WSJ: Student Loan Losses Seen Costing U.S. More Than $400 Billion

The U.S. government stands to lose more than $400 billion from the federal student loan program, an internal analysis shows, approaching the size of losses incurred by banks during the subprime-mortgage crisis.

The Education Department, with the help of two private consultants, looked at $1.37 trillion in student loans held by the government at the start of the year. Their conclusion: Borrowers will pay back $935 billion in principal and interest. That would leave taxpayers on the hook for $435 billion, according to documents reviewed by The Wall Street Journal.

The analysis was based on government accounting standards and didn’t include roughly $150 billion in loans originated by private lenders and backed by the government.

The losses are far steeper than prior government projections, which typically measure how much the portfolio will cost the government in the next decade, not the entire life of the loans. Last year the Congressional Budget Office estimated that the student-loan program would cost taxpayers $31.5 billion, including administrative costs.

STUDENT LOANS ON CLIFF
Stimulus Aid Leaves Out Millions of Student-Loan Borrowers (May 4, 2020)
U.S. Student-Loan Program Now Runs Deficit, CBO Estimates (May 7, 2019)
Program to Relieve Student Debt Proves Unforgiving (May 7, 2019)
The Student-Debt Crisis Hits Hardest at Historically Black Colleges (April 17, 2019)
After decades of no-questions-asked lending, the government is realizing that it has a pile of toxic debt on its books. By comparison, private lenders lost $535 billion on subprime-mortgages during the 2008 financial crisis, according to Mark Zandi, chief economist at Moody’s Analytics.

The effect this time is different. The government, unlike private lenders, can borrow trillions of dollars at low rates to absorb the losses, without causing a panic. But taxpayers will end up paying a price because Congress will have to raise taxes, cut services or increase the deficit to cover the losses.

The absence of a cataclysmic event like the financial crisis is removing the impetus for the federal government to change its lending practices, which analysts said have enabled colleges to raise tuition far above the rate of inflation.

“There’s no market discipline here,” said Constantine Yannelis, a former Treasury Department official in the Obama administration who now teaches at the University of Chicago. “In 2007-2008, we saw a lot of lenders who were making risky bets going under. There’s no force like that in the student-loan market.”

The government lends more than $100 billion each year to students to cover tuition at more than 6,000 colleges and universities. It ignores factors such as credit scores and field of study, and it doesn’t analyze whether students will earn enough after graduating to cover their debt.

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Taxpayers On the Hook for Billions in Unpaid Student Loan Debt

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“We make no attempt to evaluate the quality of the borrower, the ability to repay, the effectiveness of the loans,” said Douglas Holtz-Eakin, former head of the Congressional Budget Office who now leads the American Action Forum, a conservative think tank. “The taxpayer ends up picking up the tab.”

Borrowers with subprime credit scores—indicating they have had previous trouble paying off debt—are among the most likely to default, Federal Reserve research shows.

Between 2005 and 2016, nearly four in 10 student loans—most of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, according to a Wall Street Journal analysis of data from the credit-rating firm Equifax Inc. That figure excludes borrowers who lacked credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.

Since the financial crisis, private lenders typically originate loans only to borrowers with clean credit and require cosigners, and default rates are far lower than on federal loans.

Congressional Democrats have stepped up calls for President-elect Joe Biden to use executive action to forgive student debt. Mr. Biden, a Democrat, has reiterated his support for legislation to forgive $10,000 for each borrower with a federal student loan.

The administration of President Trump, a Republican, has opposed wide-scale debt forgiveness. But the government is already effectively forgiving debt through programs known as income-based repayment, which require borrowers to pay only 10% of their discretionary income—defined as adjusted gross income minus 150% the federal poverty line—and then forgive balances after 10, 20 or 25 years.

Worried that government accountants had underestimated losses on student loans, the Education Department under Betsy DeVos hired FI Consulting to project losses. It developed a computer model to produce a much more detailed analysis than prior government methods to value the portfolio. The accounting firm Deloitte was hired to review the model. Neither contractor responded to requests for comment.

