Consumer Law & Policy Blog

Huge Upswing in Credit Card Borrowing

by Christopher Peterson

New fed numbers are out showing Americans sucked down 6.9 billion dollars in new credit card debt, increasing outstanding consumer credit to $2.52 trillion during the month of January. This increase was double the $3.7 billion increase in the previous month of December--despite holiday sales.

This seems like a very ominous development to me. One suspects that this increase in borrowing is causally related to credit tightening in mortgage and home equity lending, and also that consumers facing foreclosure are turning to credit cards to stave off financial collapes. Distressed debtors that are shifting their living expenses into credit card borrowing are going to face high default interest rates and could be setting themselves up for a harder fall.

I hope the credit card lenders have their models figured out. As financial refugees from the mortgage market flee into the waiting arms of credit card lenders, it seems like there is the potential for subprime securitization problems to echo into credit card receivables. January's increase in credit card borrowing makes me wonder if the normally sophisticated credit card lenders' underwriting may finally come up short. Just a tip to all those Norwegian villagers, hedge fund managers, and investment bankers hoping to not look like Bear Sterns: Post-bubble vintage credit card recievable backed securities are a sucker bet.

Check out Patrick Deneen's interesting blog post for more thoughts.

Times Articles on Subprime Crisis, Debt Collection, the CPSC Bills, Reverse Mortgages, and Online Privacy

I've accumulated a huge backlog of recent Times articles on consumer law issues, so here goes an attempt to reduce the backlog.

Many of the articles involve the mortgage crisis and plans to do something about it.  For example, the lead article in today's Times is headlined "White House Offers Plan to Ward Off Credit Crisis."  Here's an excerpt:

The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers.

The plan would also require lenders to make more complete disclosures about payment terms to home buyers. And it would curtail possible conflicts of interest at companies that assign levels of risk to packages of mortgages that are sold to investors.

* * *

But in many ways, the plan relies on the same market participants — from mortgage brokers to credit-rating agencies and Wall Street firms — that government officials and other experts blame for the current crisis.

Ninth Circuit: Private Debt Collectors Under Contract With Prosecutors Are Not Shielded by Sovereign Immunity

by Deepak Gupta

Yesterday, the U.S. Court of Appeals for the Ninth Circuit, in an opinion by Judge Marsha Berzon, ruled that American Corrective Counseling Services (ACCS), the nation's largest operator of "check diversion" programs, may not shield itself from a consumer class action over its aggresive debt-collection practices by invoking the doctrine of state sovereign immunity.  (Information about the case, including the briefs and opinion, is available here.)

I've blogged here before about so-called check diversion companies -- private debt collectors that use their contracts with prosecutors to gin out collection demands, on official prosecutor stationary, threatening consumers who have written bad checks with criminal prosecution or jail unless they pay exorbitant collection fees.  Passing a bad check is only a crime where there's knowing and intentional fraud, but these companies demand fees regardless of whether a crime has been committed. It's a lucrative and shady business that essentially criminalizes civil debt collection.

Judge Berzon's opinion is the most thorough and scholarly treatment to date on the question of private entities and sovereign immunity.  In a sweeping rejection of ACCS's arguments, the Ninth Circuit characterized sovereign immunity as “strong medicine” that should be carefully limited, especially in the case of for-profit corporations that are not democratically accountable to the public. Quoting the philosopher Gilbert Ryle, the court called the argument that a private company could enjoy sovereign immunity a “category error,” like “inquiring into the gender of a rock or into which day of the week is reptilian.”

Debt collectors in the US may not be so bad, after all

Not compared with debt collectors in India, anyway.

Vinod Kumar was sitting in a friend's car listening to the radio one evening last January when a stranger appeared, yanked him from the vehicle and beat him with an iron bar.

To collect a debt, that is. Here in the good ol' USA, debt collectors still rely on intimidation and mental abuse, which seems quaint and peaceful in comparison with the debt collectors in India. And get this for chutzpah: after a court awarded Mr. Kumar $140,000 for the beating he suffered, the bank who hired the thug (or "goonda") collection agency appealed the award as excessive.

