Charles Phelan

An interesting article appeared last week under the title, “Bankruptcy Law Does Have Supporters.” Well, no kidding. Of course the new law has supporters. How else would it have passed Congress? I’m sure most of the executives in the credit card industry think it’s a pretty good bill. They should know. Collectively, they spent millions of dollars lobbying to get it passed.

Basically, the article in question is a litany of pronouncements by experts (?) who support the new law. But just “follow the money” and you immediately see what’s going on here. With the exception of a law professor from Georgetown University, who likes the “consumer protection” aspects of the bill (oh, brother!), virtually every other authority cited in the article represents the business community in one form or another. Absent are quotes from ANY individual, organization, or association that works with debt-strapped consumers on a regular basis.

To prove my point, take a look at the parade of pro-bankruptcy-reform authorities cited in the article:

A director from the U.S. Chamber of Commerce. Check.

The head of a market research firm that recently published a report on the widespread “abuse” of bankruptcy. Who does the firm conduct its research for? The lending industry. Check.

A spokesperson for the American Bankers Association. Check.

A lobbyist for the National Retail Federation. Check.

Head of a trade association of consumer credit and finance companies. Check.

You get the idea. All of the voices in support of the new law are pro-business. Might these folks be just a little biased? Where are the quotes from the people in the trenches? You, know, like the judges who actually try these bankruptcy cases in their courts? Why aren’t they quoted as supporting the new law? Or bankruptcy attorneys? Couldn’t they find any bankruptcy attorneys who like the new law? Apparently not. And there is a reason for that.

Yes, abuses occasionally happen in the bankruptcy system. People sometimes try to game the system. But — surprise, surprise — abuses will occur under the new law too. The bottom line is that the old system was not broken and did not need fixing. It worked fine. Was it perfect? No. Will the new law correct those imperfections? No. Will it introduce new and unnecessary problems?

At the time, Judge Frank Monroe of Austin called the new law a trap for consumers, characterizing some of its provisions as “inane, absurd, and incomprehensible to any rational human being.” I guess he just doesn’t know what he’s talking about…

In my previous post, I discussed the annual report on the Fair Debt Collection Practices Act issued by the Federal Trade Commission. As noted, the FTC receives more complaints about debt collection than for any other industry. We can expect it to get worse, however, if the collection industry gets it way on a key issue currently under review. Since sweeping changes to rules for telemarketing went into effect in 2003, debt collection firms have also been prohibited from using automatic dialing systems to call consumers’ cell phone numbers. But the industry’s trade association (ACA) is trying to get the Federal Communications Commission (FCC) to change this rule.

If the industry gets its way, we’ll see the number of complaints increase big-time. Currently collectors can only call cell phone numbers by placing the calls manually, which is very inefficient. In fact, many collection agency telephone systems are configured so their collection reps can ONLY handle calls that are placed via auto-dialer. So if the rule is changed, consumers who are behind on their bills can look forward to getting bombarded with cell phone calls in addition to calls placed to the home or workplace.

The ACA claims that inability to auto-dial cell phones will be “extremely detrimental to the industry and consumers” and “creditors will lose billions” if the rule is not changed.

What nonsense. Inconvenient to the collection industry, sure, but detrimental to consumers? Are there any consumers out there who think it will be beneficial to allow collection agencies to auto-dial their cell phones? The only people who think this is a good idea are debt collectors and auto-dialer equipment vendors.

The National Consumer Law Center has submitted a recommendation to the FCC against changing this rule.

It will be interesting to see the outcome on this debate, which has the potential to affect millions of stressed out indebted American consumers. Meanwhile, the message is clear: Don’t list your cell phone number on any credit-related applications!

The Federal Trade Commission has released its annual report on the Fair Debt Collection Practices Act for 2006, which documents complaint patterns and enforcement actions by the FTC during calendar year 2005. Consistent with recent years, the latest report shows that consumers complain more about debt collection than any other industry. “Last year, consumer complaints to the Commission about third-party debt collectors increased both in absolute terms and as a percentage of all complaints that consumers filed with the Commission during the course of the year.”

Here’s a link to the full report at the FTC website.

There are no real surprises here. The 66,627 complaints about debt collection activity received in 2005 represent a 14% increase over 2004. And of course, those 66,627 complaints are a drop in the bucket compared to what’s really going on out there in the world of collections. The simple fact is that people usually do not file a complaint even when it’s justified. Mostly they just take their lumps. So we have no real way of knowing the true scope of the problem, only that it’s getting worse instead of better, as measured by the FTC’s statistics.

Also, it’s important to note that the Fair Debt Collection Practices Act technically only applies to THIRD-PARTY debt collectors, meaning collection agencies or collection attorneys. The FDCPA does not apply to the in-house collectors employed by original creditors (like the major credit card banks). Even though the FDCPA does not apply to original creditors, the Commission still collects complaint data on in-house collections activity. In 2005, the FTC logged 23,605 complaints about in-house collectors, bringing the overall total of debt collection-related complaints to more than 25% of ALL complaints received in 2005. So the collection industry beats every other industry hands-down in terms of complaints logged.