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The consultants found that income-based repayment programs are a major driver of projected losses. Some students—particularly those in graduate schools, who unlike undergraduates face no limits on how much they can borrow for tuition—rack up big debts and then enroll in income-based repayment. Borrowers in modest-paying jobs with less debt have also used the programs to avoid default. Borrowers in income-driven repayment will repay, on average, 51% of their balances, while borrowers in other plans will repay 80%, the Education Department’s analysis shows.

It is unclear how much debt that is set to be forgiven will be interest instead of principal. Balances typically rise in income-driven repayment because the monthly payments often aren’t big enough to cover interest.

Meanwhile, millions of other borrowers continue to default on smaller amounts—typically under $10,000—after dropping out of community college or for-profit colleges. Still others say they defaulted after being defrauded by their schools and failing to land well-paying jobs in their fields of study.

Write to Josh Mitchell at joshua.mitchell@wsj.com

NACBA Joins with 65 Organizations Calling for Cancelling Student Debt to Tackle Economic Fallout

Krista D’Amelio |

WASHINGTON, D.C.- On April 13th, 69 community, civil rights, consumer, and student advocacy organizations, including NACBA, sent a letter to House and Senate leadership, urging them to include student debt cancellation in the next coronavirus package. The letter also calls on leadership to extend the suspension of payments on federal student loans through March 2021, as current estimates indicate that the economy will not recover to pre-virus levels until the third quarter of 2021.

Opinion: Why bankruptcy must be an option for homeowners and small businesses to survive this COVID-19 recession

U.S. Bankruptcy Code should be overhauled to protect families and savings
Few Americans are unaffected by the recession and economic turmoil COVID-19 has wrought, with unemployment numbers spiking to Great Depression levels and millions in need of temporary benefits such as mortgage forbearance or expanded unemployment insurance. With no obvious end to the pandemic in sight, it’s increasingly clear that many Americans are sitting on a ticking financial time bomb.

If the U.S. is to avoid a disastrous repeat of the Great Recession, there must be a determined response from government. What Americans need now is a substantial overhaul of the U.S. Bankruptcy Code. Without this lifeline, millions of Americans could lose their homes, igniting a chain reaction that will slow the recovery and cripple the U.S. economy for years to come.

So far, efforts by federal and state governments to provide relief to Americans blindsided by COVID-19 have helped to stanch the bleeding. But for many, these measures have come too little, too late. Despite more than 16 million people being unemployed, efforts to pass a second federal aid package have stalled, creating the real possibility that the lack of progress from politicians will accelerate the speed and size of the bankruptcy wave — a wave that would surpass the 2008 economic downtown, and possibly become the worst financial crisis of our lifetime.

The numbers are bleak — currently non-housing debt totals more than $14 trillion and more than 7% of residential mortgages are delinquent. This means millions of people can no longer meet their debt obligations, given the size and scope of this pandemic.

Far from being a way to escape financial obligations, bankruptcy is a key part of the social safety net for those who have been dealt a bad hand — and you’d be hard-pressed to find a worse hand than COVID-19. Bankruptcy is a vital and even necessary means for honest people struggling with finances to obtain relief.

The most common causes of personal bankruptcy include job loss, medical problems and divorce. In this current crisis, bankruptcy may truly be the only real solution for many families and small business owners who never dreamed they would need it. It should be seen as integral to surviving the recession for some Americans as unemployment insurance, loan forbearance, Paycheck Protection Program (PPP) loans, and other relief measures.

Yet the U.S. Bankruptcy Code has not evolved to address today’s global crises. Whatever Congress’ intentions might have been in passing the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) of 2005, it is clear they did not anticipate the seismic economic shocks that Americans have experienced since then. Accordingly, there remain substantial barriers to accessing bankruptcy relief that make a quick and meaningful recovery unavailable to many families.

In May of this year, the House of Representatives took an important step toward reversing this obstacle when it passed H.R. 6800, also known as the “HEROES Act.” The bill includes provisions that would provide critical relief to those burdened by the impact of COVID-19.

