The Money Trap: How Banks Lure You Into Debt

Suicides in the UK rose significantly in 2012, according to the British Office for National Statistics, and suicide prevention experts in that country say that it's due to irresponsible lending practices by British banks and predatory debt collectors there.

The Brighton Report, released earlier this year, revealed that the number of suicides in the UK hit 6,045 in 2011, a 7.8% increase compared to 2010, with deaths among men accounting for the largest proportion. A total of 4,552 men took their own lives in 2011 compared with 1,493 women.

"Debt clients frequently feel humiliated, disconnected and entrapped, with the process of debt collection having a clear impact on people's mental health," read the report from England's University of Brighton.

The ONS says that, among men aged between 45 and 59 years old, the suicide rate increased significantly between 2007 and 2011 to 22.2 deaths per 100,000 people.

"These figures ... reveal the profound human consequences of the economic downturn, in which unemployment, debt, and the relationship breakdowns that often follow, can push people who may be already vulnerable to take their own lives," Marjorie Wallace, CEO of SANE, a UK mental health charity, told Reuters.

The money trap

This is how the The Money Trap: How Banks Lure You Into Debt begins, spotlighting a man who took his own life with a duffel bag full of his past due bills next to him. Mark MacDonald was only making $26,000 a year and he was what the banking industry called, "A Revolver" -- someone who only makes the minimum credit card payment every month and acquires a huge debt load along the way.

Revolvers are huge profit centres for the banks because they're the ones who are most likely to pay the most interest charges and penalty fees without any chance of a payment holiday. Sure enough, at the time of his death, MacDonald had payed the bank over £3,000 pounds interest and penalty charges on two of his eight credit cards and he still owed thousands of dollars in principle on both. Meanwhile, one of those two cards was upgraded to platinum with a £12,000 credit limit and it was done by MacDonald's own bank -- a place that had a very clear idea of his dire financial situation and yet they enthusiastically approved his opportunity to dig himself a bigger hole.

They were, the documentary asserts, luring him into debt deeper and deeper until it was too much for him to take, bleeding him dry while simultaneously increasing his opportunity to spend. A clear violation of responsible lending practices and the problem is not just limited to the UK.

Canada is not immune

Canada holds the distinction of being the country with the highest rate of insolvencies in the western hemisphere through at least the first part of this decade and the number of senior citizens appearing among them has increased elevenfold since 1999.

Lawmakers reaction to this was to institute the mandatory requirement that before you file for bankruptcy under the Federal Bankruptcy and Insolvency act you must attend credit counseling. Creditors, who felt it was too easy for Canadians to initiate bankruptcy and get out of their debts early, lobbied lawmakers and received the requirement that the debtor must pay off their debts with any surplus income according to the Low Income Cut-Off Standards established by the Superintendent of Bankruptcy.

Both of these reactions place the blame for debt squarely on the shoulders of the individual consumer with the banks who approve credit they have no business approving remaining largely blameless in the debt equation. Financial laws in this country require the debtor to be responsible for the credit they run up, but the creditor is not required to be equally responsible when granting credit. Of course, it would be difficult to adopt such a requirement under one umbrella given the different types of debtor-creditor relationships that exist.

But, at a minimum, the lender shouldn't knowingly or recklessly grant more credit to a consumer than that person can reasonably hold and still have a chance to pay off, especially when the lender knows what that person's financial circumstances are and has a reasonable idea of what those will be in the future.

But if the law is more than a few steps behind the reality once again, how can the consumer recognize irresponsible lending and hold banks accountable?

The credit score is at the core

"What I'm seeing is that lenders are no longer using the lending criteria they used to use in handing out credit," financial expert Gail Vaz-Oxlade told the CBC. "They used to use the 'five C's of credit,' which included things like your character and your capacity to repay, along with things like your credit history, your collateral and your capital, or how much money you've accumulated. That's given way to the credit score. The credit score is now being used almost as the defining tool for granting credit, particularly when it comes to credit cards."

In fact, the credit score was once a marketing tool used by the banks to identify "Revolvers" like Mark MacDonald because they were the best and most profitable customers for the credit card companies. This is why those that only make the minimum payment get more credence and more points with lenders.

"If you look at a credit score, it's just one piece of the picture. But if you're relying totally on the credit score, then you're actually rewarding the wrong behavior," continues Vaz-Oxlade.

She is campaigning to take the credit score off the table as an adjudication tool for lending and encourages you to send a letter to your Member of Parliament asking them to vote to do the same. A good credit score is predicated on large credit limits, only making the minimum payment and having access to lots of different forms of credit, which are all counter to good financial management skills. She also encourages people to go on a credit fast and put away their credit cards in favour of only using cash.

Irresponsible mortgage lending also spells debt

Excessive irresponsible lending doesn't end with credit cards. Looking for the reason behind the current condo boom in Toronto and the rising prices that come with it, several "Mystery buyers" from condo market analysis firm Veritas discovered that "no mortgage pre-approval was needed to buy a unit. ... Only a valid driver's license was required to purchase a unit, along with a down payment cheque."

Their report also found that the banks were complicit in irresponsible mortgage lending:

"At one sales centre, BMO was willing to lend half of the required 20% down payment. Apparently, BMO is qualifying the prospective borrower on the full mortgage before approving the down-payment loan."

And of course, sales people stretched the truth when it came to the health of Toronto's condo market in general, claiming that 70% of Canada's immigrants live in Toronto. (The number is closer to 30%.) Another saleswoman over estimated how much condos in the area are renting for by 20 to 40%.

All of this combined is leading condo buyers to play the dangerous game of borrowing money against their existing house to afford their new condo, which the report surmises will put those people's retirement nest egg at risk.

"With condo prices inherently more volatile than house prices, and a demand/supply imbalance in the works, we believe the retirement nest egg of many condo investors is at risk," reads the report.

Questionable British lending practices coming to Canada

So, truly, people are being lured into debt in this country and the above is how they're doing it. As for Britain, British banks have been forced to write off much of the debt racked up by those in the direst of straights, but often they only forgive the debt once its too late and the person has already killed themselves over their financial troubles.

In an ironic twist, British pay day loan company Wonga.com, a company that offers same-day loans online and has faced it's own irresponsible lending allegations, will be making its way to Canada.

The company's cheerful advertising disguises the fact that they offer loans at an astounding 4,214% APR, or 1% a day. They envision their customer base as tech savvy millennial of the Facebook generation who thrive on instant gratification, but what they're getting are desperate indebted and struggling individuals who can't get a loan anywhere else. Here's the typical debtor profile as reported by The Guardian:

"Susan, is 53, unemployed and dependent on disability benefits. She finds that with the cost of living rising, her benefits sometimes don't stretch to the end of the month, and has taken out loans with Wonga to buy food, if she's caught short. She's a bit vague, but thinks she's taken out half a dozen loans with Wonga over the past few months."

"Sometimes we will make loans to people on significant benefits, but it is not something we do very frequently. It is very infrequent. I'm not going to say it doesn't happen," John Morwood, the company spokesman, admitted in the same article.

British MP Stella Creasy believes that Wonga is trying to be responsible, but misunderstands the needs of the real customer base they are dealing with. "The mistake they are making is to assume that people, when faced with a financial penalty, have the option to avoid it. In their mind they have the option of choosing not to extend a loan, when they see the costs. What they don't understand is that they are dealing with a clientele who doesn't have that choice," she says.

Do we really want the irresponsible lending practices that have spun out of control in Britain to be imported here? Looks like they're coming whether we want them or not.