The number one type of complaint received about third-party collectors is that they misrepresent the “character, amount, or legal status of consumers’ debts.” No surprise there, either. If a debt collector is flapping their gums, the odds are pretty good that they are either lying outright or saying something misleading in order to scare the consumer on the other end of the phone. But in this year’s report there was a big jump for this category of complaint, from 31.6% in 2004 to 42.7% in 2005. I feel that this has to do with the growing presence of debt buyers in the marketplace. And debt buyers routinely add what I call “phantom” interest to the accounts they purchase. In other words, they may buy a debt a year after chargeoff by the original creditor and then back-date interest charges to the time of chargeoff even though they did not own the debt at that time. This serves to greatly inflate the debt during the collection process, with the aim of driving up collection percentages and increasing portfolio return rates. So it’s no wonder that consumers feel they’ve been bamboozled by the debt buyers. This will only get worse as debt buying continues to displace contingency-based collection systems.

At least the FTC is proposing to Congress that legislation be passed requiring debt collectors to itemize their fees and other charges upon request. I doubt such a bill will pass anytime soon, but it would be hard to argue against such a measure, which certainly seems reasonable on the face of it, and comes recommended by the Federal Trade Commission. We can only hope, although I won’t be holding my breath on this one.

In several recent articles and blog posts, I have taken a strong position against bogus “debt elimination” programs. Unfortunately, these scammers seem to be getting bolder by the day.

In the past few weeks, I’ve actually seen some of the perpetrators issue press releases. Talk about a fast track to getting on a “world’s dumbest criminals” show! It’s only a matter of time before authorities shut down these clowns like they did with the Dorean Group (see my blog post of April 10th), but in the meanwhile thousands of unsuspecting consumers are getting soaked for big money.

I won’t post the links to the press releases here in this blog because I don’t want to help the scammers by giving them free backlinks and thereby helping them obtain traffic from the search engines. This morning I surfed a link in one of the press releases, which took me to one of the cheesiest-looking debt websites I’ve ever seen.

Here’s what the website says: “Now you can discharge 100% of your Credit Card Debt without Bankruptcy, Consolidation, or Refinancing. Yes, actually walk away from this debt!” The site also claims that this is legal and ethical.

You know, maybe I’m taking the wrong position thinking that consumers are innocently being bilked in this scam. Maybe the scammers and the victims deserve each other. I mean, really, how dumb do you have to be to think it’s “ethical” to walk away from your debts? There’s an old saying: “You can’t cheat an honest person.” Perhaps the folks who get conned into this scheme have a little larceny in their hearts and deserve what they get.

On the other hand, I understand how vulnerable people are when they are buried in credit card debt. It must be really tempting to drink the kool-aid and believe the nonsense pitched by these kooks.

Anyway, I was interested to see that one of the scammers actually posted documents providing “proof” that the “no money lent” system really works in getting debts erased. These folks claim to have “eliminated” nearly $150 million of debt. So I took a look at the “proof.” It consisted of nothing more than a few documents showing that the creditor withdrew a case or that a case was dismissed. In a couple of instances, the “proof” was in the form of notices from arbitration forums. Leaving aside the fact that arbitration awards or notices are not formal legal documents (and therefore are equal in value to toilet paper in terms of proving anything at all), the remaining actual court documents prove exactly nothing. Why? Because there are numerous reasons why a collection lawsuit might be dismissed or withdrawn, and none of those reasons have anything to do with the bogus legal theories espoused by these clowns. Such reasons include prior settlement of the debt out of court, the creditor’s inability to locate the debtor, a debtor stipulating to judgment, and even instances where a legitimate dispute against the creditor was demonstrated by the debtor. In other words, there are lots of reasons why collection lawsuits do not always proceed to the point of judgment. But these documents of withdrawal or dismissal do not prove anything relative to claims made by the scammers for their magic “system” of erasing debts.

The boldness of these scammers continues to amaze me. I recently spoke with one consumer who had been pitched by a “debt elimination” scam sales agent. The sale rep actually suggested that the consumer (who was still current on her obligations at that point) OPEN A NEW CREDIT CARD ACCOUNT solely for the purpose of paying the scammer’s outrageous fees, with the intention of immediately defaulting and never making any payments at all. Folks, that’s FRAUD, pure and simple.

So, my message for the day to the con artists who peddle this scam is this: Keep it up! Keep painting a great big red bull’s-eye on your back by issuing press releases and encouraging consumers to commit fraud. It’s only a matter of time before some state Attorney General takes aim. I can’t wait to see the documents produced by the discovery process in such a case, which is sure to happen sooner or later. It should make for some seriously fun reading.