For example, it would increase the homestead exemption floor so that debtors forced to file bankruptcy as a result of the pandemic do not lose their homes due to a financial disaster that is far beyond their control. The legislation would protect debtors from having their COVID-19-related benefits, often the only resource standing between them and deprivation, seized by trustees during the bankruptcy process. And it would dramatically expand access to and effectiveness of Chapter 13 bankruptcy by raising debt limits for filing and providing more flexible options for discharging debts or extending repayment plans.

This legislation is a move in the right direction. It now falls to the Senate to craft a companion bill that goes the distance to relieve debtors and provide a light at the end of the tunnel. There is more that can be done, including giving Chapter 13 debtors options to deal with mortgage payments when there has been forbearance on those payments, as well as expanding provisions for relief from onerous student loan debts. One thing is clear: doing nothing is not an option.

Without decisive action, Americans who have lost jobs or businesses through catastrophes beyond their control will be mired in crippling debt they cannot repay. They will not soon return to the earning, spending and investing behavior that will be essential for America’s recovery. The long-term health and competitiveness of the U.S. economy will suffer for this mistake.

Bankruptcy reform is the fresh start — and the economic kick-start — we desperately need. It’s a solution with bipartisan appeal, and with the pandemic not likely to end anytime soon, it’s time for Congress and the Trump administration to come together to make this a priority.

John C. Colwell is president of the National Association of Consumer Bankruptcy Attorneys.

Read the article on MarketWatch

Broadband Survey for Faster Internet

North Carolina Announces Broadband Survey and Encourages Your Participation for Faster Internet Connection

“Reliable internet access is crucial for getting North Carolina back on its feet so that students can learn, teachers can teach, businesses can grow and communities can connect,” said N.C. Department of Information Technology and State Chief Information Officer Tracy S. Doaks. “As communities begin to survey their citizens, we will gain a better understanding of North Carolina’s internet speeds and need, which is critical for building strategies to achieve affordable broadband access for all.”

The brief survey was created in collaboration with the Friday Institute at North Carolina State University. The survey can be taken online for users with internet access and by phone for users without service.

“Every community has different challenges and unique needs,” added Doaks. “Without the data to understand what those are, designing strategies and implementing plans to expand affordable broadband access will always be a challenge.”

Information gathered using the survey will be used to provide context to the state’s broadband picture, guiding funding opportunities through North Carolina’s Growing Rural Economies with Access to Technology (GREAT) grant program, informing research and policy recommendations, and supporting strategic targeting of additional funding channels.

This project is an extension of NCDIT’s Speed Reporting Tool, which allowed people to report whether they have internet access at their home or business and determine the speeds received at their address.

“Our office is continually looking for new ways to gather the data that will help us better understand and properly portray the real-life stories of students and families who can’t access the internet at home,” said Jeff Sural, director of the Broadband Infrastructure Office.

To access the online survey, visit: ncbroadband.gov/survey . Residents without internet service, but with phones capable of text messaging, can text “internet” to 919-750-0553. Standard text messaging rates will apply.

Residents with land lines or cellphones that do not have texting capability, may call 919-750-0553. The interactive voice response system will guide them through a series of short questions to obtain their address and register it in the database as having no internet capability.

Governor Roy Cooper has made expanding broadband access a priority with the goal of affordable access for all North Carolinians. Executive Order 91 established a task force on connecting North Carolina to help achieve this goal.

About the Broadband Infrastructure Office

The Broadband Infrastructure Office is a division of the North Carolina Department of Information Technology working to enhance affordable high-speed internet access and adoption in communities across the state. The office administers the GREAT rural broadband grant program, facilitates partnerships with broadband providers, gathers data to identify unserved areas, and provides policy and technical guidance to local and state leaders. Broadband access and adoption can enhance a community’s viability and livelihood by creating income opportunities, facilitating greater civic and cultural participation, expanding educational opportunities, and providing access to health care providers and other essential services.