While the 21-year-old college student lay bleeding in the parking lot, the assailant sped off with the tiny silver hatchback. But this was no ordinary mugging: Mr. Kumar's attacker was a /goonda/ -- a thug -- working on behalf of one of India's largest banks.

Ruling on Mr. Kumar's case in November, the Delhi State Consumer Commission fined ICICI Bank, India's largest privately owned bank by market value, almost $140,000 for what a judge called "the grossest kind of deficiency in service and unfair trade practice." ICICI Bank has appealed the decision to the Delhi High Court, arguing that the consumer court doesn't have the authority to impose such a large fine and that the collection agency should be held responsible for the attack, not the bank. It has also fired the collection agency responsible for the attack.

Read the rest of the WSJ article.

[crosspost: Caveat Emptor]

Robert Hunt Primer on Debt Collection

Robert M. Hunt on the Fed has written "Collecting Consumer Debt in America" available at   
http://ssrn.com/abstract=993249.  Here's the abstract:

Why should economic scholars study the consumer debt collection process? First, the cost and effectiveness of the collections process has implications for the pricing and availability of consumer credit. Second, changes in technology and the structure of credit markets have transformed the collections industry. Small mom-and-pop operations are increasingly being replaced by firms operating nationally, collecting on billions of dollars in bad debt purchased from
creditors.

This article explores how creditors and their agents attempt to collect past-due consumer debt, particularly unsecured debt.Creditors have a number of remedies open to them, but their
effectiveness is limited by the fact that consumers can file for bankruptcy. Even outside of bankruptcy, consumers enjoy a variety of legal protections, including some they may not be aware of.

Foreclosures over the Holidays

by Deepak Gupta

Last month, I mentioned a case in which Public Citizen, together with Baltimore-based Civil Justice Inc., is challenging the constitutionality of mortgage foreclosure notice procedures in Maryland.  This morning, the Washington Post ran a very moving profile of our client, Joyce Griffin. The story recounts how Joyce, a first-generation homeowner, saved up her whole life to buy a house, was tricked into a predatory refinanced mortgage with the now-defunct Ameriquest, and never learned until it was too late that her home was put up for sale at a foreclosure auction on the courhouse steps.  She first found out that she had lost her house when she and her young daughter returned home one day and found a handwritten note that had been tacked onto the front door by the investor who bought the house.  The lawyers that conducted the foreclosure proceedings never tried to personally serve Ms. Griffin (the procedure that would have been followed in virtually any other civil proceeding, even an action to collect a very small debt), never posted the house, and did nothing when the certified-mail notices they sent were returned undelivered.   I'll be presenting oral argument in Ms. Griffin's case in the Maryland Court of Appeals in Annapolis on January 8. 

Discharged Debts That Won't Die

by Deepak Gupta

  BusinessWeek.com has just posted an interesting investigative report, titled "Prisoners of Debt," by reporters Robert Berner and Brian Grow.  The piece focuses on how big lenders and credit card companies keep squeezing money out of consumers whose debts have been discharged in bankruptcy, and on the selling and buying of those discharged debts.  "In a financial version of Night of the Living Dead," the article recounts, "debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold."  Discharged debts continue to show up consumers' credit reports and, in many cases, consumers end up paying the discharged debts anyway, just to make the creditors' go away.  So much for bankruptcy as a fresh start.

Update: Over at the Credit Slips blog, law professor Bob Lawless has some thoughts on the BusinessWeek report.

Eleventh Circuit: Debt Collectors Masquerading as Prosecutors Don't Get Sovereign Immunity

by Deepak Gupta

A front-page article in the San Jose Mercury News earlier this week and a recent AP story both reported on a practice I've previously blogged about here: private debt collectors that rent out a prosecutor's name and authority, which they use to threaten consumers who have written bad checks with criminal prosecution and jail unless they pay exorbitant collection fees.  The threats are made without regard to the facts of the case (in the vast majority of cases, there's no criminal intent), and the revenues are split with the prosecutors.  Assuming they're subject to suit, these companies' practices violate virtually every section of the Fair Debt Collection Practices Act. 

