Credit/Debt Recovery

No more posts until September

Sorry posting has been slow here. My wife's grandfather, who had been in a coma, passed away yesterday. We're traveling to attend services, and I hope to be back in business by the end of next week.

She's now lost both of her grandfathers in less than a month. I may return with some posts on how to deal with a deceased relative's debt; we'll see what kind of mood we're in when we return.

Is Experian Cheating?

My mother called and told me she had several calls on her caller ID from Experian (the credit bureau); they had called repeatedly and never left a message. She wondered if she should call them back.

Naturally, my first impulse was no, don't call them back. But she was concerned that maybe someone was trying to obtain credit in her name and maybe the credit bureau was calling to verify her identity. A good concern to have, but without leaving a message, the whole thing was just too fishy to respond.

I was curious if this was even really Equifax, or just some phishing scam; I googled the phone number from her caller ID and learned something interesting. One, this was indeed Experian, but it was their business department, not their consumer department. Two, this was a telemarketing call.

Based on comments I saw from other people hit by this wave of telemarketing calls, Experian is calling small businesses (and they're defining that loosely) to sell their services. I saw reports from people who were called on behalf of their web site, as though setting up a web site made you a small business owner. Setting aside the very sticky issue of how Experian got the names and phone numbers of people to call (they seem to have exploited the WHOIS.net database in violation of their TOS), I think what may be happening here is an end-run around the Do Not Call Registry. A small business owner (like my mother), web site owner, or other individual might get a cold call on behalf of the business instead of to them personally. If challenged, they can assert that they're calling the business, say "jeffmichael.com" rather than calling the person, "Jeff Michael." It seems like a dirty trick to me, and it has a lot of people mad at Experian right now.

Should credit counseling be grant funded?

We're a few months away from the one-year anniversary of bankruptcy reform. So far, it hasn't gone as I expected; the nation's credit counselors were ready to meet the increased demand presented by the new law, but because there was no provision in the law to fund the new counseling and education requirements of the law, the counselors tasked with meeting the requirements have had a very tough year.

The pain is primarily financial; since BAPCPA is a massive unfunded mandate, counselors try to keep their operations running at massively increased capacity while relying on their existing funding channels (plus modest fees paid by the clients that --by law-- must be waived in the case of financial hardship).

But those existing funding channels have been in decline for years. Despite what counseling opponents (like the vandals who have turned the credit counseling wikipedia entry into a useless one-sided pile of $#!%) say, the fair share model does not put credit counselors squarely in the pocket of creditors.

For one thing, it's disappearing. Creditors used to make a 15% fair share contribution (that's a percentage of the funds recovered from the borrower through counseling) and these days, a counselor is lucky to get 3%.

And besides that, a lot of creditors don't participate at all any more. A few years ago, many of the largest card issuers decided that instead of paying back a percentage of all the money they recover through counseling, they'd create a fixed fund and divvy that up among all the counseling agencies with which they work. So counselors are pitted against each other to get a larger piece of that finite pie.

This grant-funding model is a terrible development. When the creditor just hands a lump sum of money to a counseling agency each year based only on mysterious criteria (the creditors refuse to disclose their criteria for awarding or denying grants), then the creditor really has control of the industry. They can starve out agencies they don't like without having to answer for their denial of funding, they can reward the agencies that do things like steer clients away from bankruptcy even when they need it. All accountability goes out the window.

With fair share, there was a meritocracy. Funding was based on performance, not the agency's reputation or the mood of the creditor that quarter. If you did your job, you got paid. That's the way it should work.

I'm not saying fair share is the best way to fund counseling, but it's way better than relying on grants.

Back in town

I just returned yesterday from a road trip; sorry for the slow posting and lack of notice on that. But I'm back to work now.

One thing I heard on my trip was a radio ad for some mortgage refi mill, and the announcer said, "Before you destroy your credit with bankruptcy or so-called credit counseling, call the mortgage hut (or whatever they were called) to refinance your mortgage now!"

If you know me, you already know my reaction to this. But I realized that at long last here was something bankruptcy attorneys and credit counselors can agree upon.

Don't go to anyone who doesn't explore all of your options before recommending a course of action. Of course I recommend going to credit counseling first; it's free and you can always proceed directly to a mortgage lender or BK attorney if you want. But whatever you do, I'd recommend staying away from any business who's sales pitch is primarily attacking the other services available to help you.

HR 4 to become law; will limit credit counselors

HR 4, a "The Pension Protection Act of 2006," was passed by the senate on Thursday, and will likely be signed into law by President Bush.

It contains provisions that establish additional standards for credit counseling agencies to gain tax exemption under tax code sec. 501. Among those provisions:

1. The organization provides credit counseling services tailored to the specific needs and circumstances of the consumer.
2. The organization makes no loans to debtors.
3. The organization provides no services for the purpose of improving a consumer’s credit record, credit history, or credit rating, except when those serivces are incidental to credit counseling.
4. The organization does not refuse to provide credit counseling services to a consumer due to inability to pay.
5. The organization requires that any fees charged to a consumer for its services are reasonable, and waives fees if the consumer is unable to pay.
6. The organization has a board of directors not more than 20% creditors.
7. The organization does not own more than 35% of a corporation that is in the business of lending money, repairing credit, or providing debt management plan services, payment processing, and similar services.
8. The organization receives no fee for providing referrals to others for debt management plan services, and pays no fee to others for obtaining referrals.

This seems onerous at first glance, but I think legit credit counselors won't have any trouble complying with all of this. These provisions should also put to rest any argument that now-defunct companies like Ameridebt and the NCC were on the level; they never would have survived with these provisions in place.