DEFUSE THE STUDENT DEBT BOMB

America’s student loan debt continues to grow. At the end of 2018, student loan debt hit over $1.5 trillion, tripling in size since 2006. For the over 44 million Americans with student debt, there was no hope for relief if they ever found themselves in a situation where they could not pay back their loans. But…

In May 2019, the Student Borrower Bankruptcy Relief Act was introduced to set things right. If approved, student debt would once again be treated like medical debt or credit cards in bankruptcy. For borrowers who truly cannot afford to pay their student loans, they would be able to wipe the loans out in bankruptcy. Filing bankruptcy not taken lightly: bankruptcy courts evaluate each case closely.

That is why the National Association of Consumer Bankruptcy Attorneys (NACBA) has released a new project:

StudentDebtBomb.com

To further strengthen the call to restore student loan bankruptcy discharge, NACBA is proud to introduce a new project: studentdebtbomb.com, a social media campaign to promote the Student Borrower Bankruptcy Protection Act of 2019 (S. 1414 and H.R. 2648), which seeks to make student loans fully dischargeable. The goal of the social media campaign is to encourage people to contact their Senators and Congressional Representatives, urging them to cosponsor the bills.

For further information, please contact Krista D’Amelio, NACBA Director of Government Affairs & Communications, at krista.damelio@nacba.com.

Members of Congress Join NACBA and NCLC to Discuss the Importance of Bankruptcy Reform in the time of COVID-19 and Beyond

For Immediate Release

The National Association of Consumer Bankruptcy Attorneys (NACBA) and National Consumer Law Center (NCLC) recently hosted a Congressional and expert panel featuring Senator Dick Durbin (D-IL), Senator Sheldon Whitehouse (D-RI), Congresswoman Zoe Lofgren (D-CA), and Chief Economist at Moody’s Analytics Dr. Mark Zandi calling on Senate to prioritize bankruptcy protections to help families and small business owners in upcoming bills, several of which were included in the House-passed HEROES Act.

The Coronavirus pandemic will leave devastating financial consequences for families and small business owners as many continue to lose their jobs and businesses close, ultimately leading millions to file for bankruptcy over the next few years. Immediate and substantial amendments to our nation’s Bankruptcy Code are needed to prepare for the expected increase in consumer debt, which is already at an all-time high. “It’s safe to assume that a wave of bankruptcy filings is on the way,” said Senator Dick Durbin. “Now is the time for bankruptcy reform. Whether it is finding ways to help families save their homes in bankruptcy, to restoring dischargeability of student loans, to reforming the Chapter 11 process to better protect workers and retirees instead of corporate executives; we must end years of delay and finally make our bankruptcy system fairer.”

Economist Mark Zandi highlighted that importance of Congress updating bankruptcy tools, given the current economic conditions, noting that “bankruptcy is a very critical tool for households to manage their financial problems.”

While a wave of consumer and individual bankruptcies has not hit yet largely because of the relief that was delivered in the early stages of the crisis, Congresswoman Zoe Lofgren warned it is coming. “But let’s not fool ourselves; more and more American families are likely to need bankruptcy relief especially as the economic damage deepens,” Rep. Lofgren explained. “In the HEROES Act… in addition to the relief given to individuals, there are several critical reforms to the bankruptcy system. To be honest, these reforms should have been included a long time ago.”

Other issues not included in the HEROES Act bankruptcy provisions, but very critical to address, are the dischargeability of student loans and debts for criminal court costs and fees. Senator Sheldon Whitehouse also pointed to the help people will need as a result of medical debt. He revealed that he, alongside Sens. Durbin, Brown and Warren, have filed a medical bankruptcy bill that addresses the problems dating back to the bankruptcy amendments of 2005 to help people forced into bankruptcy by medical debt. “These things are almost always unanticipated, massively expensive and uncontrollable,” Sen. Whitehouse explained.

Questions can be directed to Krista D’Amelio, Director of Government Affairs & Communications: krista.damelio@nacba.com.

NACBA Announcement – HEROES Act Bankruptcy Provisions

As a majority continue to follow stay at home orders due to the COVID-19 crisis, NACBA’s Legislative Committee with support from NACBA’s Board of Directors have been working nonstop with House and Senate staff to ensure significant bankruptcy provisions were included in H.R. 6800, Health and Economic Recovery Omnibus Emergency Solutions Act, also known as the “HEROES Act”. We are pleased to announce NACBA’s success in having many of our provisions included that will facilitate the availability of bankruptcy for victims of COVID-19 and its foreseeable economic consequences.

