Bank’s Credit Card ‘Redlining’ Is Justified
Massachusetts Congressman Joseph P. Kennedy II called it redlining--”morally unfair . . . economically unwise,” “clear injustice” and downright “un-American.”
First Chicago Corp., parent of First National Bank of Chicago, had canceled or cut the credit card limits of 8,900 of Kennedy’s constituents. The nation’s fourth-largest bank card issuer (6.6 million accounts) had noted a 77% increase in bankruptcies among its New England bank card holders and conducted a special review of the 1.7-million cardholders in nine Eastern states.
Most of those axed had been delinquent or exceeded their credit limits. Clearly they needed some controls imposed, but Kennedy and a fellow Democrat, Rep. Edward Markey, saw “geographic discrimination” in the unscheduled review. They thought it unfair to cancel or reduce anyone’s credit line without advance notice and suspected some “irrelevant or unjust standards” behind the judgments.
It was, moreover, a “test program,” said First Chicago. Left unchallenged, it could become bank, even industry, custom. So Markey and Kennedy challenged it last month with a congressional bill to ban such “arbitrary or capricious reductions in credit” nationwide.
The situation drew a lot of polemic, but the criticism wasn’t off-the-wall. There was a certain justice in both the delinquencies and the public view that delinquency was acceptable: Banks had created a monster, and it had turned against them. “The credit card industry has been giving away credit for years,” says a Markey aide, “and now they come in with an abrupt change of behavior.”
There are also legitimate questions about First Chicago’s approach. The recession is nationwide. New England actually had fewer bankruptcies than other areas, in spite of the increase in its bankruptcy rate . Why the earlier review?
One could say, like the Markey aide, that “if they hadn’t lived in New England, they wouldn’t have been reviewed.” One could also say that the cardholders were offered a credit card “loan” for two years and both the mid-cycle review and the credit reduction were a unilateral “change in terms.”
No one knows how arbitrary the “scoring” of each account actually was or if location was a consideration: First Chicago’s scoring system is proprietary information. No one knows the results (also proprietary) of the “test”--not a test of the bank’s review process, says First Chicago spokesman Lisabeth Weiner, but of “how customers would respond, how they would pay it off.”
If nothing else, the congressmen sought assurance of some official scrutiny on the consumer’s behalf. But they only got a letter from the Comptroller of the Currency saying that First Chicago’s program seemed perfectly legal, even prudent.
Indeed, banks need protection. In 1990, a record year for credit card spending, the debt outstanding on general-purpose credit cards at year-end was up 17% over 1989, according to David Robertson, president of the Nilson Report, a Santa Monica-based industry newsletter. Delinquencies (payment 30 days past due) were also up 30%, as were “charge-offs” (uncollectible debts).
In the first quarter of 1991, personal bankruptcies also ran 30% ahead of last year’s first quarter, says Philip Corwin, an attorney with the American Bankers Assn., “and bankruptcy accounts for half of all credit card losses. The other half, the people just stop paying.”
No one was denied credit just because of where he lived (redlining). There was reason enough--without even considering location--to close 7,800 accounts and reduce 1,200. Nine out of 10 had been delinquent in the past six months--i.e., the customer had unilaterally changed the terms. Almost half were currently delinquent or over their credit limit, and First Chicago bolstered its judgment with further analysis of each credit history.
First Chicago’s handling, moreover, doesn’t seem unfair. Its notices invited appeal and didn’t demand repayment of outstanding balances, although finance charges continued to accrue and no new charges or cash advances were allowed. And, in a new option, some people were given lower credit limits in lieu of outright cancellation.
It doesn’t even seem economically unwise. Credit cards aren’t a right but a privilege, and not easy to handle. Such “loans” obscure the amount outstanding at any given time, and the assessment of finance charges is incomprehensible. They’re hardly ideal financial aids for someone already overextended and under-funded, providing ever more rope on which to hang. Indeed, tightening credit is good for individuals in trouble, as any credit counselor would advise.
Fortunately, the “regional redlining” bill doesn’t need to be either salutary or workable. It was mostly meant to “make sure the industry and legislators know that Congress has an active interest in this,” says the Markey aide.
Congress should also be sure its legislation truly serves that interest. If better credit controls sweep the country--whatever the geographic order--it’s not so bad. In fact, it’s overdue.
