01 Dec Credit Card Debt Crisis Predicted by Industry Insider
Joe Nocera, the “Talking Business” columnist for the New York Times, recently wrote a very enlightening article about fundamental and structural problems in the business models used by most credit card lenders. In his November 25, 2008 column, The Worst is Yet to Come: Anonymous Banker Weighs In On the Coming Credit Card Debacle, Mr. Nocera quotes from an email he received from an unnamed corporate executive in the banking industry. The unnamed banker talks about the “buy now, pay later” mentality that is common in the credit card lending industry.
As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.
The banker’s observations mirror my experiences as a bankruptcy lawyer. I can’t begin to estimate the number of bankruptcy clients I have spoken to who have credit card balances well in excess of their annual incomes. Today, for example, I spoke to a mid-level executive who is carrying credit card debt that is approximately three times his annual income.
Clearly anyone who assumes this level of debt is not blameless and I think that the current bankruptcy system gives lenders a great deal of leverage to challenge the discharge of debts that are incurred with no reasonable expectation of repayment.
However, I don’t think that the credit card lender should be let off the hook. Just as grocers use psychology in placing impulse buy items in the checkout line, and theaters disburse the smell of freshly popped popcorn to sell overpriced concessions, credit card lenders use technology and buyer psychology to encourage borrowers to take on more and more debt. As our unnamed banker suggests, the credit card issuers really do not want to know how much you can afford when they issue the credit, but you can be sure that they will argue that the borrower acted irresponsibly if the debtor tries to discharge his debt in bankruptcy.
Mr. Nocera suggests that Congress ought to amend the Fair and Accurate Credit Transactions Act of 2003 to eliminate unsolicited credit offers generated from credit profile data mining. That may be a good first step, but I’m not sure that it goes far enough. Perhaps the Bankruptcy Code could be amended to provide for a more lenient discharge standard in the case of debts arising from reckessly issued credit. What do you think?
Jonathan Ginsberg, Esq.
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