Friday, April 14, 2006

'Maxed Out' - A Scathing Look at the Lending Industry

Filmmaker James Scurlock set out to create a lighthearted, satire about consumer irresponsibility. Instead, "what the self-described "finance geek" and former publisher of a financial newsletter ended up with however, is a much starker tale, one of struggle, suicide and desperation."

In a recent Newsweek interview, Scurlock indicated that there are to main points that he wants to get across with his movie: "one is that the financial industry has changed a lot in the last generation, and people need to realize that ...We're in a totally different time now where we're deluged every day with offers of credit. And the second thing is that I think people need to start getting active with Congress and [pressuring them] into changing the balance that's been so weighted toward the financial industry and against the consumer."

He goes on to say "[t]he major change is that the industry discovered that the most profitable consumers were the least responsible consumers--college students, people who'd declared bankruptcy, housewives [and] people who were consuming beyond their means. People who would pay anything for credit, any fee or any interest rate because they needed more credit. That's the major change. Before, credit was rationed based on whether you could pay it back, based on your reputation, based on your character to some degree. It's just not that way anymore, and that's a huge change."

He also talks about the depersonalization of the lending process (i.e., all decisions are based on a number, namely our credit score), how 90% of all credit reports contain at least one error, how difficult it is to correct those errors because credit bureau have no incentive to remove the inaccurate information, etc.

The one comment that he made that really struck a chord with me was in regards to what he perceives as the changing role/attitude/perspective of local bankers: "back in the '60s and '70s ... a lot of bankers objected to credit cards and said they were not going to give consumers the noose from which to hang themselves--that was immoral, that was unethical ... They understood that people would abuse credit if given too much of it, and the banker had to fill this role of regulator. That philosophy doesn't exist any more."

I'm not really sure that I buy his argument. It's true that financial institutions expect to write off a certain percentage of bad debt. But it's also true that they absolutely hate it when consumers file for bankruptcy. With unsecured debt, they'll be able to recover at most, cents on the dollar. As for secured debt, most financial institutions would still rather avoid the lengthy process of foreclosure. They'll work with the consumer to try to figure out an alternate plan.

Although the stories that he shares about suicide attempts are depressing, I do want to say that one of the disturbing trends that I've noticed in some of the documentaries is that we tend to blame society for individual problems rather than accepting personal responsibility for the choices that we make. In the '60s and '70s, maybe local bankers did have a more paternalistic attitude. But on the flip side of the coin, back in the day, when people borrowed money, they also fully intended to pay it back. I've met way too many people whose attitude towards or remedy for overspending is to just file for bankruptcy. So I really do applaud all of the folks in the pf blogging community who are taking active steps to repay their debt. As Scurlock would say, it's the moral and ethical thing to do.

Anyway, I do agree with Scurlock's assessment that financial institutions target college students because they typically have parents who will bail them out. And there's always the prospect of future earning potential. But that's where the role of the parent comes in. When I was in college, my parents threatened to cut me off if I so much as ordered a pizza instead of eating in my cafeteria, which they'd already helped pay for. I'm exaggerating, but you get the point. I mean, you literally couldn't walk down the street without being inundated with free credit card offers (t-shirts, frisbees, coffee mugs, etc.). I think maybe once I gave in and filled out an application for a Discover card so I could get a free mug. But when I got the card in the mail, I immediately cut it up into little pieces and tossed it in the garbage can.

As for lobbying Congress to put more protective measures in place, there are several anti-predatory lending laws on the books, at least in Illinois. Reputable financial services institutions hate being lumped into the same category as companies that provide paycheck or tax refund loans. But I'm not sure if that's what Scurlock is talking about? If he's talking about capping interest rates on loans for risky consumers with poor credit history, my guess is that the larger financial institutions will simply refuse to lend money to those individuals, period. That could be a good thing. But it might also mean that the rich will continue to get richer and the poor will continue to get poorer.

Anyway, the interview/movie provides an interesting perspective on changing norms in both society as a whole and within the financial services industry. Definitely worth checking out the movie and the memoir when it comes out in 2007.

Have a very Good Friday and a wonderful Easter weekend. I'll be back on Monday.


Miserly Bastard said...

I tend to hate these anti-credit documentaries. Frontline ran a piece about the credit card industry about a year ago. The net takeaway from the show was that credit card companies are all bad, exploitative, corporate monsters, and consumers are ignorant, unwitting "little guys" just trying to make ends meet.

I think this is hogwash. While it is true that in many instances personal bankruptcy is driven by something like the loss of a job, or a catastrophic medical injury, there are also many cases in which people get themselves into financial trouble by buying plasma TVs, etc. I dont have any sympathy for these guys.

Yes, credit is easy to get. Yes, you are constantly bombarded by advertising messages to be a consumer. Yes, credit cards have lots of fine print and all sorts of sharp practices like "universal default". Yes, the language is dense and hard to understand. Yes, some payment schedules like as the "minimum payment" plan make almost no headway against principal loan balances. Yes, the interest rate charged borders on usorious....


People are grownups. If they make decisions, they need to face consequences. I have zero sympathy for credit deadbeats who got there by living the consumerist lifestyle.

John OMM said...

I'm curious to see the documentary though I expect I'll strongly disagree with its paternalistic message. If you haven't seen the episdoe of Frontline about the credit card industry it's worth checking out too.

John OMM said...

^How funny. Looks like miserly bastard beat me to it, and did it better.

IRA said...

John OMM and Miserly Bastard - thanks for the link. I'll have to take a look at the Frontline piece as well. I agree that there's a fine line between enticing customers with intriguing offers vs. exploiting them. I'm just not convinced that most reputable financial institutions have crossed that line. You'll hear stories here and there about overly aggressive employees targeting low income workers, but in general, that type of behavior is frowned upon because it inevitably results in bad debt and defaulted loans having to be written off.

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