July 29, 2005

Lending and Credit: “Universal Default” is Out of Control

As much as I keep up with goings-on in the credit industry, I did not know all of this, and I’m stunned–not that I didn’t know, but at the sheer audacity of the virtually unregulated lending industry.

From the indefatigable CardWeb.com’s CardTrak online publication (bold is mine):

A new study has found that some credit card issuers will jack-up your interest rate to 30% or more if they become aware you have opened a new card account or applied for a car loan or mortgage. The “universal default” business practice, unique to the USA, can send just about any consumer to the penalty box for very insignificant reasons. The annual study by San Francisco-based Consumer Action found that a declining credit score is the most common reason a cardholder’s rate is sent to the stratosphere. Paying a mortgage, car loan or other credit obligations late came in second. About one-third of the issuers who have “universal default” policies said that getting a new credit card could be considered a “default.” CA also found that the average penalty rate this year is 24.23%, up from the 2004 average of 21.91%. For more information visit: http://www.consumer-action.org.

TOP TEN REASONS WHY YOUR CREDIT CARD RATE WENT UP
1. Credit Score Declines
2. Paid Mortgage Late
3. Paid Car Loan Late
4. Exceeded Credit Limit
5. Bounced a Payment
6. Too Much Debt
7. Too Much Credit
8. Got a New Card
9. Applied for Car Loan
10.Applied for a Mortgage

Of course I’ve known about universal default, and blogged about its outrageousness several times during the runup to the what has become known as “BAPCPA” (The Bankruptcy Abuse Prevention and Consumer Protection Act, so-called “bankruptcy reform,” which BizzyBlog opposed) that became law in April and will take effect October 17.

I did NOT know about reasons 4, 8, 9, and 10. In my opinion, as standalone reasons to move to penalty rates, they are indefensible:

  • No. 4 (going over limit)–We all know that if you try to purchase anything that costs more than your available credit, the transaction won’t be authorized. The ONLY reasons you can go over your credit limit are if finance charges at statement time take you over the limit (and if that happens, it’s never by more than a couple of hundred dollars, usually much less), or if the issuer’s system allows you to go over the limit during the month in the hope that you won’t be alert enough to pay your balance down sufficiently before the next statement prints (this is rare, but MBNA, recently bought by Bank of America, is notorious for this). The over-limit trap is therefore nothing more than a sophisticated and cynical game of “gotcha” that in a sane regulatory environment would be illegal. Consumers who exceed their limit should not be moved into penalty rates, or even charged an over-limit fee, unless they fail to pay the balance down sufficiently by the next payment due date, PERIOD.
  • No. 8 (got a new card)–Even if you haven’t charged anything on it, let alone gotten to the point of having to pay interest? It would appear that this is the case. Getting too many new cards can eventually affect Reason No. 7 (too much credit), but using the fact that a consumer got one new card as the sole justificiation for assessing penalty rates, which is how it’s presented, is simply inexcusable.
  • No. 9 (applied for car loan)–If this factor, in and of itself, gives lenders the RIGHT to move to penalty rates, almost all of us are exposed, and are literally at lenders’ tender and (if a serious recession ever hits) non-existent mercies.
  • No. 10 (applied for a mortgage)–That’s rich. You could do the mortgage loan app, get approved based on current finances, move in, and find out your rates were jacked up SOLELY because you had the nerve to want to own a house. Or if the closing process dragged out too long, I suppose a lender who found out that a buyer has been moved into Penaltyland might be forced by underwriting standards to pull the plug for no objectively defensible reason.

One of my main objections to BAPCPA was that there was not even an attempt to rein in abusive lending practices and contractual garbage like universal default. What we heard from some of BAPCPA’s congressional supporters was “we’ll get around to that.” 3-1/2 months later, we can see that those promises were so much hogwash (to my knowledge, nothing with a chance of passage is pending), and no one with a brain would want to bet that they get anywhere on meaningful lending reform this year. Congress had their chance to reform lending when they “reformed” bankruptcy (y’know, quid pro quo?), and didn’t.

BAPCPA was a primarily Republican bill (but there were noteworthy and frankly shocking supporters on the Democrat side, which shows what political contributions “liberally” doled out by the financial services industry can do). Any negative repercussions from continued abusive lending practices, which I predict will become more outrageous thanks to the safety-net-fraying effects of misnamed “bankruptcy reform,” will come back to bite the GOP, which will deserve all the injuries that occur.
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UPDATE: Jeff at Credit/Debt Recovery caught me missing a word (Abuse) in the name of the bankruptcy law, and that means the abbreviation is really BAPCPA. All of that has been changed in the above. Thanks for the catches, Jeff.

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3 Comments

  1. Your article explains what happened to us this month. First MBNA raised our rate to 24.99%. Never missed or been late with a payment. I called and all I got was deaf ears. Next few days I received my AARP Visa bill which recently was acquired by Chase from First Bank some time back and the rate on that went to 23.99%. Guess I got a 1% discount since I am a AARP member. Fortunately I have the liquid assets to pay off and close these cards and tell them to kiss off. I will make sure in the future if I get a card to make sure there is NO Universal default clause. I am surprised that the AARP Visa followed suit. Called, same story, deaf ears. I think it is outrageous that these companies, MBNA and CHASE use these types of tactics. I have had my AARP visa for years, and have been a good customer, paid the whole balance off a few times etc.

    Comment by Peter Haase — May 13, 2006 @ 8:29 am

  2. #1, it is truly sad. It’s like having your rent raised by the landlord because you didn’t pay your electric bill on time.

    They sometimes give you a chance to close your old account and keep the old terms without having to pay your balance off in full, but that stuff gets mixed in with all the other garbage that comes with your statement and is easy to miss.

    Comment by TBlumer — May 13, 2006 @ 10:31 am

  3. Here’s a kicker. I called MBNA in January about my credit line. They aggressively tried to sell me an equity line of credit to transfer my balance to. I finally agreed to allow them to quote me on a refinance. “What could be the harm?” I thought. .Apparently this is the “mortgage application” that triggered my universal default rate increase to 20.74%. My credit is fine, no late payments anywhere. A call to MBNA netted nothing. Now in the process of sending a formal written complaint, based on never receiving any notice whatsoever.

    Comment by Mark Schlicher — July 8, 2006 @ 3:37 am

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