Universal default

Universal default is the term for a practice in the financial services industry in the United States for a particular lender to change the terms of a loan from the normal terms to the default terms (i.e. the terms and rates given to those who have missed payments on a loan) when that lender is informed that their customer has defaulted with another lender, even though the customer has not defaulted with the first lender.[1]

This is a phenomenon that dates from the mid-1990s. Credit card companies included universal default language in their cardholder agreements at that time, due to increasing deregulation of the industry. Today, approximately half of the banks that issue credit cards have universal default language. However, since the inception of these provisions, most credit card companies have not enforced them regularly or systematically.

Every year since at least 2003, Congress has considered several bills to curb abusive credit card practices, including universal default provisions. In the meantime, the Office of the Comptroller of the Currency issued a stern advisory letter to the credit card industry regarding several of the most egregious practices. Most credit card companies have not responded to the letter.

In 2007, Citibank became the first bank to voluntarily eliminate its universal default provision.

In 2009, most forms of the practice were outlawed in the United States.[1]

Background

Under the theory and practice of risk-based pricing, the interest rate of the loan should reflect the risk of the borrower to avoid subsidizing those who default at the expense of those who always pay on time (or alternatively, to allow loans to be given to a broader range of customers, with a broad range of credit history).

Usually, if an interest rate is to be risk-based, the risk premium (or amount charged extra for the risk) is set at the time of an account opening. However, this does not take into consideration that the risk of a borrower defaulting may change later (and in fact the risk might be less).

Thus, while lenders have increased credit limits and lowered rates to borrowers in good standing, reflecting the decreased perception of risk, recently lenders have begun to raise rates to those it later has found have defaulted with other lenders.

This practice generally only happens on credit cards, which are one of the only forms of consumer credit to have an adjustable interest rate not simply based on an interest rate index but on the perceived risk of the customer (both positive and negative).

Instead of a specific increase in the risk premium charge, credit cards often change their interest rate to what is known as the default rate. This rate is usually the highest rate charged by the card, an average of 27.8%. In addition this is charged in a first in, last out FILO basis.

Normally the default rate is charged when a customer fails to make a payment on a particular lender's credit card, but with universal default, the lender will charge the rate if the customer defaults elsewhere.

Criticisms

The concept of universal default is criticized for many reasons.

  1. Those who disagree with the entire concept of risk-based pricing disagree necessarily with an application of that concept.
  2. The concept of one lender charging a higher price when their customer defaults with another lender has been compared to having a cartel, or price fixing structure.
  3. It is thought that when a customer in dire financial straits defaults with one lender, the concept of universal default, and the subsequent interest rate increases, can create a vicious cycle which can cause the customer to default everywhere.
  4. There is the possibility that the credit product which was shown as being in default in the first place was in default due to fraud or institutional error. If this is the case, while the customer has full legal rights to have the error corrected on his credit report, any lender who instituted the universal default rate is under no obligation to return to the normal rate.
  5. The increased rate is seen by some to be too high even reflecting the risk.
  6. Nature of the rate structure means that the customer usually must fully pay off their credit card before receiving the normal rate again.

Support

Supporters of the concept argue that lenders should use all available information at all times in order to avoid adverse selection. These supporters argue that the continuing practice of charging higher prices reflective of risk will allow lenders to charge lower prices reflective of non-risk, or, to extend credit to those previously thought to be too risky in the past, giving benefits to those potential borrowers. These supporters argue that the increased rates reflect the risk and are not price gouging, as proven by the steady or diminishing profit margins of the credit card business.

Still others, while admitting that the increased default rate more than compensates for the risk, argue that competitive pressure makes that so (i.e. because lenders who do charge the default rate can possibly offer lower normal rates, while lenders who do not would seemingly have to try and advertise that the lack of a default rate is a competitive advantage (opening them up to adverse selection), or adopt the practice themselves.

Ban on forms of universal default

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 prohibited the practice of retroactively raising any annual percentage rate, fees, or finance charges for reasons unrelated to the cardholder's behavior with their account. One of the intentions of this law was to shield customers from arbitrary rate increases if they have been on time with their account.

