Credit/Debt Recovery

GAO report on credit counseling requirement

The General Accounting Office has released its report on the credit counseling requirement of the Bankruptcy Abuse Prevention and Consumer Protection Act. The news isn't as bad as its headline suggests.

In general the GAO has found that the EOUST approval of credit counseling agencies has been effective, producing relatively few legitimate complaints about approved agencies. They found that there are enough approved agencies to meet the demand for counseling and education, and no agencies have yet had their approvals revoked for any reason.

There is a subtle threat there, though; four approved agencies are being audited by the IRS, and if the IRS revokes an agency's non-profit status, the EOUST will yank their approval as well. Thing is, there are bureaucrats at the IRS who seem intent on taking down the entire credit counseling industry; it's just a matter of time before they get to them all. That IRS activity will be something to watch as all of this unfolds.

The GAO study, titled "Value of Credit Counseling Requirement Is Not Clear" recommends that the Trustee Program develop a way to track and analyze the pre-filing credit counseling, and institute formal guidance for credit counseling agencies as to when they should waive their fees. (The study found that agencies are waiving fees for clients who are not able to pay, but there is no consistent standard.) I don't have any special problem with either of those recommendations.

The title refers to the fact that the stated objective of the credit counseling requirement, to "help consumers make informed choices about bankruptcy and its alternatives," isn't really being met. That's attributed to the counseling being initiated too late to help the consumer; by the time they attend their counseling sessions, their debt situation has grown so dire that bankruptcy is the only viable option for them.

Thing is, the lawyers don't want the counselors presenting alternatives to their clients. (Though I'm sure they'll use this study to bash counselors all the same.) I don't know how they can resolve this issue; credit counselors really want to build partnerships with bankruptcy attorneys, and they aren't about to poach clients from them. The GAO study interprets the bankruptcy law as requiring credit counselors to attempt to do just that.

For my part, I think there's value in the counseling sessions even if they aren't attempting to dissuade the debtors from declaring bankruptcy. The debtor gets personal assistance with developing a budget and creating an action plan for managing their debt, and they get counseling about their personal finances and the things that led them to financial difficulty in the first place. And of course I think the debtor education component is worthwhile--the GAO report seems to agree with me on that.

Real estate video

A reader sent this interesting video, which is said to be US home prices adjusted for inflation, then "acted out" on a virtual roller coaster. Naturally, there are ups and downs, but the general trend is upward.

The maker of the video, Richard Hodge of Speculativebubble.com has this to say:

Our mission is of economic and financial prudence.

We are not anti-housing or apocalyptic soothsayers of the future, but realist that believe housing will adjust and revert to a historical mean.

We believe that housing needs to reflect the incomes of those living in the immediate area.

We believe that easy access to credit and negligence of those offering loans inflated the housing sector.

We are against exotic and ridiculous financing offered to minimum wage works so they can purchase $400,000 mega mansions or 800 square foot boxes in California.

We vow to continue blogging in 2007 and 2008 to offer guidance to newcomers that are just having their eyes open to the housing bubble.

We understand that housing is an emotional and economic issue and that buying a home is not always based on what is economically right, but also the psychology of the current market.

We take an oath against giving in to the propaganda machine that all debt is good and that all debt equals freedom.

That's all basically sound, but I don't know of anyone who's saying that "all debt is good." I don't agree with all of the economic theory at work on the site, but it's worth hearing what Mr. Hodge has to say.

Familiar Phone Call

Here's the call, received at 5:00 pm yesterday:

Hi, this is Mike from cardholder services, and I'm calling about your credit card accounts. Don't worry, there's nothing wrong with your credit card accounts at this time, but if you press 1 now, I can tell you how to lower your credit card interest rates to as little as 6.9%. To qualify, you must have at least $2500 in credit card bills...

I looked up the number from my caller ID online, and a lot of people have been getting cold calls from these people; most of them rightfully smell a scam. I reported them to the Do Not Call registry (for all the good that will do), but the call had the familiar ring of the NCC's "education campaign" that got them shut down by the FTC. If they are trying to hide behind a "non-profit" exception to the Do Not Call registry, they'll get busted the same way the NCC did. But I'm having such a hard time getting any hard information about the company that I think it's more likely they're just an outright scam and are covering their tracks.

After doing some research, it seems the company is perpetrating a scam, spoofing a disconnected number so it will be harder for the FCC to catch them. Someone on a message board identified them as "Debt Solutions USA" or "American Debt Negotiators," operating out of Florida, but I haven't confirmed that.

I'm assuming if you're smart enough to use the internet to read blogs like mine, you've entered your phone number into the Do Not Call registry. And even if a scammer like this tells you they're exempt from DNC because they're non-profit, report them anyway. They might meet the same fate as the NCC.