NACBA’s Legislative Committee and Board of Directors proudly share our association’s bankruptcy provisions included in H.R. 6800.

Protecting Homes and COVID Benefits. The House bill included a $100,000 homestead exemption floor, applicable to all cases where the homestead exemption would otherwise be lower, and a provision excluding COVID benefits from property of the bankruptcy estate. Many debtors will be filing bankruptcy cases solely because of the pandemic and its effects. They should not lose their homes just because these circumstances caused financial disaster. And debtors should also be protected from trustees seizing COVID benefits that are often essential to continued subsistence.

Protection from Discrimination Against Bankruptcy Debtors. In the initial days of attempting to obtain benefits afforded by the CARES Act, bankruptcy debtors were being told that they cannot receive the benefits such as mortgage relief and small business loans because they are in bankruptcy. Bankruptcy Code section 525 is amended to make clear that no entity can discriminate against past or current bankruptcy debtors in providing COVID-related mortgage assistance.

Ensuring Chapter 13 is Available to Families that Need It. The debt limits in Chapter 13 have not kept up with increasing home mortgage and student loan debt. Chapter 13 can also provide a method of reorganization from many small businesses that is much less expensive than chapter 11. The chapter 13 debt limits are doubled by the bill, which would allow more families and small businesses to file chapter 13 cases to resolve the hardships caused by this crisis.

Ensuring a Fresh Start for Chapter 13 Debtors Who Become Unable to Make Plan Payments. Debtors currently in chapter 13 will lose jobs and income or have large medical expenses, making continued payments impossible. They now have the option to obtain a chapter 13 discharge without completing payments if they have been in chapter 13 for at least one year.

Allowing an Extended Period for Chapter 13 Debtors to Catch Up on Missed Mortgage Payments. Debtors currently must complete their chapter 13 plans within a five-year period. They are now allowed to extend their chapter 13 plans for up to an additional 2 years, not to exceed 7 years, solely to allow them to catch up on missed mortgage payments or on mortgage payments which had been subject to forbearances.
While not all offered provisions were incorporated into the current bill, NACBA is strongly continuing our efforts towards getting them into the final House and Senate compromise bill. One provision NACBA continues to push for is:

Giving Chapter 13 Debtors Options to Deal with Mortgage Payments When There Has Been Forbearance on Those Payments. This provision permits mortgage servicers to file a supplemental claim when there has been forbearance on mortgage payments during a chapter 13 plan. The debtor can request that the court modify the plan or order that the mortgage payments be deferred until then end of the mortgage period. The court can also order mediation to allow the debtor and mortgage servicer to work out a mutually satisfactory arrangement to deal with the payments.

Should you have any questions or comments, please direct them to Krista D’Amelio, Director of Government Affairs: krista.damelio@nacba.com

NC Attorney General Recovers $150K+ in Consumer Relief in Price Gouging Settlement

North Carolina Attorney General Josh Stein obtained a consent judgment against Ohio-based Scotts Tree Service and defendants Scott Lacey and Randy Shannon to resolve a Hurricane Florence price gouging lawsuit. The consent judgment bans the defendants from performing tree removal work in North Carolina, prohibits them from collecting $153,100 in outstanding invoices from North Carolina consumers, and orders them to pay $20,000 in restitution, civil penalties, and fees.

“As North Carolinians in eastern North Carolina work to recover from damage caused by Hurricane Dorian, I urge them to be vigilant of price gougers,” said Attorney General Josh Stein. “If you think you have been the victim of a price gouging scam, please report it to my office. As this post-Florence case demonstrates, we will not abide scammers who try to take advantage of this disaster.”