The one that bothers me the most is #3. A huge part of seeking debt assistance is improving one's credit rating. It can be argued that everything credit counselors do is designed to improve the client's credit history.

And more importantly, identity theft remains widespread, continues to grow, and the sector best positioned to assist identity theft victims with repairing the damage to their credit history is America's credit counseling agencies. This law will make it impossible for non-profit credit counselors to do that. Helping a consumer legitimately correct his or her credit is a worthwhile activity that has been unfairly stigmatized, and in the identity theft era, short-sighted provisions like #3 are going to hurt more consumers thany they protect.

BAPCPA Attorney-Client "Gag Rule" thrown out

Over at the BAPCPA Blog (from the American Bankruptcy Institute) this post discusses the "gag rule" that prevented BK attorneys from advising their clients to incur more debt before filing bankruptcy.

It's a bad rule because there are legitimate times when a BK attorney should advise a client to incur debt (such as refinancing a home). However, there was a reason that gag rule was included in the law in the first place.

I left a comment on this BizzyBlog post basically stating that the gag rule was supposed to keep BK attorneys from coaching clients into enough debt to sail through means testing. Ultimately, that sort of behavior is unnecessary, because everyone sails through means testing. There's really no need to cheat to get access to bankruptcy.

Banks offer accounts to kids

The Wall Street Journal recently ran an article "The Banks Want Your Kids" that highlights what I consider an excellent trend. (Article is subscription only.)

More banks are offering products aimed at children and teens. I've written repeatedly that no one should bank with an institution that doesn't offer accounts for kids. Now it looks like many of them are getting the message; creating a generation of life-long customers is smart. Denying accounts to potential customers just because they're underage is dumb.

Yet the banks had to re-discover this essential lesson. As the article states:

The new services represent an updating of a classic teaching tool: The traditional passbook savings account that many of today's grownups will remember from their own childhoods.

The article goes on to warn parents that these new accounts carry more risks for the account holder, which is a silly concern, IMO. The second that kid turns 18 s/he's going to be carrying the same risks as the rest of us when it comes to banking. Why not teach him/her the importance of handling a real account as early as possible?

Experts are divided over whether educational programs alone can influence young people's spending and investing behavior. That's where some of the new product offerings could be helpful.

I guess as an educator and published author on the subject, I qualify as an "expert" in this. And no, educational programs alone don't do the trick. Get your kid one of these accounts as soon as they're old enough to understand what money is. ("When they are old enough not to eat it," as the saying goes.)

"Ripple" monetary system

I've been following the Prosper.com phenomenon because of its big-picture implications for credit and debt. On a related note, the Ripple Project bears watching.

Ripple's creator bills it as a "monetary system based on trust," but it seems like less of a monetary system than a banking system spread out over its individual users.

In a sense, it involves incurring debt and granting credit, but the IOUs generated by the system serve as a kind of currency.

I won't be able to explain it succinctly here. Check out the link above for an overview of the concept.

This does have big implications for the future; in the internet age, central banks aren't strictly necessary. If something like the Ripple Project really takes off, then people will be able to deal with each other directly, without paying a bank to be an intermediary.

Everybody complains about those evil greedy creditors, but they're going to have their hands full competing with stuff like this. They'll have to offer better rates, lower fees, and friendlier policies to attract customers in the future. Or, they'll just buy off Congress to pass laws to protect their business model.

There's a working prototype of the Ripple Project at Ripplepay.com. I can't endorse it at this point because my browsers are unable to verify it as a trusted site. (Mozilla says "Could not verify this certificate because the issuer is not trusted.") Until that changes, I wouldn't give them any personal information.

Psychology Today's "Nation of Wimps"

I saw a post on Radley Balko's "Agitator" blog pointing to this Psychology Today article. It highlights what Balko has coined (hilariously and appropriately) the "Anya Kamenetz Syndrome."

That coddling kids sets them up for failure later in life should surprise no one who actually had a childhood. But so many adults seem to have long-term memory loss, and think that the same kind of education and child-rearing that let them grow up successfully won't work for the next generation.

This article brings back a lot of memories for me: around ten years ago, when I was teaching kindergarten, I said something about "recess" to an administrator, who admonished me that it wasn't recess. "It's gross motor time," she said. I knew right then I was not going to go on to become a teacher for life.

And maybe it's just because I've gone on to work in the debt recovery industry, but I still see the connection. Kids need to learn crucial lessons about responsibility and work=reward, and they're not getting them. What they are getting is crushing debt that could be avoided.

The article even touches on the instant gratification problem:

What's more, cell phones—along with the instant availability of cash and almost any consumer good your heart desires—promote fragility by weakening self-regulation. "You get used to things happening right away," says Carducci.

I'd say it's not just the "instant availability of cash" but the fact that cash isn't even necessary anymore. College kids have credit cards, and they're not using them to buy washing machines or to start small businesses. They're buying beer and pizza. And why would any creditor extend credit to college kids with no income? Because they gambled that the parents would come to the financial rescue. And they have gambled correctly. So the same wimp-development that the Psychology Today article discusses continues right through college, just as Radly Balko correctly concludes.

On credit scores and insurance rates

Check out yesterday's post at BizzyBlog about insurance premiums. Tom gets into the relationship between credit scores and insurance rates, which unfortunately coincide. Tom's right that insurance rates are yet another reason to work to improve your credit score, even though I think the insurance companies are making a bogus connection between credit scores and accident rates.