Consumer Law & Policy Blog

Making Money on Bounced Checks

CNN is reporting here on a program under which county prosecutors turn over bounced check matters to American Corrective Counseling Services (ACCS), which then requires the consumers who wrote the checks to pay to attend ACCS classes.  The articles describes how a bad $14 check ultimately cost a consumer $285, including the $160 class fee.  My co-blogger Deepak Gupta is quoted in the story, and Public Citizen has filed cases charging that the practice violates the Fair Debt Collection Practices Act.  (Hat tip to Kristie Kline).

Update: ProPublica, which co-produced the CNN story, has a more detailed report on their website.  The Consumerist discusses the story here.

FTC Releases Annual Consumer Complaint Tally, Debt-Collection Reports

by Deepak Gupta

The Federal Trade Commission today released its annual tally of consumer complaints. For the ninth year in a row, identity theft was the number one consumer complaint category. Of 1,223,370 complaints received in 2008, 313,982, or 26 percent, were related to identity theft. The next-largest category, clocking in at 9% of all complaints, was debt collection. The FTC receives more complaints about the debt-collection industry than any other industry. You can view a summary of the results here, and a detailed report on the data, including geographical statistics, here.

The FTC also released two important reports on debt collection practices--a report on a workshop held last year to mark the 30th anniversary of the Fair Debt Collection Practices Act and the Commission's annual report to Congress on enforcement under the Act.  The workshop report, titled Collecting Consumer Debts: The Challenges of Change, makes several specific recommendations for amendments to the FDCPA and raises questions about abusive collection litigation practices and the use of mandatory binding arbitration.

• Give FTC Rulemaking Authority: The report recommends that Congress give the Commission authority to issue rules under the FDCPA.
• Increase Statutory Damages: The report states that private actions, not FTC actions, were intended by Congress to be the primary means of promoting industry compliance with the FDCPA, and notes that the amount of statutory damages (up to $1,000) that consumers can obtain in lawsuits under the FDCPA has not changed since 1977. To increase deterrence, the report recommends increasing the damage amounts to reflect inflation since then, and, in the future, to increase them periodically.
• Information Flow:  Require that collectors have better information, making it more likely that their efforts will be for the right amount and be directed to the right consumer.

• Validation Notices & Reasonable Investigations: Require that collectors provide consumers with better information explaining their rights under the FDCPA, including (1) that the “validation notices” that collectors are required to send to consumers also disclose the name of the original creditor; break down the debt by principal, total interest, and total fees; and inform consumers of certain rights they already have under the FDCPA and (2) that collectors conduct “reasonable” investigations responsive to the specific dispute the consumer raised.

• Adjustments for New Technology: Modernize the law to reflect changes in technology, including prohibiting collectors from contacting consumers via their mobile phones, including by text messaging, without prior express consent; and requiring collectors who use new payment technologies to obtain express verifiable authorization from consumers before accessing their accounts.

Debt-Collection Litigation and Arbitration Practices: The report recognizes that "certain debt collection litigation and arbitration practices appear to raise substantial consumer protection issues."  Among other things, the report cites Public Citizen's report, The Arbitration Trap, on the use of arbitration as a debt-collection mechanism. The report makes no definitive recommendations on arbitration and litigation, but instead announces that the FTC will convene regional roundtables this year with state court judges and officials, debt collectors, collection attorneys, consumer advocates, arbitration firms, and other interested stakeholders to learn more and develop possible solutions.

Times Piece by Debt Collector and Reports on Other Consumer Issues

Today's Times has a piece written by a debt collector about how he helps people, In Tough Times, A Debt Collector Sees the Pain.  An excerpt:

When someone calls back and thanks you for suggesting they get the debt resolved with me before it appears on a credit report, I think, “Wow, I did do good for someone.” It’s a great feeling to help someone out of a dire situation. I’ve helped young people just out of school and took time out to explain how bad credit could hurt them in the long run. They call back and say: “Thanks for the advice. You’ve saved me years of heartache.”

I wonder if the Times will print any letters from those who have different feelings about debt collectors (maybe readers of the Blog?).  The article was in the business section, so letters should be emailed to sunbiz@nytimes.com. 

