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sexta-feira, novembro 28, 2008

The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle

By Joe Nocera

A few weeks ago, I published an e-mail message sent to me from an executive who

works in the banking industry — and had become disgusted by what he sees all

around him. This weekend, that same banker sent me another e-mail message, which

he has also agree to let me publish. It's another wake-up call. Too bad nobody is


Today, we are bailing out the banks because of their greedy and deceptive lending

practices in the mortgage industry. But this is just the tip of the iceberg. More

is coming, I'm sorry to say. Layoffs are being announced nationwide in the tens of

thousands. As people begin to lose their jobs, they will not be able to pay their

credit card bills either. And the banks will be back for more handouts.

I received a catalog today from Casual Living and in big bold print on the front

page, it said "BUY NOW, PAY NOTHING". Then in significantly smaller print

underneath, it said, (until April). That mantra has been sung throughout the

credit markets over the last 10 years. The banks waive a carrot in front of the

consumer and reel them in and encourage them to go deeper and deeper into debt.

They do this by prescreening customers through credit reporting agencies, mailing

offers to apply, and to transfer balances at teaser rates or zero percent

financing. They base it on credit score and not on capacity to repay. A good

credit score does not equate to the ability to repay debt.

Over my career, I have seen thousands of consumers that have credit card lines in

excess of their annual salaries. Some are sinking under their burden. Some have

been fiscally responsible and have minimal amounts outstanding. My 21-year-old

daughter, who's in college, gets pre-approved offers all the time. She has no

ability to repay debt, yet the offers flow in just the same. We all know how these

lines are accumulated. The banks, in their infinite stupidity, keep upping credit

lines because the customer pays the minimum payments on time. My daughter's credit

line started at $1,000 and has been increased over the last two years to $4,400.

She has no increased earnings to support this. But the banks do it without asking.

And without being asked. The banks reel in the consumer, charge interest rates

higher than those charged by the mob, increase lines without the consumer asking

and without their consent, and lure them into overextending. And we can count on

the banks to act surprised when they aren't paid back. Shame on them.

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.

I recently had a client apply for a credit card. She is a homemaker, with no

personal income. The house she lives in is in her husband's name. She would have

asked for a $3,000 credit line, just to pay miscellaneous expenses and to

establish some credit on her own. So the computer is told that her household

income is $150,000; her mortgage/rent payment is zero. The fact is that her

husband's mortgage payment is $7,000 a month (which he got with a no income

verification loan). She had a good credit score, but limited credit since she has

only lived in this country for the last three years. The system gave her an

approval for a $26,000 line of credit!

This has got to stop. People are going to be learning hard lessons over the next

years. It would help, though, if the banks could change their behavior now, before

things get any worse. Tomorrow is already too late.

In 2003, Congress passed the Fair and Accurate Credit Transactions Act of 2003.

This law was implemented through regulations issued by the Federal Trade

Commission in consultation with the federal banking and credit union agencies. It

requires all credit card and insurance solicitations to include a disclosure for

"prescreened offers." We are all familiar with them. They are the dozens of credit

card offers that are sent, unsolicited, to consumers, usually by mail. The law

allows the consumer to opt out of receiving prescreened offers by calling an


I think Congress did this backwards. Perhaps it could amend the law. The

regulation should have required the consumer to opt in, if they so desire, instead

of opting out. That would mean that no one would get an unsolicited credit card

offer. If a consumer needs a credit card he or she could be given an option to

call an 800-number to opt in. Or the consumer could go to their local bank and

apply for a credit card in person. Or the consumer could go online and apply for a

credit card. The consumer can also view all the best credit cards, nationally, at

bankrate.com. Bankrate.com is an invaluable tool for consumers.

Some other benefits: (1) It would halt the message being sent that credit is free

and perhaps limit irresponsible accumulation of credit lines. (2) It would force

the banks to become more competitive in their rates. The consumer is going to need

a break and they will need it soon. And credit card rates, which are quite often

above 22 percent, is piracy. (3) Eliminating mass mailings would save a lot of


I've been reviewing many of the banks annual reports over the last month and there

is no question that the default rates are on the rise. If Congress doesn't act

today, the bankers will have their hats in their hand before we know it, and doing

another a tap dance before the Senate Banking Committee, and asking to be bailed

out once again with our tax dollars. Sad, but true.



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