Nonsense from NACBA

Predictably, the National Association of Consumer Bankruptcy Attorneys, the Consumer Federation of America, and the Center for Responsible Lending are using the subprime mortgage explosion as an excuse to attack bankruptcy reform again. (link)

"Consumer Groups" have been calling for an end to this law since before it was enacted. A NACBA speaker even compared the bankruptcy reform law to the holocaust. So I'm not surprised at this move.

What I am bemused by is the ridiculously stupid attempt to blame subprime mortgage problems on the credit counseling requirement:

"As a result of the 2005 amendments to the Bankruptcy Code, there are now several hurdles a debtor must clear in order to file for chapter 13 bankruptcy, as Credit Suisse notes in its analysis of the impact of the 2005 amendments on subprime borrowers and the subprime market. For example, as a result of the 2005 amendments, an individual cannot even meet the definition of a 'debtor' (and so cannot file for bankruptcy) without first receiving credit counseling from an approved credit-counseling agency. Requirements like these cost precious time, which a borrower facing foreclosure cannot afford to lose, and were clearly not designed for dealing with an immediate crisis regarding the borrower's home ... The remedy to the counseling requirement is simply to eliminate it for debtors facing foreclosure."

The "precious time" this requirement costs is a couple of hours. The argument that counseling costs precious time is just plain dumb. And besides the fact that counseling is available on-demand, with completion certificates available almost immediately after the counseling session is completed, the bankruptcy court is free to waive the requirement if there's an extenuating circumstance that might delay their filing (like the debtor not speaking a language in which counseling is available, or disability that prevents the debtor from complying with the requirement).

It may be that these "consumer advocates" just don't understand how efficient the counseling process is. No honest commentator could describe the counseling requirement as "time-consuming" in the context of a foreclosure proceeding. Perhaps the spokespeople haven't dealt with the counseling requirement first-hand and don't know just how quickly debtors can complete the counseling requirement and get the certificate they need to proceed.

Credit counseling & education are far from being the problem here. In fact, counseling and education are more vital than ever. A certified counselor can help a debtor interpret the documents relating to their mortgage, communicate with lenders, and better understand their predicament. Many EOUST-approved credit counselors are also HUD-approved housing counselors... why wouldn't a debtor facing foreclosure want to talk to one of them? (They would, of course... the real question is why wouldn't a bankruptcy attorney want the debtor to speak to them.)

I'm not going to argue the bankruptcy law is perfect, but I won't accept that the counseling and education requirements are the problem. In the whole bankruptcy reform mess, the credit counselors are the weakest and most vulnerable player; they don't have high-dollar legal teams, they're not funded by lawyer groups or well-treated by their creditor abusers. They actually have a lot of real work to do, and don't have as much time as "consumer advocates" do to fight these battles. If someone wants to chip away at the bankruptcy law, the easiest place to do it is to attack the credit counselors, who are focused on the debtors and holding up their end of the deal. It's a shame.

De-mancipation day

My wife and I were just talking, wondering why taxes are due tomorrow instead of today. So I looked it up; today is Emancipation Day, celebrated in Washington D.C.

I suppose it's only around 1% of the population who sees the same irony I do; the end of slavery is celebrated on the day after the normal income tax deadline. Here's my point, put another way.

Here's an idea

I propose that a specialized set of math courses be created for journalism schools. That way, when j-schoolers graduate and become reporters, they can keep their pants on when the nation's foreclosure rate "soars" to 0.118%. (That's last month's figure; one foreclosure out of every 884 houses.)

Foreclosure is serious, (even when it's one in 800) and it's great that there are housing counseling agencies ready to help those in trouble. A big part of my career is about helping people avoid problems like foreclosure by budgeting and saving to be prepared for emergencies.

We need to be concerned about rising foreclosures. But we also need some perspective. The world isn't ending. Yet.

Checking account denial due to credit report

I've heard a disturbing story of a young Hispanic consumer who lost her checking account because of something that appeared on her credit report. There was nothing on her ChexSystems report, and she initially was able to open the account, only to see it closed because of a collections account on her TransUnion credit report.

No one in the dinosar media is talking about this yet, but it is huge news. How did banks get away with instituting this practice without anyone realizing it? This is the first I've heard of a credit check precipitating the opening of a bank account.

This is not a credit account, mind you; giving someone a checking account is not the same as extending credit to them. There's already a consumer reporting agency--ChexSystems--that banks can use as an excuse to deny people accounts. So why are they using credit reports?

There are a lot of dimensions to this; the bank who closed this account, when confronted, insisted that all the major banks are doing it now. When a financial institution pulls your credit report, that inquiry affects the consumer's score. [UPDATE--Two of the banks known to engage in this practice, Citibank and Wells Fargo, insist the inquiry is a "soft hit."] The consumer in this case has a very common name, and the collection account was put on the report by a junk debt buyer. (Which means I have NO confidence that the debt legitimately belongs to this particular customer.) In the credit recovery industry, we know how easy it is for collectors to abuse the credit reporting system to extort payments. Remember, one in four credit reports contains serious errors.