Attorney General Stein filed an enforcement action against Scotts Tree Service, Lacey, and Shannon in October 2018 after Hurricane Florence hit North Carolina. Homeowners in Castle Hayne alleged that Lacey, who owns Scotts Tree Service, and Shannon, its employee, billed them $14,500 to remove two fallen trees without first discussing or getting agreement on the price. Attorney General Stein’s lawsuit alleged that Scotts Tree Service had one of the homeowners sign a statement of work to be done and later filled in the document with the $14,500 price, which the homeowner had never agreed to pay. After the homeowners refused to pay this invoice, Scotts Tree Service sent the invoice to a bill collector, the co-defendant Goldberg & Donovan, Inc., a Massachusetts company. Attorney General Stein reached a $15,000 settlement with Goldberg & Donovan and its proprietors, Stephen and Amy Lombardi, in May.

During its investigation of Scotts Tree Service, Attorney General Stein discovered evidence that numerous other North Carolinians may have also been price gouged by the company. The company’s invoices to those consumers were cancelled as part of the consent judgment.

North Carolina’s price gouging law was in effect after Gov. Roy Cooper declared a state of emergency for Hurricane Dorian. People can report potential price gouging by calling 1-877-5-NO-SCAM or by filing a complaint at https://ncdoj.gov/file-a-complaint/price-gouging/.

After Hurricanes Michael and Florence devastated North Carolina in 2018, Attorney General Stein brought seven lawsuits against 22 defendants under North Carolina’s price gouging statute. He has obtained eight judgments against 17 defendants, including a $274,000 settlement that was one of the largest price gouging settlements in the department’s history. The Attorney General’s Office has won more than $725,000 in these judgments, including:

$242,500 in consumer restitution
$392,500 in money companies are barred from collecting from homeowners
$94,500 in penalties and fees

FICO changes how credit scores are calculated

The company that calculates our credit scores is making changes in the way it comes up with your number. The name of the company is Fair Isaac Corporation, hence the term FICO SCORE.

FICO scoring models are typically updated every few years. With the latest change, your score will still be based on how much you owe, the number and types of accounts you have, and of course your payment history. But in the future, even if you pay your credit card and loan bills on time, your credit score might drop if your report shows a trend that your debt balance is going up.

Ted Rossman of Bankrate.com says one key adjustment involves the use of what’s known as trended data.

“One prime example of that is that recent behavior has the potential to help or hurt you more than in the past,” Rossman explained. “So, if you have a recent late payment, that’s going to have a big negative effect. Also, if you used to have better credit habits, like maybe you used to have a better on time payment history or you used to have lower debts, your debt has crept up. Trended data has the potential to negatively affect you for that reason,” Rossman said

Experts say under the latest credit scoring model people with scores below 600 could see their credit score drop by 20 points or more. Reports indicate some people might also face a credit score penalty for signing a personal loan, which is generally considered more risky because it’s not secured by thing with collateral value like your home or car.

How will your credit score hold up to the newest scoring model changes?

“The flip side though is that if you’re improving. If your the proverbial C student that starts getting a bunch of As, that’s going to help you,” said Rossman, using student grades as a metaphor for debt management.

Professionals in the non-profit credit counseling industry say this is another reminder of the importance of identifying your risks of drowning in debt, if you’re barely keeping your financial affairs afloat.

“This is where a non-profit credit counseling agency can directly assist in helping you get a plan to fix the issues that are holding your credit score down, get back on track with any bills that you’re paying late, and have a chance to completely restore any issues that are having an effect on your personal finances. Now is the time to do that, said Bruce McClary with the National Foundation for Credit Counseling.

“Some people might look at that 20 point decrease and say, ‘Well, that’s not a big deal.’ But if you’re on the threshold of either qualifying for credit or not, that 20 points can put you totally out of the game.”

Both McClary and Rossman agree that people may not be impacted right away by the recent FICO adjustments, since many lenders are still basing their loan decisions on older FICO scoring models.

As months go by, however, that could change, especially since consumer credit debt nationwide is now higher then levels before the financial crisis of 2008 and more people are dangerously over their heads in credit card and loan debt.

“I wouldn’t worry too much about being impacted right away by this, McClary said. “But if you do think that you will be impacted, now is the time to start addressing the problems that are holding your credit back.”

