The Debt Trap: How Banks Push Troubled Borrowers Deeper Into Debt
Brenda Jerez hardly seems like the kind of person lenders would fight over.
Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.
For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.
"Good news! You are approved for both Visa and MasterCard -- that's right, 2 platinum credit cards!" read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.
"It's like I've got some big tag: target this person so you can get them back into debt," said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with "less-than-perfect credit."
Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.
Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.
They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers -- even those who would normally have trouble qualifying for the credit they were being pitched.
These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers' lives, creating the appearance of almost irresistible serendipity.
These leads, which typically cost a few cents for each household profile, are often called "trigger lists" in the industry. One company, First American, sells a list of consumers to lenders called a "farming kit."
This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.
The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.
"They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest," said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. "It's the wrong product at the wrong time."
To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.
Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.
The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.
"It almost seems like they are trying to get you into trouble," he says.
The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade -- not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.
During the housing boom, "The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to," said Steve Ely, president of North America Personal Solutions at Equifax.
The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its "Niches 2.0" database. Its "Oodles of Offspring" grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the "Midlife Munchkins" group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.
Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.
In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.
One technique is called "predictive modeling." Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign -- one that asks people to refinance their homes, for example -- and who has simply thrown the letter in the trash.
The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.
The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises "advanced profiling techniques" to identify people who show a "statistical propensity to acquire new credit" within 90 days.
An Equifax spokesman said the exact formula was part of the company's "secret sauce."
Data brokers also sell another controversial product called "mortgage triggers." When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.
In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.
At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.
"We called people who were astounded," said Alan E. Geller, chief executive of the firm. "They said, 'I can't believe you just called me. How did you know we were just getting ready to do that?' "
"We were just sitting back laughing," he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.
The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.
What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah's attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.
"I was being bombarded by so many offers that, after a while, it just got more and more confusing," she says of her ill-fated decision not to carefully read the fine print on her loan documents.
Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.
"This is an opportunity for consumers to receive options and to understand what's available," said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.
Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.
Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.
"The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers," said Peg Smith, executive vice president and chief privacy officer at Experian. "It is up to the bank to keep the right balance."
Decrease in Mailings
In today's tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.
Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.
Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.
For example, unsolicited letters from banks now often state what each person's individual savings might be if a new home loan or new credit card replaced their existing loan or card.
Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry's newest challenge is to personalize each offer without appearing too invasive.
He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient's home on the image.
The campaign flopped. "It was just too eerie," Mr. Harvey said.