And here's another angle to all of this that must be explored: was this consumer's credit checked because she is Hispanic? Would any consumer have suffered through this, or just the ones with ethnic-sounding names? Sure, it seems like it could be the new redlining, but it could also be a coincidence--name confusion is more common with Hispanic consumers, which means they are more frequently punished for credit blemishes that are not legitimately theirs.

I looked around online, and I've seen a few banks disclosing credit checks in various ways. Citibank says they may "verify your identity using comercially-available databases containing information from public records, orther financial institutions and consumer reporting agenceis." They seem to be obscuring the fact that they use the credit report for more than just "verifying your identity."

Bank of America says flat out that they will collect and use information from a consumer report, including credit score and credit history. But their site co-mingles bank accounts and credit cards so thoroughly that it's hard to know what they're referring to specifically; it appears as though it could be that they only use credit reports for their credit card clients, but I've gotten confirmation that BofA does in fact check credit reports for new deposit accounts.

I downloaded a printable Wells Fargo checking account application, and it includes this disclosure "You are authorized to check my credit and employment history and to answer questions about your credit experience with me."

So that's Citibank, Wells Fargo, and BofA that are confirmed as pulling credit reports for new deposit accounts. No confirmation on Washington Mutual yet, though I've been told that they do. I understand that US Bank does NOT pull credit reports when opening new bank accounts.

Since all the big banks are major credit-card issuers, have they just decided to treat every checking account holder like a credit card customer? Or are they singling out certain races for more thorough scrutiny?

What every bank discloses is the Patriot Act connection:

To help the government fight the funding of terrorism and money laundering activities, U.S. Federal law requires financial institutions to obtain, verify, and record information that identifies each person (individuals and businesses) who opens an account.

Well, it's a far cry from 'verifying identities' to closing an account because of collection activities on a credit report.

Will the banks get away with this? Credit reports already affect or determine your access to housing, employment, insurance, car ownership, and credit. Will they now determine your ability to have a checking account? This is a very scary development.

Medical billing question

Alex comments in my last post:

Jeff, I just received a statement from my child's pediatrician's office. The statement is for services from February. This is the first statement that I have received for this visit and the amount due is already 31 to 60 days late. I'm meticulous about keeping credit bills and statements for about two years, especially medical bills because of the tax deduction for medical expenses. Seeing that the statement was already considered late, it made me interested to find out how many times I've been billed for medical expenses so long after the visit. I looked back and found that about 90% of my bills were either; billed before the insurance company had paid for the visit, making my bill/statement for the entire amount of the visit (which, of course, I had no intention of paying until insurance had paid their portion, making my amount due late by the next time the billing cycle had come around to find out my "real" amount due); or, billed thirty or more days after the visit, after insurance had paid (making my amount due fall in that "late" category). In every instance, I've found that I've never been charged a late fee or interest on the amount due although, by stated billing practice, I could have been.

This raises the question for me: How many of these collections/bankruptcies due to medical bills that we hear about are because of, what I would consider, sloppy billing practices used by the medical office or insurance company? Sure, I understand the huge emergency medical bills that have defaulted because of lack of insurance (I have a family member who works construction in that bind), but what about the people that have insurance but just don't understand the billing statements that they receive?

Alex

This is a very good set of questions. I think, in general, that the medical bills themselves aren't so much the problem. Medical-related bankruptcies involve lots of debts... when you're sick, you can't make the mortgage/rent, car payment, credit cards, etc. Eventually, medical debts do get sold to collectors who will sue you, ruin your credit, etc. But before that, doctor's offices are pretty good about working with their patients to get payment. They'll accept payment plans, they'll accept late payments without dinging your credit, etc. (I'm saying all this in general... I'm sure there are individual exceptions to this all over the place.) All those other debts aren't so understanding and flexible.

So yeah, I think a lot of medical bills are sent late and contain innaccuracies (I've had a billing/insurance issue with a doctor's office myself, and in the last 60 days), but I don't think those kind of delinquencies are reported to the credit bureaus right away. Because insurance companies drag their feet, medical offices are used to a certain amount of delay in getting their payments. That's probably why in your experience you don't tend to get charged late fees even when the payments are technically going to be late.

And remember, the medical bankruptcies we keep hearing about are wildly exaggerated. And even when the bankruptcy case isn't willfully misinterpreted by scholars with an agenda, the medical bills themselves aren't always what brought on the bankruptcy, but the credit cards, taxes, and other expenses that got out of hand while the debtor was sick.

