Word: defaulters
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...might sound like a setup for another subprime-mortgage debacle. But so far, Lending Club's default rate is less than 0.5%. That's partly because P2P members are motivated to pay back or lend to an actual person rather than a big bank. Since May 2006, Marilyn Paguirigan of Honolulu has lent a total of $30,000 to more than 100 people on Prosper, most of whom she has never met. "I measure my returns in not just the dollar amount," says Paguirigan, who happily makes 6% to 7% on her loans. "It's in the fulfillment...
Most consumers are unaware that the banks constantly monitor all their borrowing behavior. Even if you just get too close to your borrowing limit (a figure you probably don't know) on your cards and mortgages, as Groves did, you can trigger what the industry calls universal default...
...ending universal default is only the start of sweeping changes to the lightly regulated, $160 billion credit-card industry that are being demanded by consumers and lawmakers alike. Both Hillary Clinton and Barack Obama are campaigning for credit-card reform. On Feb. 7, Representatives Carolyn Maloney and Barney Frank introduced a credit-card bill of rights that would make it harder for issuers to add fees and hike rates. Senator Carl Levin is also sponsoring a bill that would cap rate increases, rein in fees and require clearer disclosures of all costs...
Although the industry continues to defend its "risk-based pricing", which it says has made cards more generally available, the voluntary changes from Chase and Citibank (which eliminated its universal default clause in 2007) show a new willingness to curb some of the more controversial practices. "They are kowtowing to political pressure," says Frank Braden, an equity analyst at Standard & Poors. Adds Levin, "They take it very seriously. I think they are very nervous...
...while the stereotype of a chronic debtor is of someone who is simply careless about spending money and paying bills on time, this is rarely the case. "Delinquency and default are nearly always due to loss of job or a 'life event' such as health problems (and medical bills), death or divorce," wrote analyst Chris Brendler of Stifel Nicolaus in a January report. Today's unemployment rate has yet to cause alarm, but it's the X factor that could determine how much worse credit-card defaults may get as recession looms...