However, this law did not prohibit all forms of universal default. Credit card companies have begun the practice of canceling altogether the accounts of customers who are delinquent or in default with other credit agencies even if the customer is still in good standing with the credit card company.[2][3]

References

  1. ^ a b New curbs on US credit card firms (BBC, May 22, 2009)
  2. ^ The Ban on Universal Default Creditslips.org. January 11, 2011
  3. ^ I Call For A New Credit Card, Am Told My Account Is Canceled Consumerist.com. January 11, 2011

External links

Beta Code

Beta Code is a method of representing, using only ASCII characters, characters and formatting found in ancient Greek texts (and other ancient languages). Its aim is to be not merely a romanization of the Greek alphabet, but to represent faithfully a wide variety of source texts – including formatting as well as rare or idiosyncratic characters.

Beta Code was developed by David W. Packard in the late 1970s and adopted by Thesaurus Linguae Graecae in 1981. It has become the standard for encoding polytonic Greek and has also been used by a number of other projects such as the Perseus Project (which encodes all its Ancient Greek texts using Beta code), the Packard Humanities Institute, the Duke collection of Documentary Papyri, and the Greek Epigraphy Project at Cornell and Ohio State University. Beta Code can be easily converted to a variety of systems for display, most notably Unicode.

Systems such as Sophokeys for typing Beta Code but producing Greek glyphs directly in the entered text (rather than when it is typeset or otherwise output) are increasingly popular, with the result that Beta Code, with some variations, has become a sort of universal default keymap for text entry in polytonic Greek.

Consumer Action

Consumer Action is a nonprofit, consumer education and advocacy center, serving consumers in the United States. Founded in 1971, the mission of Consumer Action is to help individual consumers assert their rights in the marketplace and to advance pro-consumer industry-wide change for the benefit of all. Consumer Action primarily achieves that mission by providing multi-lingual education, outreach, and advocacy services.

It has offices in San Francisco, Washington, D.C., and Los Angeles.

Credit card

A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance. In other words, credit cards combine payment services with extensions of credit. Complex fee structures in the credit card industry may limit customers' ability to comparison shop, helping to ensure that the industry is not price-competitive and helping to maximize industry profits. Due to concerns about this, many legislatures have regulated credit card fees.A credit card is different from a charge card, which requires the balance to be repaid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.

Credit card debt

Credit card debt is an example of unsecured consumer debt, accessed through credit cards.

Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.

The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has.

When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.

Research shows that people with credit card debt are more likely to forgo needed medical care than others, and the likelihood of forgone medical care increases with the magnitude of credit card debt.

Credit card interest

Credit card interest is the principal way in which credit card issuers generate revenue. A card issuer is a bank or credit union that gives a consumer (the cardholder) a card or account number that can be used with various payees to make payments and borrow money from the bank simultaneously. The bank pays the payee and then charges the cardholder interest over the time the money remains borrowed. Banks suffer losses when cardholders do not pay back the borrowed money as agreed. As a result, optimal calculation of interest based on any information they have about the cardholder's credit risk is key to a card issuer's profitability. Before determining what interest rate to offer, banks typically check national, and international (if applicable), credit bureau reports to identify the borrowing history of the card holder applicant with other banks and conduct detailed interviews and documentation of the applicant's finances.

Dina Titus

Alice Costandina "Dina" Titus (born May 23, 1950) is an American politician who has been the United States Representative for Nevada's 1st congressional district since 2013. She previously served as U.S. Representative for Nevada's 3rd congressional district from 2009 to 2011, when she was defeated by Joe Heck. In 2012, she ran successfully for Nevada's 1st congressional district. Titus is a member of the Democratic Party. She previously served in the Nevada Senate and was that body's minority leader from 1993 to 2009. Prior to her election to Congress, Titus was an active professor of political science at the University of Nevada, Las Vegas (UNLV). She taught American and Nevada government at UNLV for 30 years.