Another article in the Business section, Phones as Credit Card? Americans Must Wait, describes how we may someday use cell phones as payment instruments, something that has been occurring in Japan for years.  Does that mean that cell phone contracts will someday include TILA disclosures? And from the Real Estate section, Safeguarding Against Loan Discrimination, about settlements reached by the New York State Attorney General's Office with two mortgage brokers accused of charging minority borrowers higher fees than white borrowers, and how borrowers can protect themselves. 

Wednesday's paper brought distressing news: Big Breach in Card Data Raises Risk for Millions.  Here's the first paragraph:

Heartland Payment Systems, a major payment processing company, disclosed a data breach on Monday that potentially exposed tens of millions of credit and debit cardholders to the risk of fraud in what could quickly become one of the country’s biggest data compromises.

At the risk of trampling on Alan White's territory, here's an article from back on December 21 that I never got around to posting, Bob Tedeschi's Mortgages column titled Revising Loan Modifications.  Some excerpts:

“The average loan servicer wants to reach a resolution about a loan modification with a single letter or a phone call,” said Steven Horne, the president of Wingspan Portfolio Advisors, which helps clients renegotiate loan terms. But, he said, devising an effective long-term strategy to enable a borrower to avoid foreclosure might take several rounds of communication.

* * *

But Mr. Horne, a former executive at Fannie Mae, suggested that the new loans had not been structured to best meet borrowers’ financial circumstances, in large part because the loan servicers that collect mortgage payments cannot engage in a lengthy analysis of each borrower’s finances.

It is up to the borrowers, therefore, to be more proactive. Mr. Horne says they can increase the likelihood of securing the right loan if they push for more personal attention, and do a little homework about their own finances.

And from December 18, Yahoo Puts New Limits on Keeping User Data, about how Yahoo will keep some personally-identifiable data for only 90 days, less time than the other major search engines.

Pity the poor debt collector?

Consumers took on millions of dollars of credit card, medical, and other debt in the last five or six years, creating lots of work for debt collectors. But debt collectors say they are hurting along with everyone else in this recession, because fewer consumers are able to pay off those debts.

Apparently, more consumers are just "refusing" to pay their bills. Minneapolis debt collection lawyer William Hicks from Messerli & Kramer estimates a 25-40% drop in recoveries for some portfolios over the last sixteen months. According to University of St. Thomas professor David Vang, and finding out in the process that most debt collectors are really bluffing: "They really aren’t going to pursue their borrowers very hard."

Vang apparently does not consider harassment to be "very hard" pursuit by debt collectors. If debt collectors are recovering less, they seem to be trying harder than ever, if complaints to the Federal Trade Commission (PDF link) and the Better Business Bureau are any indication. Perhaps unsurprisingly, complaints about debt collectors are on the rise.

Collection revenues down; harassment up. Just a sign of the times.

Collectors hurt by recession as consumers walk away from unpaid bills | Finance & Commerce (via Caveat Emptor)

(photo: Wikimedia Commons)

Worst yet to come?

The New York Times published a gloomy anonymous email from a banker castigating his own industry yesterday.  The banker predicts further bank collapses as more credit card receivables go into default. The banker makes the point that credit card divisions in banks rely on stated income and assets in much the same way that the mortgage industry relied on "liar" loans and are continuing to aggressively market high cost debt to those that cannot repay it.

In general, my impression has been that credit card lenders have been more sophisticated in managing default risk because they lacked the cushion of collateral. Moreover, unlike mortgages, credit card portfolios were not so obviously exposed to an asset bubble.  Still, as the recession spreads and Congress continues to sharpen moral hazard with financial institution give-aways (irrespective past consumer abuse) one cant help but wonder.

Times Reports on Credit Card Suits, Modification of Mortgages, Evictions in Chicago and More

Yesterday's Times included "When Plastic Seduces, A Reckoning Awaits," about cases in the New York City Civil Court against consumers on credit cards.  An excerpt:

As the final stop on the subprime lending train, the Civil Court has become the 21st-century debtors’ court. Filings have nearly tripled since 2000. Of these, court officials project that about 350,000 this year will involve debt on credit cards. * * *

* * *

[The article then describes how Juan Vega, a security guard making $11 an hour, had obtained a credit card on which the lender claimed he owed $1,400.]