The threshold question, however, is whether these companies are above the law.  They have argued that they're entitled to blanket immunity from suit--that they get derivative sovereign immunity by virtue of their contractual relationship with the government.  In one case, a Florida federal district court bought that argument, extending the doctrine of state sovereign immunity far beyond previously existing law.  In a second case, a California federal district court disagreed.  In separate appeals, Public Citizen's Consumer Justice Project has been defending the California decision and urging reversal of the Florida decision.

Yesterday, the U.S. Court of Appeals for the Eleventh Circuit (a notably conservative court on immunity issues, and the only federal appeals court ever to have sustained a state sovereign immunity defense by any private corporation) reversed the Florida district court and rejected the immunity defense raised by a company called American Corrective Counseling Services (ACCS).  In its decision, the appeals court found that attorneys in the prosecutors’ offices do not review cases before ACCS threatens consumers with prosecution, and that the prosecutors exercise virtually no control over ACCS.  Sovereign immunity, the court said, “has never been held to apply simply because an independent contractor performs some government function.”

The decision has potentially far-reaching implications for holding all sorts of government contractors--from private prisons to Blackwater--accountable in the federal courts.  And both in its analysis of the Eleventh Amendment issue and its characterization of the program itself, the decision in many ways provides a roadmap for arguing that these types of debt collectors should be held liable under both state and federal consumer protection law.   [press release]  [case info and briefs]

Senate Hearing Today on Credit Repair Organizations and Telemarketing Fraud

The Senate Commerce Committee is holding a hearing at 2:30 this afternoon on telemarketing (specifically, the Do-Not-Call list and proposals to improve it, as well as telemarketing fraud aimed at seniors) and the Credit Repair Organizations Act (CROA).

The CROA may not be the best-known federal consumer protection statute, but it's an important one.  It was passed in 1996 to address abuses by credit repair organizations, outfits that take money for services that will purportedly improve a consumer's credit score.  The legislation was the result of a rare alliance between consumer advocates and credit reporting agencies, who were getting swamped with dispute letters generated by credit repair services.  The Act requires certain disclosures, provides for a 3-day right to cancel, prohibits the acceptance of payment before services are performed, and prohibits any person--not just "credit repair organizations"--from engaging in certain deceptive acts.  (The statute has thus been applied to lawyers, debt collectors, and payday lenders in certain circumstances.)  CROA has strong civil liability provisions, including punitive damages.

Connnecticut consumer advocate Joanne Faulkner, who an expert on bringing cases under the CROA, is testifying this afternoon on behalf of the National Association of Consumer Advocates, the National Consumer Law Center, U.S. PIRG, and Consumer Federation of America.   Joanne will suggest a number of improvements to CROA, including a clear ban on mandatory binding arbitration, distant forum, and class action waiver clauses, as well as a provision allowing for injunctive relief.  You can read her written testimony here.  The other witnesses are Lydia Parnes (Director of the Bureau of Consumer Protection, FTC),  Richard Johnson (AARP), Jerry Cerasale (lobbyist for the telemarketing industry), Robin Holland (lobbyist for Equifax), and Steve St. Clair (Iowa Attorney General's office).

Elizabeth Warren on the Relationship Between Our Broken Health Care System and Personal Bankruptcy

Professor Elizabeth Warren testified last week before the Judiciary Committee of the U.S. House of Representatives on the tragic relationship between our failing health care system and the rise in personal bankruptcies.  As Prof. Warren puts it:  "Since 2000, an estimated five million families have filed for bankruptcy in the aftermath of serious medical problems. The current health care finance system is bankrupting hard-working, play-by-the-rules American families."  Prof. Warren's testimony, as well as materials related to her proposal to create a Financial Product Safety Commission to protect consumers against risky financial products, can be found at this entry on the Harvard Law School website.  For more on the relationship between illness/injury and bankruptcy, see this empirical study in the journal Health Affairs by Warren, David Himmelstein, Steffie Woolhandler, and Deborah Thorne.