Don’t Believe What You Read In The Papers.

There was a big front page article in the New York Times today trumpeting the banks’ return to extending credit, now that they have written down all of their junked up sub-prime debt and have recovered from the losses on loans made to troubled borrowers. The article points out that some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

I think the truth about this report is that the banks’ media relations folks got together with the NYT‘s editorial folks and everyone decided it would be nice to have a little media party and give regular folks a glimmer of hope about the credit markets and the banks a glimmer of “really not such bad guys after all” patina on their hopeless public images. 

They, of course rolled out their stat machines and pointed out that credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said. Of course, Experian is in on the deal as well, as positive lending news benefits them immensely. It is similar to the housing report by our HUD secretary today (covered in the Yes, This Really Happened. post later) which makes everyone in charge including of course, the current administration look better.

The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.

Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost. “These people are addicted to credit, and banks are pushing it,” said Charles Juntikka, a bankruptcy lawyer in Manhattan. Some former banking regulators said they worried that this kind of lending, even in its early stages, signaled a potentially dangerous return to the same risky lending that helped fuel the credit crisis. No. You think? 

“It’s clear that we are returning to business as usual,” said Mark T. Williams, a former Federal Reserve bank examiner. Ah, lighten up Mark, this is just banking.

The lenders argue that they have learned their lesson and are distinguishing between chronic deadbeats and what some in the industry call “fallen angels,” those who had good payment histories before falling behind as the economy foundered. A spokesman for Chase, Steve O’Halloran, said the bank “seeks to be a careful, responsible lender,” adding that it “is constantly evaluating the risks and costs of funding loans.”

Regulators with the Office of the Comptroller of the Currency, which oversees the nation’s largest banks, said that as long as lenders adhered to strict underwriting standards and monitored risk, there was nothing inherently dangerous about extending credit to a wider swath of people. Snicker, snicker. 

In fact, an increase in lending is a sign that the economy is improving, economists say. While unemployment remains high, consumers have been reducing their debts. Delinquencies on credit card accounts and auto loans are down sharply from their heights in the crisis. “This is a natural loosening of credit standards because the banks feel they can expand again,” said Michael Binz, a managing director at Standard & Poor’s. And lenders miss many potential customers if they focus just on people with perfect credit. WOW! Really?

“You can’t simply ignore this segment anymore,” said Deron Weston, a principal in Deloitte’s banking practice.

The definition of subprime borrowers varies, but is generally considered those with credit scores of 660 and below, which is interestingly a “FAIR” credit score according to the Experian web site. So, again the message is mixed, and I suspect you will find that if you applied for a credit card with a credit score of 695, you will be rejected. 

The banks, regardless of what they are “saying”, will treat you in much the same way as the two leading peer-to-peer lenders do; that is, if you don’t have a FICO credit score above 700, you will be rejected. So, beware of what you read in the press and consider the source and the underlining motivations of these lending behemoths. They didn’t get too big to fail by being nice to your loan applications. 

Not unlike Capital One, the one lender that has been courting borrowers with damaged credit, even those who have just emerged from bankruptcy, with pitches like, “We want to win you back as a customer.”, these banks all have their own self-interest at heart. Notice Capital One said “even those who have just emerged from bankruptcy” but they didn’t say “even those who have just emerged from foreclosure”. They love bankrupted borrowers, because they can’t erase their future debts in bankruptcy again for many years. Not so much foreclosed borrowers. If they believe you won’t repay your debt, you won’t get a loan.

Pam Girardo, a spokeswoman for Capital One, said, “Our strategy is to provide reasonable access to credit with appropriate guardrails in place to ensure consumers stay on track as they rebuild their credit.”

Pam, that is absolute nonsense. Have you no shame, and what’s in your wallet?

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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