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 normal the terms to the default terms (ie the terms and rates Given To Those Who-have missed payments are 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, there are a number of banks that 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 concerning 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 to the expense of those who always pay for time. To a broader range of customers, with a broad range of credit history ).

Usually, the risk premium is a risk-based, risk-based solution . However, this can not be taken into consideration.

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 who have defaulted with other lenders.

This practice Generally it happens only credit cards , qui are one of the only forms of consumer credit to-have an adjustable interest rate is based not simply an interest rate index object on the Perceived risk of the customer (Both positive and negative).

Instead of a specific risk premium Increase in the load, credit cards Often Their interest rate changes 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 lends a 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 whole concept of risk-based pricing disagree necessarily with an application of that concept.
  2. The concept of a lender charging a higher price when their customer defaults with another lender has been compared to a cartel , or price fixing structure.
  3. It is thought That When a customer say in financial straits defaults with one lender, the concept of universal default, and the subsequent interest rate Increases, can create a vicious cycle qui can because the customer to default everywhere.
  4. There is no guarantee that the payment will be made in good faith . If this is not the case, then it is a good idea to make sure that it is the correct one.
  5. It is a very good place to stay.
  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 in order to avoid adverse selection . These supporters argue that the continuing practice of charging higher prices will allow the lenders to charge lower prices. . These supporters argue that the rising prices of the credit and are not price gouging , as proven by the steady or diminishing profit margins of the credit card business citation needed ] .

Still others, while admitting that the increase in the amount of compensation for the risk, argues that competitive pressure makes it so. Try and advertise that the lack of a competitive advantage (opening them up to adverse selection), or adopt the practice themselves.

Ban on forms of universal default

The Credit Card Accountability, Accountability, and Disclosure Act of 2009 prohibit 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 had been on time with their account.

However, this law did not prohibit all forms of universal default. Credit cards 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 in good standing with the credit card company. [2] [3]

References

  1. ^ Jump up to:b New curbs on US credit card firms (BBC, May 22, 2009)
  2. Jump up^ The Ban on Universal DefaultCreditslips.org. January 11, 2011
  3. Jump Up^ I Call For A New Credit Card, Am Told My Account Is CanceledConsumerist.com. January 11, 2011