Is Common Sense Returning to Consumer Lending?

June 16, 2009 by  
Filed under Debt and Credit

Yesterday I read a post by The Finance Buff which the writer entitled “The Credit Crunch Finally Hit Me.”  After reading the post, Mr. ToughMoneyLove had to leave a comment that disagreed with the title and premise of the article.

My comment started with this: “The credit crunch didn’t hit you. Common sense in lending hit you.” I will tell you why I said this.

The author (“TFB”) told us that he/she had applied for an unsecured personal line of credit from Wells Fargo Bank. The credit application had recently been denied. TFB was surprised enough by this to post about it:

The underwriter said the reason for the decline was that the size of the credit line I asked for was too high for my income. Fine, tell me what you can give me. No, they just flat out declined me. It’s been widely reported that credit card companies are cutting people’s credit limits. They have spared me so far. Ah, the credit crunch finally hit me.

Not to be deterred from this search for more credit, TFB appealed to higher powers  in the bank:

The phone rep told me the underwriter couldn’t give me a higher credit line because I already have plenty of credit available to me from my three credit cards. The underwriter said if I were to max out on all my credit cards, the required payments would be too high for my income.

To me, this is the important part. TFB was proud of his/her 790 credit score. But that high score did not prevail this day. Why? Because the bank actually looked at the borrower’s debt to income ratio. It didn’t matter that the ratio of actual to available credit was low. (FICO loves that ratio.) Common sense in loan underwriting – where did that come from?

How refreshing and novel to read this in an age of credit score worship. I thought that a high credit score was the ultimate indicator of your financial merit? Isn’t that what FICO and personal finance bloggers galore have been telling us? The FICO score does not even consider income yet Wells Fargo used it in this case to deny credit to a 790 applicant.

If you think about what Wells Fargo did in this case, doesn’t it make sense? Doesn’t it make you wonder why FICO and all of the institutions that worship the FICO score de-emphasize or completely ignore a person’s income or net worth when extending consumer credit?

I hope this little anecdote is evidence of a systemic return to common sense in consumer lending. I hope it means that lenders will look at all aspects of a person’s finances and not just their skills at playing the credit score game. I hope it signals the beginning of the end of credit score dominance in personal finance. I am sick of it.

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6 Responses to “Is Common Sense Returning to Consumer Lending?”
  1. My Journey says:

    While I often disagree with your disregard of credit scores – mainly because of the real life application. I agree with you 100% with your assesment of this particular situation; DTI ration is not even factored with score and that should be one of the most important aspects of a loan.

  2. My Journey: Thanks for your concurring views on this. Only a few million more like you and we may see some progress!

  3. RC Brooks says:

    It’s good to see a little progress on this end. However, I think much more needs to be done. I pay for most everything in cash (vehicles included). However, I recently looked into buying some property and needed financing for about two thirds of it. I was unable to secure the extra funds through my local bank (that I have banked through for over two decades) even though they were fully aware of my income and my good history. No, because I have not played the credit game I was unable to borrow the needed money (at least the amount I needed and what they were willing to lend was astronomically high.) In the end I marshaled more of my reserves and went in together with a relative to purchase the land.

    To think all of that money being pulled out of the economy to feed those fools. It’s enough to make me see red.

  4. TFB says:

    I actually agree with you. Perhaps I’m not good at it. The title of the post was meant to be tongue-in-cheek. Toward the end of the post I said the way Wells Fargo did it was the right way. All loan applications should be evaluated by a real person taking into consideration income and debt capacity.

  5. I was amused to see that is one of the sponsored links on this site (delivered via Google). I’m not implying anything. It’s just ironic.

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