The Ban on "Universal Default"

 Did Congress' effort to protect you from your card company with the Credit CARD Act inspire you to pore over the new Cardmember "Agreement" that probably arrived in your mailbox this week? I actually read at least part of mine, looking in particular at the implementation of the Credit CARD Act. (I am apparently one of the "consumer advocates" that Ronald Mann thinks has the time to "scrutinize the agreements and bring attention to provisions sufficiently onerous that they would not bear public scrutiny.") 

The first place I looked in the Cardmember Agreement was the paragraph labeled "Default/Collection."  I was looking for the much-touted restrictions on universal default. Here is what I read, to my initial surprise: "Your account may be in default if any of the following applies:  . . . we obtain information that causes us to believe that you may be unwilling or unable to pay your debts to us or to others on time."  Wait a minute. . .  That sounds like my default (or purported default) on my debts to someone else is a default to JPMorgan Chase. Isn't that what "universal default" is?

Actually, no, at least not as defined in the legislation. The Credit CARD Act prohibits raising "any annual percentage rate, fee, or finance charge applicable to any outstanding balance" with a few exceptions.  Notably absent from the list of exceptions is the ability to increase those charges based on a cardholder's default to other creditors. But of course that is not what the JPMorgan Chase agreement permits. Rather, it says that I can be in "default" for being unwilling or unable to pay debts due to others, not that my charges can be increased. Under the Cardholder Agreement, a default permits JPMorgan Chase to close my account without notice and require me to pay my unpaid balance immediately. That is pretty grim result for a late payment to another creditor, even if it is not "universal default."

Comments

[CreditCrunch]

Anyone that's been paying attention to the financial industry over the past 20 years could/should have easily predicted this. The financial industry is now built around shafting the customer as much as possible, but stopping just short of making them leave, rather than providing a service for a reasonable fee.

Think about this.

Lenders hammered their customers for years AND made insane bets with money they didnt have. When that exploded, they went to the same people they've been charging usurious rates and pounding with fees with their hands out and a thinly veiled threat of taking out the entire economy if we didnt prop them up. Our thanks for saving their companies and insuring enough money was in their accounts to pay themselves outrageous bonuses? Additional shafting in the new credit card laws thanks to "completely unrelated campaign contributions".

Welcome to the USA, where the lenders and our govt. collude to make themselves money at the tax payor's expense.

[Terry]

Even Congress was not stupid enough to legislate that a credit card company had to keep a line of credit open for someone who is in default of other credit obligations. Why in the world should a credit card company be reqired to continue to offer credit to an underwater homeowner who is in default on their mortgage and home equity loan but continues to make their minimum payments on their credit card?

Closing the account is the only option left to the credit card company, since they cannot adjust rates of fees to account for the risk.

[CreditCrunch]

Terry:
In that very specific instance, you have a valid point, but any adult knows there's
an honest way to conduct business and there's the "shaft-them-all-you-can-till-they-quit" method is what we're currently working under.

Anyone that thinks Congress didnt craft this bill in a manner that provides enough loopholes in it to make up the revenue from the odious practices is simply naive.

The financial sector dump MILLIONs into congress. Does any sane person think that wouldnt buy them enough loopholes? Lenders have historically been a lot like cockroaches. Illuminate them and they scurry to another dark place and continue doing what they've done all along. Insuring maximum profit, regardless of the circumstances and results since they get paid.

The irony is immoral lenders arguing "moral hazard" when consumers want the credit reporting system updated, yet had no problem taking insane risks that turned south since there is no question they will be covered by the tax payors.
If that isnt the very definition of Moral Hazard, then apparently most people dont know what that word means.

[Adam Levitin]

Katie,

I think there's a big difference between jacking up rates retroactively based on off-us behavior and cutting off a line of credit based on off-us behavior. The former exploits borrower lock-in. The latter could be pretty crumby for a consumer, but it is the difference between an at-will line of credit and a term line of credit. The issuer might have all sorts of reasons for needing to cut off cardholders (such as the issuer's own financial troubles). I'm not sure that the equities are as clear-cut as with repricing.

Of course, an issuer could threaten to cut someone off, and then if they beg to keep the line open, it's a workout and fits under the rate-jacking workout exception. Some issuers have already supposedly been doing this by increasing minimum payments (not prohibited if there is 45 days before effective), which can put borrowers in distress and then restructuring the rate as a "workout." Probably a rather costly way to rate-jack, though.

I'm wondering if there is another reason for keeping universal cross-default. The Credit CARD Act says that no creditor may "no creditor may increase any annual percentage rate, fee, or finance charge applicable to any outstanding balance," except in certain enumerated circumstances, like 60 day delinquency. But my read of its language is that it does not prohibit an issuer from applying a fee that was previously disclosed. So an issuer could have a default fee. As long as that the creditor applied the previously disclosed level of default fee, rather than a higher level (and that fee level were "reasonable"), I think the card issuer is kosher under the CCARD Act.

