Consumer Credit Models: Pricing, Profit and Portfolios Book

I wish I wrote this review earlier, immediately after reading Debt For Sale. I respect Dr. Brett Williams' arguments but felt they lacked objectivity. I say that after being an alum from American University where Dr. Williams is a professor, but was a never a student in her class. The objectiveness that Dr Williams fails to provide is basic finance theory. Finance theory states the higher the risk the higher the return must be. Conversely the lower the risk the lower the return. Dr. Williams' argument Boils down to that banks should be focused on providing services to the poor and those with bad credit scores to help them, and should tax the rich and those with good credit scores to do so. Based on finance theory, this isn't reasonable because why would a banker want to charge a higher interest rate or fee for a risk that they want to keep on their balance sheet, conversely why would they pay to have bad credit risk on the balance sheet. Based on finance theory it should be the opposite, which is exactly what is happening in the field, and what Dr. Williams is arguing against.

Dr. Williams also brought in examples of an employee working at a banks who racked up credit card debt from buying material objects, and then complained about the debt trap they were in, and said banks shouldn't be able to charge high interest rates. I am a banker, and I can tell you it highly likely that people who rack up large credit card debts do often walk away without having to pay those debts in full. Often these debts have to be sold to hedge funds and other collectors for pennies on the dollar to recuperate the funds for pennies on the dollar of what was originally lent out. The bank never put a gun to the person's head and said they had to buy a television among the multitude of other things. It was clearly written into the agreements with the borrowers that they will be charged interest if they don't pay off their items by certain deadlines. They are responsible grown-ups and cable of understanding when their credit card (loan) needs to be paidoff and are capable of budgeting for that. If they cannot do that then the bank has every right to charge them for the interest. Additionally, as I progress through my banking career, I realise that that money does have a real cost to the bank through interest that the bank pays to other banks (federal banks), and is deflationary in nature costing the bank money, and therefore it is absolutely necessary to recoup that cost through interests. It is unfortunate that this interest is saddled on those who cannot afford to pay, and I am sympathetic with the ideas that companies need to pay fair living wages. However, credit cards will continue to be cheaper for those who use them correctly and can pay them off prior to maturity without accruing interest, and if a bank changed these policies they would either go to another bank where it will be cheaper to finance them, or they would simply payoff their credit cards on a monthly basis, not accruing interest. If changes were made to the policy to charge people who payoff in full every month, then they would stop using credit cards and resort back to cash. Dr. Williams arguments are highly flawed, and do not consider basic finance theory.