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October 29, 2008

Up next: Credit card crisis

 

Because who could have foreseen that extending massive amounts of credit to unqualified borrowers at exorbitant interest would be unsustainable?

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said. [NYT]

Redlining is illegal for mortgage lenders, but apparently it's okay for credit card companies to discriminate against people based on where they live, what industry they work in, or what company issued their mortgage:

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action. [NYT]

It's rightly considered discriminatory to refuse to offer a mortgage to someone based on what neighborhood they live in. Banks used to write off entire neighborhoods based on race.

Black and Hispanic neighborhoods nationwide have been disproportionately affected by the housing crisis. If credit card companies can lower the credit scores of people because they live in these neighborhoods, that's redlining by another name. It's even more insidious because the lenders can do it after the consumers have already borrowed.

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Comments

in what most like to believe is the finest hood in tampa (the lykes live there so whatever and all) they received letters that their equity based lines of credit were CUT and lowered drastically. These folks have a one credit ratings and it hurt them badly too. I think some of them forget that they're not actually living on money they're making but on money they borrowed.
I receive so many letters offering me HUGE lines of credit based on my home equity that I started saving them. All scungy enterprises. I have a drawerful from all over the county but mostly North Carolina. They hope to trick you out of your home in this fashion.
A person might be the ONLY one who is extended credit by these ephemeral thugs.
This was a goal not an accident as you pointed out.

Black and Hispanic neighborhoods nationwide have been disproportionately affected by the housing crisis. If credit card companies can lower the credit scores of people because they live in these neighborhoods, that's redlining by another name. It's even more insidious because the lenders can do it after the consumers have already borrowed.

Lindsay, it may be more insidious, but that doesn't mean in should be illegal. Do people have a legal right to have a credit card? Is having your credit limit likely to have the same impact on people as not being able to get a mortgage? If a credit card company thinks it can be more profitable by applying some algorithm that includes data about a customers address, occupation and shopping habits, are you arguing that it should be illegal?

On the one hand you mock credit card companies for "extending massive amounts of credit to unqualified borrowers" but apparently want the government to tell them what standards they can use to determine who more qualified borrowers might be.

If redlining is illegal in one area of lending, I don't see why it should be legal in other types of lending.

Credit score discrimination is insidious because it it's opaque and retroactive. As the NYT article suggests, the companies are adding new terms and conditions after the money has already been borrowed.

Say you got a credit card based on your payment history and income. How would you feel if the credit card company secretly decided after the fact that you should be paying more because you live in a majority-black neighborhood--even if you're making just as much and paying on time?

I wouldn't mind these models if the companies were required to be 100% transparent about what factors affect creditworthiness. A couple months ago, I posted about credit card companies secretly downgrading creditworthiness ratings for people who charged marriage counseling sessions and tire retreads. If the company had been completely upfront about all the factors that might affect credit and people still wanted to do business with them, okay. But this secret readjustment bullshit is wrong.

If redlining is illegal in one area of lending, I don't see why it should be legal in other types of lending.

Maybe because getting a mortgage and getting a credit card are different in non-trivial ways.

If the company had been completely upfront about all the factors that might affect credit and people still wanted to do business with them, okay. But this secret readjustment bullshit is wrong.

What if companies are completely upfront and say "factors that might affect your credit are determined by a proprietary process that we don't want to make public." If you are asking me for credit, do you think your request gives you the legal right to know what factors I decide to take into account in deciding to extend the credit it to you?

If a credit card company discovered a system that more accurately predicted who would default on credit card payments, that would be a competitive advantage they probably wouldn't want to share publicly. Do you think Google should be forced to reveal what factors they use in determining page rank on searches. (There have been arguments that they should be forced to do so.)

Lindsay:
Excellent post. Your readers might also want to keep an eye on the third-party debt buying industry. Most Americans don't even know these vultures exist. But they are becoming more and more abusive. Here's how it works: An original creditor, say American Express, cannot collect on a debt so it takes a generous writeoff allowed by law. AMEX then is likely to sell the debt, along with thousands of others, to third-party debt buyers. These folks buy the debt for pennies on the dollar and then try to get the debtor to pay the full amount. NCO, CACH LLC, and Portfolio Recovery Associates are three of the best known bottom feeding debt buyers. They are supposed to follow the Federal Debt Collections Practices Act (FDCPA), but they tend to not let the law get in the way of their greed. Abuse among third-party debt buyers is likely to increase as original creditors also struggle to recover on bad debts.

Its about transparency and fairness. This banker has it right. Check out the piece at Paybefore.com or on the bank's website at:

http://www.metacash.com/Main.aspx?MenuName=Home.Press_Room.6_16_2008

been waiting for this shoe to fall.

Krugman's last op-ed about the response the congress ought to have to the collapse of consumer spending does not please my fiscally conservative take on our gotta-have-it consumerism...but 22%/year and worse is not a way to resuscitate an economy, its just a way to screw the consumers who have no other way to buy necessities. I don't think any of Krugman's stimulus ideas include usury.

Credit card crisis?, well we don't really feel it. It's the credit card companies which are experiencing them because of the massive amount of CC owners hiding from them and not paying the bills regularly or even not paying the bill at all.

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