Fine print

Fine print, small print, or "mouseprint" is less noticeable print smaller than the more obvious larger print it accompanies that advertises or otherwise describes or partially describes a commercial product or service. The larger print that is used in conjunction with fine print by the merchant often has the effect of deceiving the consumer into believing the offer is more advantageous than it really is. This may satisfy a legal technicality which requires full disclosure of all (even unfavorable) terms or conditions, but does not specify the manner (size, typeface, coloring, etc.) of disclosure. There is strong evidence that suggests the fine print is not read by the majority of consumers.Fine print may say the opposite of what the larger print says. For example, if the larger print says "pre-approved" the fine print might say "subject to approval". Especially in pharmaceutical advertisements, fine print may accompany a warning message, but this message is often neutralized by the more eye-catching positive images and pleasant background music (eye candy). Sometimes television advertisements flash text fine print in camouflagic colors, and for brief periods of time, making it difficult or impossible for the viewer to read.

The use of fine print is a common advertising technique in certain market niches, particularly those of high-margin specialty products or services uncompetitive with those in the mainstream market. The practice, for example, can be used to mislead the consumer about an item's price or value, or the nutritional content of a food product.US Federal Trade Commission (FTC) regulations state that, for an advertised offer to be lawful, the terms of the offer must be clear and conspicuous, not relegated to fine print.

Keith Ellison

Keith Maurice Ellison (born August 4, 1963) is an American politician and lawyer who is the 30th and current Attorney General of Minnesota. Ellison was the U.S. Representative for Minnesota's 5th congressional district from 2007 to 2019. He also served as the titular Deputy Chair of the Democratic National Committee from 2017 to 2018. He is a member of the Democratic–Farmer–Labor Party (DFL), the Minnesota state Democratic Party affiliate. His previous district centered on Minneapolis and the surrounding suburbs. He was a vice-chair of the Congressional Progressive Caucus and a Chief Deputy Whip, and also served on the House Committee on Financial Services.

Ellison was the first Muslim to be elected to the U.S. Congress, and the first African American to have been elected to the U.S. House from Minnesota.In November 2016, progressive groups and United States senators, including Bernie Sanders of Vermont, supported Ellison for chair of the Democratic National Committee. On February 25, 2017, minutes after defeating him on the second ballot, newly elected Chairman Tom Perez moved for Ellison to be elected his Deputy Chair, which was approved by a unanimous voice vote of DNC members. On November 8, 2018, Ellison resigned as Deputy Chair.On June 5, 2018, Ellison announced that he would not seek reelection to a seventh term in Congress in 2018, but would instead run for Minnesota Attorney General. On August 14, Ellison won the Minnesota Democratic primary. On November 6, he was elected Attorney General, defeating Republican Doug Wardlow and becoming the first African American elected to statewide office in Minnesota, as well as the first Muslim to win election to any statewide office in the United States.

United States v. Ballin

United States v. Ballin, 144 U.S. 1 (1892), is a decision issued on February 29, 1892 by the United States Supreme Court, discussing the constitutional definition of "a quorum to do business" in Congress. Justice David Brewer delivered the opinion of the unanimous Court, analyzing the constitutional limitations on the United States Senate and House of Representatives when determining their rules of proceedings. In particular, the Court held that it fell within the powers of the House and Senate to establish their own rules for verifying whether a majority of their members is present, as required for a quorum under Article I of the Constitution.

The case was brought after the Board of General Appraisers affirmed the decision of the Collector of New York to classify imported worsted cloth as woolens, thus subjecting them to a higher rate of customs duty. The importers challenged the validity of the law authorizing the duty increase, alleging that a quorum was not present when the law was passed. On appeal, the Circuit Court for the Southern District of New York sustained the importers' claim and reversed the Board's decision. The United States appealed to the Supreme Court, which reversed the Circuit Court's judgment and upheld the Board's decision. The decision established unambiguously that when a quorum is present, approval by a majority of that quorum is sufficient for the House or Senate to pass a bill.

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