People who follow these FICO changes say if your credit score is 700 or higher, you could see a 20 point increase in your score and some people will see no change at all. But the key for everyone is to always pay more than the minimum payment, keep your overall debt balance going down, and whenever possible, pay before your payment is due, since the information that goes on your credit report is usually based on how things look as of your monthly statement date.

If you do have poor credit, beware of credit repair scams that promise to help you lower your debt. Regardless what you hear or see in advertising or solicitations, always seek help from a certified, non-profit credit counseling agency, or a licensed attorney, and never pay sums upfront.

Banks Are Handing Out Beefed-Up Credit Lines No One Asked For

It might sound like a risky strategy at a time when millions of Americans are drowning in debt: keep raising the limit on people’s credit cards, even if they don’t ask.

But that’s exactly what big banks have been doing lately to turbocharge their profits, leaving customers with the potential to rack up even bigger monthly bills.

For years after the financial crisis, Capital One Financial Corp. resisted that step for customers who looked vulnerable to getting in over their heads. In internal conversations, Chief Executive Officer Richard Fairbank characterized the restraint as a radical theology, in part because it went beyond post-crisis requirements, according to a person with direct knowledge of the discussions.

But then Capital One — known for its “What’s in Your Wallet?” slogan — reversed course in 2018, after the bank came under pressure to keep revenue growing. The company’s revenue reached a record last year.

The same reversal is playing out across U.S. banking, as more customers get unsolicited access to additional credit, in what’s becoming a new golden age of plastic. The goal: to get consumers to borrow more. The question, just like in the heady 2000s, is how it will end for lenders and borrowers alike. Research shows many consumers turn higher limits into debt. And the greater the debt, the harder it is to dig out.

“It’s like putting a sandwich in front of me and I haven’t eaten all day,” said D’Ante Jones, a 27-year-old rapper known as D. Maivia in Houston who was close to hitting the ceiling on his Chase Freedom card when JPMorgan Chase & Co. nearly doubled his spending limit a year ago without consulting him. He soon borrowed much more. “How can I not take a bite out of it?”

The banks say the increases are good customer service and that they raise spending limits carefully, discourage reckless borrowing and let customers reverse the increases at any time.

Record Borrowing

Whatever the case, the immediate result is clear: debt, and lots of it. Outstanding card borrowing has surpassed its pre-crisis peak, reaching a record of $880 billion at the end of September, according to the latest data from the New York Fed’s consumer credit panel. That’s boosting profit at top lenders like Capital One, JPMorgan and Citigroup Inc. a decade after banks cut credit limits without warning during the crunch.

“Capital One examines a number of factors before determining whether a customer is eligible for a credit line increase, including reviewing their credit and payment history, debt-to-income ratio and ability to pay,” a spokeswoman said in a statement. She said the company offers customers tools to “help them manage credit wisely.”

JPMorgan said it makes sure borrowers don’t owe too much and avoids raising limits for subprime cardholders.

“In a very targeted way, we grant credit line increases to creditworthy customers who have demonstrated consistent usage of the card and have shown strong repayment patterns,” a JPMorgan spokeswoman said. Less than 1% of increases are reversed by customers, she said.

“I didn’t know there was a way to say no,” said Jones, the Texas rapper. He was making less than $30,000 after taxes when Chase gave him access to an additional $1,500 during the 2018 Christmas season. A lot of people would celebrate access to more money. But he said he was terrified he’d spend more than he could handle. After thieves damaged his car, he tapped the full credit line and could only afford to make the minimum monthly payment.

Banned in Australia

Proactive credit line increases, known in the industry as PCLIs, emerged in the 1990s but virtually disappeared after regulators clamped down on the practice following the 2008 financial crisis. But as banks struggled to ramp up lending, PCLIs made a comeback with executives finding more aggressive ways to work within the consumer-protection laws.

U.S. issuers boosted credit lines for about 4% of cards in each quarter of 2018, according to the Consumer Financial Protection Bureau’s most recent data. That’s double the rate in 2012.

Subprime and near-prime customers got increases at a higher-than-average pace, according to the agency. That means many of the people getting boosts have blemished or limited histories of paying bills.

Courtesy: Bloomberg