So my take on your final question is entirely different. I'm guessing that while sloppy billing practices and insurance-related billing problems are probably pretty common, they aren't especially responsible for collections or bankruptcies. I think it's even possible that hospitals, insurance companies, and medical offices are more likely to make extra money off of these billing issues than to drive a debtor to bankruptcy. (I suggest that because with the last three medical issues I've had, I've been double-billed or had some other over-charging that I had to dispute to get resolved.)

Fair Share and game theory

I've been grappling for the past few days with the idea of counselor vs. creditor. vs. client. A lot of observers of the debt recovery industry point to the funding relationship between creditors and credit counselors and think they smell a rat.

If the debt management plan returns money from the client to the creditor, they ask, then isn't it just debt collection? And if the counselor is funded with a percentage of the funds collected, aren't they just debt collectors?

No and no.

First, if any product that returns money from the debtor to the creditor is suspect, then what kind of debt recovery industry will we have? The only thing that rhetorical question allows for is bankruptcy, since chapter 7 is the only debt recovery method that doesn't involve paying back what you owe.

Clearly, there is a need for an industry that helps consumers resolve their debts short of filing bankruptcy. And yes, such an industry is necessarily going to return money to lenders. And duh, that's a good thing. What's an even better thing is that the lenders finance this industry because they like it when their debtors repay what they owe. Funding the counselor with a percentage of the funds collected rewards the agencies who are better at educating their clients and offer the best budget assistance. It punishes counselors who sign absolutely anyone on a debt management plan whether it's the right plan for them or not. It punishes counselors who can't help the client create an effective budget.

The central misconception that fair share critics make is assuming there has to be a winner and a loser. Not true. Credit counseling is not a zero-sum game. If the creditors get most of their money back, that doesn't make the debtors the losers. Everybody wins when debtors avoid bankruptcy, creditors get paid, and counselors are able to continue to educate and assist their clients. People who don't believe that have a neurotic hatred of creditors, and are rooting for the debtor to fail. They're cheering on bankruptcy. I find that creepy.

And I'm not saying bankruptcy is bad. It's an unfortunate necessity for a lot of people. But there are no winners in bankruptcy court, save the lawyers.

In debt recovery, the win-lose model plays out with traditional debt collections. "Pay us every dime you owe, or we'll destroy your credit." It's the collector's legal right to do that, but it's impossible to argue that the debtor "wins" in any real sense. Settlements can mitigate this, since the creditor or collector at least gets something, and the debtor gets a reduction in what they owe (and a dinged credit rating). One might argue that's a win-win of sorts, but it's certainly less than ideal.

All this is not to say that I support the creditors. I think people should generally repay what they owe. But the creditors are abusive, of both their borrowers and the credit counselors who endeavor to help those borrowers. Unfortunately, they use their funding as a cudgel to bring counselors into line, and create agreements with customers that give them unlimited power to assess fees, raise rates, and change loan terms at their whim. They grant credit indescriminately, then crush the lives of the debtor who can't repay. They're bad guys, these creditors. But there's no way for the borrower to 'win' against them, without being destroyed themselves.

The best solution is to not borrow. Only do business with lenders who treat you like a human being.

And the other thing that might help improve creditor behavior? Mandatory fair share.

"Debt Recovery" means more than credit counseling

My last post talked about the difficulties I face in defending credit counseling. But the debt recovery industry is bigger than that.

Consider settlements. I support the idea of debt settlements when it's right for the consumer, and when the settlement negotiator has made everything clear (including the risks, costs and consequences to one's credit).

Not everyone in the credit counseling world agrees with me. (And virtually no one in the settlement industry agrees with me about credit counseling.)

This is where we get into insidious creditor control of the counseling industry. It would be great to have one non-profit organization that could triage clients and get them to the best solution; if it's bankruptcy, then here's an on-staff BK attorney. If it's credit counseling, then we'll set up a DMP. Or if it's settlements, then let's begin negotiating. Unfortunately, any credit counseling organization who tries this will be cut off from funding and eventually go down the tubes.

I guess they could quadruple the fees they charge their clients if they want to survive. I don't like that solution mainly because I think the creditors should pay for the counseling. All the "consumer advocates" who point to creditor funding of the counseling industry aren't considering the alternative: "consumer-funded credit counseling." (I know many of them secretly wish for "taxpayer-funded counseling" but I don't even want to think about that.)

Of course, the other reason they can't raise their fees is because most states have laws in place limiting them. So they have to preserve their creditor funding because state legislatures are forcing them to.

So it's "offer settlements, get de-funded". And the NFCC could care less. They don't seem to want their agencies to offer choices to their clients. They don't want to let their members help consumers restore the integrity of their credit reports, or repair the damage collectors have done to their credit scores. They just don't seem to care about anyone but the creditors. That has to change.