“They gave me a $500 spending limit,” he said. “So it was less than that. The rest to get it to $1,400 was interest, fees.”

The negotiations had been two sentences long.

“The lawyer said, ‘We can finish this for $900,’ and I said, ‘O.K.,’ ” Mr. Vega said. * * *

The lawyers for the banks had virtually no documents on the cases, just printouts with names, account numbers and the amount that was supposedly owed. When it was Miranda Gee’s turn, she produced papers showing that she held a different account with Capital One than the one listed on the printout, which claimed that she owed about $1,000.

“They brought me here, but it wasn’t my account at all,” Ms. Gee, 43, said. “They put a hold on my bank accounts with Chase for twice the amount they claimed.”

The judge agreed to sign an order unfreezing her savings with Chase while Capital One investigated to make sure it had the right account. Since Mr. Funk, the bank’s lawyer, had no paperwork, he asked Ms. Gee if he could copy her file. She said yes.

Reports like these in which it appears that creditors are obtaining judgments without being able to prove that the money is indeed owed make me wonder how many of these claims, many of which sound like they end up in default judgments, are in fact owed, or if the consumer did indeed take on the debt, whether the claimed amount is inflated. 

Friday's Times brought an op-ed piece by Harvard Law Student Eric S. Nguyen, titled "Fight for the Family Home."  Nguyen argues that Congress should modify bankruptcy laws to permit modification of terms in mortgages on primary residences.  A pretty persuasive excerpt:

Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.

The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?

If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. * * *

On Thursday, the Times published "Sheriff in Chicago Ends Evictions in Foreclosures."  The article explains:

Sheriff Dart said he took the measure because an increasing number of the residents being evicted were renters who might have been dutifully paying their rent, and might have had no knowledge that the owner was behind on the mortgage.

On Wednesday, the coverage shifted to online selling in Europe with "Europe Prepares Consumer Rights Plan."  The new proposal would provide for a 14-day cooling off period, among other changes.  I don't know about European sales laws, but that would be an extraordinary length of time for a cooling off period in this country.

Debt Collector Uses Consumer's Debit Card Information for Spending Spree

The Buffalo News reports here about a debt collector who persuaded a consumer to provide him with her debit card information and then ran up nearly $2,000 of charges on her account.  He later asked the debt collection agency for his pay check!  With issues involving identity theft, debt collection, fraud, payments, and possibly credit reporting, the story would make a good exam question (hat tip to Gina Calabrese).

New York Exempt Income Protection Act Enacted

On Friday, September 26, Governor Paterson signed into law New York's Exempt Income Protection Act.  Some payments, such as certain Social Security benefits, are immune from seizure by debt collectors.  But some debt collectors had found a way to get around the exemption by sending a restraining notice to the bank where the consumer maintained the funds.  Some banks responded to these notices by freezing the bank account, preventing consumers from obtaining the funds until they had gone through a time-consuming and expensive process.  The statute provides that the first $2,500 in an account that contains directly-deposited exempt funds cannot be frozen.  My St. John's colleague, Gina Calabrese, helped secure passage of the statute.

Much More on Proposed Federal Reserve Credit Card Rules

Earlier today, we blogged about a new Federal Reserve proposal to protect credit card users from predatory bank practices. You can go to the Federal Reserve's webpage on the proposal to find a ton of information, including the agency's press release, a synopsis of the proposed rules, and the proposed rules themselves. Happy reading!

Federal Reserve Proposing New Protections for Credit Card Consumers

The top story in the Washington Post this morning is this story entitled "Fed to Pursue Aggressive Checks on Credit Cards." The Federal Reserve, along with the Office of Thrift Supervision and the National Credit Union Administration, will issue proposed regulations today that seek to put a halt to certain credit card practices. This excerpt from the Post story provides an overview:

The proposed regulations, which could be finalized by year's end, would label as "unfair or deceptive" practices that consumers have long complained about. That includes charging interest on debt that has been repaid and assessing late fees when consumers are not given a reasonable amount of time to make a payment. When different interest rates apply to different balances on one card, companies would be prohibited from applying a payment first to the balance with the lowest rate.

We will post the proposal itself when it becomes available.