Week that was: Vulnerability of the consumer highlighted as rarely before — debt, mortage, credit, housing issues collide

August 25th, 2009 by Mike Hinshaw

[Editor's note: This is the follow-up to a "week that was" review of several consumer-debt issues that  were in the news from August 15 to August 21, 2009.]

In the preceding post, we looked at a “debt-relief” company that is getting sued by the Texas Attorney General, in an attempt to get back more than $4 million for more than 2,500 customers who got hung out on the line when the company shut down and filed for bankruptcy. What really stinks about that can be found in the AG’s petition, describing the “aggressive practices” of the so-called debt-relief industry in general: “Consumers interested in debt settlement likely are also considering options such as traditional credit counseling, debt management plans, debt consolidation loans, and possibly bankruptcy.”

Imagine that: bankruptcy was absolutely not a good idea for its customers but was a nifty-good idea for itself.

The petition goes on to spell out the dangers of dealing with companies like Debt Relief USA. Repeating that such companies “may also disparage” other, better methods, the petition continues: “In reality, the debt settlement company has no interest or ability to advise consumers on the best option for them, rather they are selling their program.” Then it lists “inherent risks” with the practice, risks “that can have catastrophic effects to the consumer.”

Here’s an amended list of some of those risks:

  • additional interest, late fees, over-limit charges and assorted, hard-to-predict other fees;
  • stuck with a much higher balance than before, consumers can “end up in a far worse financial situation than when they entered the program”;
  • ramped-up, harrasing collection efforts;
  • creditors may file lawsuits, which most “debt-settlement” companies can not help with, perhaps resulting in numerous judgments;
  • the consumer’s credit report will likely take severe hickies, making it tough to get a car, a house–or even a job;
  • if the company is actually able to secure a settlement, by the time all the fees are aggregated, it’s likely that any realized will be far less than promised;
  • finally, if a settlement is reached, whatever debt forgiveness that does occur will be treated as taxable income.

Also last week, the first of Team Obama’s credit card reforms kicked in, on August 20, when millions across the U.S. were to begin seeing “a host of improvements on their accounts,” according to Daily Finance. Unfortunately, the account continues, “many have already begun to see higher interest rates. Anticipating the changes, many credit card companies have spent the last few months rushing to raise raise rates before the first changes take effect.

“In the past few months, credit card companies have been racing to raise interest rates on millions of credit card holders. People with cards from American Express (AXP), JP Morgan Chase (JPM), Citigroup (C), Discover (DFS), Capital One (COF) and others have been reporting increases even if they’ve never made a late payment and have excellent credit scores. At this point, it looks like all cardholders who carry balances from month to month will see their credit card costs increase.”

According to Jane J. Kim of  The Wall Street Journal, the new rules are “the first of a series of federal actions that constrain card issuers from changing terms on customers.”

Kim summarizes this set of changes by saying that “banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

“Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.”

“In the past,” writes Lita Epstein at Daily Finance, “by the time cardholders learned of a rate increase, there often wasn’t much time to protest. Even if they chose to do so, they only had two options: paying off the account or locking in the current rate by agreeing to close the account. For many struggling to meet bills after a job loss or other emergency, neither of these options were viable.”

But is anybody surprised that the big banks have already found loopholes? For example, writes Epstein, “Many credit card issuers are getting rid of fixed rate cards completely and instead offering variable rate cards set to an index. That way they don’t have to send notices at all. As the index rate goes up, so does the credit card rate. This method enables them to avoid the protections in the new law.”

Giving the credit card industry so much lead time to plan for the law’s phased in approach is already hurting consumers. Again from Epstein, “Unsurprisingly, these credit card changes have accelerated cardholder default rates,” and “For people who have lost their jobs, rapid interest rate increases and minimum payment changes put even more strain on their budget and will push them even faster toward bankruptcy.”

Indeed, concludes Epstein, although the new legislation may be good for “some consumers, it would have been far more useful if its provisions were enforced immediately upon passage. When it gave the credit card companies so much lead time, Congress also gave them the opportunity to figure out ways around the changes before the bill took effect. Ultimately, with higher fees and interest rates pushing more customers in default, everyone loses — including the credit companies.”

That’s not a bad take. On the other hand, given what we know about “perverse incentives” for the mortgage industry to deny help for hard-pressed homeowners, it kinda sorta makes one wonder whether credit card companies have found a way to securitize credit-card debt in such a way that they come out ahead if consumers default and declare bankruptcy.

Next in “The week that was, Part 3″: housing sales versus housing starts and auctions; obsolete regulation of credit derivatives.

Related resources for personal bankruptcy:

Overview of the bankruptcy process, with links to Chapters 7 and 13.