Credit/Debt Recovery

Credit crunch stuff

You'll be seeing the phrase "credit crunch" where ever you look for months to come. It's a phrase carefully coined to make a sudden infusion of common sense in lending look like a bad thing.

The crunch just means lenders are going to stop handing out credit to people who haven't demonstrated that they can handle it. Call it a "crunch" if you want, but it's the way the lending business should have been run all along.

It used to be, until activists stepped in and convinced the government to intervene, forcing lenders to extend credit more broadly.

This is analogous to the biofuel mess Mark Steyn writes about (and linked to by Tom Blumer of BizzyBlog). Environmentalists pressured government to require more use of biofuels, which is backfiring in a big way.

Ditto lending. When you require lenders to engage in subprime lending, don't be surprised when the whole thing backfires. Here's Caroline Baum with more on this.

Being good

John Gruber's Daring Fireball blog links to Paul Graham advising startup companies to "Be good."

Gruber's summary of Graham resonates:

His argument, more or less, if that if you use “do what’s best for the users” as your rule of thumb for any decision, you’re more likely to grow into a successful business. He even makes the case that was true for Microsoft during their years of phenomenal growth.

How I wish credit card companies would think the same way with regard to their debtors. I think that sums up the difference between me and other critics of the credit card companies. I want people to have access to credit, and I want creditors to apply Paul Graham's advice to their own industry and be successful. The business of lending isn't evil; it's the way the Bank of Americas of the world go about it. I just hate when creditors resort to coercion and fraud to make a few extra bucks.

The kind of behavior I'm talking about is what Bob Sullivan calls "Gotcha Capitalism." Except it's not really capitalism. Translate "users" in the quote above to "customers" and you've got a near-perfect description of real capitalism (the evils committed by credit card companies aren't capitalism, despite what journalists or social studies teachers say).

Internet lending

I've blogged about Prosper.com a few times in the past (here and here are a couple of examples).

My basic take on the whole thing was that the "feel-good" borrower-lender relationships being promoted would give way to traditional numbers-based lending. That is, a reliable credit score will beat out a compelling sob story every time.

And that's what seems to have happened. Prosper lenders I know started in good faith trying to help borrowers in need, and these days they just look at credit ratings and ignore the personal narratives and borrower profiles altogether.

I see Richard Nikoley is eyeing the peer-to-peer lending industry as well. He's started accounts with Prosper and Lending Club, and not surprisingly, has started out with a clear head. From his blog:

I'm not interested in people's stories, only their credit grade, debt ratios, and so on -- all the classic criteria.

I know Richard to be firmly grounded in reality, so of course he's not just going to lend to the person with the best narrative. He's going to use proven criteria. The bottom line is, the credit scoring system we have works pretty well. It's not perfect, or else there'd be no need for books by me about repairing your credit. But credit reporting and scoring are not about to be replaced by personal narratives.

Though maybe traditional creditors will give way to more peer-to-peer lenders. I'd like that. While I don't think creditors are evil for using traditional credit reporting, their treatment of their debtors is less than virtuous. I don't expect individuals lending with peer-to-peer websites to completely negate their lending agreements and change fees, terms and interest rates in violation of their signed contracts. We'll leave that sort of thing to Bank of America and the other lenders who aren't on this list.

I look forward to seeing what else Richard has to say about peer to peer lending, and yes, my curiousity is piqued about Zazingo.