Universal Default and FICO Scoring

[Lucid08]

I know that some CC issuers use this as a method of changing a persons interest rate and/or CL, with the latter having the possibility of affecting a persons FICO score if the CL is reduced, but do any other types of lenders(such as auto loans or mortgages) use a type of universal default clause, or is it a CC specific mechanism?

[RobertEG]

Great question, Chris.  Looking back at the history of credit laws and restirictions, many states implemented relaxed laws in order to entice CCCs to do business in their states.  Dakota, Jersey, and Delaware are major examples.  Exemption from usual usory laws, and ability to change terms based on 4-pt fine print in user agreements on revolving accounts.  However, installment loans, such as mortgage and auto, have preset fixed terms.  While they do have penalties, they do not normally permit reset of the basic contract at the will of the lendor.

To date, no federal legislation has been enacted that would restrict such practices.  Legislation is pending in Congress, but the credit lobby has to date been strong enough to block any such legislation.

[Lucid08]

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@RobertEG wrote:

Great question, Chris.  Looking back at the history of credit laws and restirictions, many states implemented relaxed laws in order to entice CCCs to do business in their states.  Dakota, Jersey, and Delaware are major examples.  Exemption from usual usory laws, and ability to change terms based on 4-pt fine print in user agreements on revolving accounts.  However, installment loans, such as mortgage and auto, have preset fixed terms.  While they do have penalties, they do not normally permit reset of the basic contract at the will of the lendor.

To date, no federal legislation has been enacted that would restrict such practices.  Legislation is pending in Congress, but the credit lobby has to date been strong enough to block any such legislation.

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Interesting.

I was wondering, as I made the OP, if this might not become a mechanic due to the mortgage meltdown we are currently seeing. I was unable to find any instances where this has occured with fixed rate loans, but I was a little intrigued as to whether this might not play a factor in variable rate mortgages or auto leases of the near future.

[marty56]

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ChrisGA43 wrote:
I know that some CC issuers use this as a method of changing a persons interest rate and/or CL, with the latter having the possibility of affecting a persons FICO score if the CL is reduced, but do any other types of lenders(such as auto loans or mortgages) use a type of universal default clause, or is it a CC specific mechanism?

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I dont think so.  So I would say it is CC specific.