Of course, when that happens, the other scammers will have an easy answer. The inevitable attack by the FTC or state AGs will all be a part of the “banking conspiracy” to keep the “truth” from the American people, the government is part of the conspiracy, etc. That’s what those two ripoff artists from the Dorean Group are still claiming, while they sit in jail awaiting trial for wire fraud and other criminal charges …

“Maxed Out” is the name of a new documentary by James Scurlock that takes a hard look at our credit card culture. I haven’t yet viewed the film, and will post a review after I’ve had a chance to see it. For the moment, I’m basing this post on the recent Newsweek interview with Scurlock.

(Note: This article is so old it no longer appears on Newsweek’s website or archives.)

From the interview, it sounds like Scurlock pulls no punches in targeting the credit card industry for some of its more insidious tactics. In my own debt negotiation coaching practice, I talk to struggling debtors on a daily basis. I hear the same things over and over again — how people keep getting credit card offers long after they were already in deep trouble, how the banks trap people with lures of low-interest rates only to jack up the rates later. The names change and everyone has a different background story, but the theme is the same. I talk to people with $100,000, $150,000, $200,000 of credit card debt on a regular basis. How does someone get so much credit in the first place? Simple: A credit card industry that is completely out of control.

I think Scurlock has it right with respect to an industry that has grown unchecked with very little regulatory oversight. In fact, the only significant credit industry legislation passed recently was the new bankruptcy law, which was totally anti-consumer and pro-creditor. The most telling point in the interview, in my opinion, is where the filmmaker notes that the banks have discovered that the most profitable business lies with the least responsible consumers. I would modify that a little and state that the most profitable customers are the ones who are struggling, period, not necessarily due to financial irresponsibility. And much of that profit comes not just from excessive interest rates (as noted in my prior posting), but also from $35 late fees. As much as one-third of credit card bank profits come from late fees and penalties. Something is clearly wrong when a business bases the bottom line on its customers’ financial misfortune.

I’m looking forward to seeing this documentary and hope that it gets a wide audience across indebted America.

Today (April 12, 2006) is the 25-year anniversary of Citibank’s move to South Dakota. Why should you care? Well, if you’re paying excessively high interest rates on your credit cards, you can thank South Dakota and its sweetheart deal with Citibank.

Believe it or not, 25 years ago Citibank was bleeding red ink all over the place. The problem, you see, was that they could only charge 12% interest in New York where they were headquartered. New York’s usury law prohibited interest rates in excess of 12%. This was at a time when the prime rate stood at a mind-boggling 20%. That was during the era of “stagflation” — high inflation coupled with stagnant economic growth. And Citibank, among other financial institutions, was getting crushed. Imagine being able to borrow money on your credit card at 12%, then turn around and deposit it in a money market account tied to the prime rate, thereby pocketing an automatic profit! Those days are long gone, but at the time things looked pretty grim for the major credit card banks.

In 1978, the Supreme Court ruled that a bank could “export” interest rates to states other than its own, without respect to the interest rate regulations for the destination state. Bill Jankow, then Governor of South Dakota, met with Citibank’s VP to discuss Citibank moving its credit card operation to Sioux Falls. In 1980, Jankow succeeded in getting legislation passed in South Dakota that eliminated that state’s existing usury law, thus effectively allowing unlimited interest rates. He also got another bill passed that allowed out-of-state banks to create subsidiaries in South Dakota. This allowed Citibank to charge any interest rate it felt the market would bear, without respect to New York usury laws or those of any other state.

The result of this sweetheart deal between South Dakota and Citibank is that states no longer have any control over interest rates charged by out-of-state banks. This has caused a lot of financial pain for consumers caught on the treadmill of endless minimum payments (that never seem to reduce the principal debt balance). Of course, excessively high interest rates are not paid by cardholders with perfect payment histories. As of today, the nationwide average for standard credit cards with variable rates stands at 13.99%. (Source: Bankrate.com) This may still be too high, but it’s not in the category of “outrageous.”

However, everything changes if you fall behind. Miss one or two payments due to financial difficulty, and rates can jump to 28%, 32%, or higher — even if you later catch up and get current again with your payments. And that’s because there is no effective ceiling on what credit card banks can charge. Once a customer starts to slip, the banks no longer have to worry about the customer switching to a competitor, so they can literally charge whatever they want to.

Just to put it in perspective, here’s the common definition of usury: “the lending of money at unconscionable or exorbitant rates of interest.”

Now, let’s take a look at a $10,000 credit card balance at 32% interest. If you pay $266.67 per month — a typical minimum payment level, it will take 40 years to pay off the debt, at a cost of more than $118,000 in interest! If that doesn’t meet the definition of usury, what does? Is it any wonder people have filed bankrupcy at record pace in recent years? Or that scams have flourished that falsely promise a way out of this trap?

Something is clearly wrong here, especially when one bank can raise your interest rate when you fall behind on payments with a completely different company. (That’s the infamous “universal default” clause we’ve heard so much about lately.) So where will it stop? The genie is out of the bottle, and we’re stuck with this situation on a permanent basis. Thank you, Supreme Court, South Dakota, and Citibank!