loan - and were told they didn't qualify. No previous borrowing meant no credit history, no credit rating - and no loan.
Now they did try to deal with local banks, and the character factor should have weighed heavily in their favor. But banks these days typically want to be able to sell their mortgages, and, to be able to do that, their mortgages have to be made exactly in accord with the recipes the big institutions impose on all the smaller lenders that want to do business with them.
The growing dominance of the big lenders might be bringing an end to the kind of character loans depicted in the Christmas Movie It's a Wonderful Life. But, as the big institutions grow ever bigger, there's an even more worrisome character issue. Our largest financial institutions have become so big that they have become too big to fail. The collapse of any one of them might send the whole economy into a tailspin, so the government seems to have no choice but to prop them up.
But the prospect of a government bailout increases what economists call moral hazard, the increase in risky behavior inherent whenever decision-makers can transfer the potential costs to others.
The most important way of reigning in the irresponsible behavior of our financial high-rollers is to quit shielding them from the consequences of their decisions. And, as Alan Greenspan said, If they're too big to fail, they're too big.
Northern banking professor Stan Vinson contributed to this column. Art Marmorstein, Aberdeen, is a professor of history at NSU. He can be reached at firstname.lastname@example.org. The views are his and do not represent Northern State University.