If I'm right, that's a huge loophole in the law. Issuers can't jack the rate, but they can apply a fee for pretty much any reason they want.

[Katie Porter]

I am fine with cutting off the line of credit based on off-us behavior. Declining to provide credit is part of the open-ended credit deal.

But I am not fine with making the whole balance all due and payable immediately for off-us behavior. That is much harsher than raising the interest rate in some ways. For many people, having to pay their balances immediately is a trigger for a dunning, a collection suit, etc. At a higher default rate, it would hurt them to repay but if they didn't like it they could pay off the whole balance.

I think it is wrong for credit card issuers to make your whole balance due and owing immediately based on solely on a vague standard like "unwilling or unable to pay" another creditor. If you have been paying that cardholder on time and the minimum payment, they should not declare a default; their remedy for off-us behavior should be limited to cutting or reducing your credit line.

[Judge Roy Bean]

It's interesting to see how financial blogs and reporters have so little grasp of opportunistic business management behavior.

The wealth of analytical data available to product managers and executives is the devil's playground when it comes to taking advantage of consumers.

These kinds of abusive products are not simple ideas about how profits can be improved. They are intricate and creative traps - products of teams of people among whom creativity at all costs is often rewarded. Among today's financial oligarchs there is no longer a regard for the social compact an institution might have had when headed by people who valued their family honor and reputation.

Anything goes as long as the attorneys can keep the mob at bay.

[credit cards for students]

the new credit card act could be not so good news for some students who are below 21 yrs old mainly because they cannot acquire a student credit card without a co-signer or proof of independent income. But let's look at the benefit of it. A credit card can help a student learn the true meaning of becoming responsible but let's not neglect that many other people who suffered a bad credit score as a consequence of improper credit card use. Bear in mind that how you manage your account can affect your credit rating.

[Mike Shafer]

It's interesting as one reads around the Internet on this topic is to see people try and defend the indefensible with the latter absolutely applicable to the credit card industry in the US. The first thing to accept is the reality that the credit card industry in the US is a government sanctioned and legalized criminal cartel. As mentioned too much money is directed by lobbyists into Congressional hands to ever really change this situation. Those that believe otherwise please contact me. I some land in Florida I'm looking to unload.

Myself having been screwed into bankruptcy by the bastards in the industry I'm intimately familiar with the universal default clause. I also know it's one of the best hidden facts of the business as because I have a background in finance and wondered how it was I wasn't aware of this gem I did an informal survey. After having asked 263 folks if they knew what universal default was the results were only one knew. And this person knew because they had be screwed by it.

As to the ability of a lender to close the account and demand immediate payment I find problematic due of the reality of credit reporting. The error rate is horrendous and in sum your credit future and finances can be in the hands of a bored worker who is at best making slightly over minimum wage and cares little for accuracy. Hey they have text messages that need answered.The credit report says you're a bad guy and there's no forum to defend yourself otherwise. The credit reporting agencies take the position you're wrong until you can definitely prove otherwise. I in fact, many a year back, had to threaten legal action to get a minor negative off my credit record 14 years after the fact that the law clearly requires be removed after seven.

My own recent situation was precipitated by precisely what I describe above in that an error was made on my credit record, which I know because I used to monitor it carefully by buying a full report every six months. A big name credit card operation marked an account I had closed and paid off in full as in default thus causing GMAC and BOA to trigger universal default and take my interest from around 9% (I used to have sterling credit) to 29% all without any explanation. I found out when the next statements arrived and I found my credit lines had been severely reduced and interest rate raised from 9% to 29%. I would note these were credit cards I used solely for my IT consulting business as I I don't used credit cards for buying toys etc. On seeing the changes I assumed of course there was an error and attempted to contact customer support at both operations and was essentially stonewalled and was not given ANY explanation other I was told they could by law basically do what they damn well pleased.

In sum after threes years of busting my tail trying to pay off these cards and being constantly screwed by the high interest and fees I finally in January 2007 called both of the above and said here's the deal. We split the difference at 15.5% or you never see a payment again. They had all sort of excuses and declined and I made good on my promise.

I spoke with a lot of people in the industry and a number of groups working to change this situation. If you don't think at least some of these companies profile customers and engage in these practices intentionally I don't envy you. That's the reality I discovered and in fact had insiders at some of these companies admit I was correct.

I've been rebuilding my business over the past 14 months since finalizing my bankruptcy and am doing better than ever the economic state not-with-standing. Moreover I've been involved in working with a friend/IT entrepreneur in two start-ups with the first in 1987 and the second in 1995. Professional investors don't really care much your personal credit rating. They too know the reality. What am I saying.

The answer is really simple. Tell the whole credit industry to go to hell, use private investment money, your own earnings or perhaps bank LOCs for financing. I'll never own a credit card again and frankly like it that way.