Posts Tagged ‘Credit Cards’

A predatory business model based on lawbreaking

August 28, 2014

Predatory local governments are emerging in the USA, which get a large part of their revenues from fines and confiscations.   The law allows confiscation of property used in drug crime even if the property is not owned by the criminal and nobody has been convicted of a crime.  Other local governments make a practice extracting money from poor and vulnerable people for trivial offenses.  Evidently Ferguson, Missouri, is one of them.

They have a parallel in predatory corporations.   Credit card issuers, for example, get more profit from fees and penalties than they do from straight interest, event though interest rates are high.  The problem with this, as with predatory law enforcement, is that it is impossible to do this on a mass basis, and still follow due process of law.  If this was done, the courts would be overwhelmed.

The law says that if somebody owes you money, you have to get a judgement from a judge before you have the right to collect.  Before you get a judgment, you have to let your debtor know you’re going to court so they can present their side of the case.

If credit card companies and debt collection agencies actually did that, courts would be overwhelmed.   So they usually don’t.

The.Divide.Matt.TaibbiMatt Taibbi described the process in a chapter in his book, The Divide: American Injustice in the Age of the Wealth Gap.  It is a counterpoint to his chapter on mass arrests of young black men on New York City, another high-volume business that would overwhelm the courts if police and prosecutors followed the law.

Most credit card companies, after a certain point, sell their bad debts to collection agencies for a few cents on the dollar.  The debt includes not only accumulated interest, but fees and penalties for late payment, and an extra penalty payment to the collection agency for its trouble.  But this only works if the collection agency can keep its expenses down.

Commonly collection agncies use “gutter service”.  Or they mail a postcard to an old address than may or may not be valid.  The going rate for process servers is $4 a notice, so they can’t be expected to put in much effort to track down the person.

It doesn’t matter to them if the notice is properly served or not.  If the debtor doesn’t appear in court, the creditor gets a default judgment.  Once the judgment is served, the collection agency has free rein to attach the person’s wages, seize their property and so on.

Taibbi’s chapter on credit card debt told a remarkable story about JP Morgan Chase’s sale of 23,000 court judgments to collection agencies.  A debt in which a court judgment already has been made is more valuable than just an IOU.  All the owner of the judgment has to do is to find you, and then collect.

The problem was that a lot of alleged judgments that weren’t valid—the judgment had been made, but later reversed, or the decision was pending, or, in a couple of cases, the court had ruled in favor of the debtor.  It’s Chase’s duty to have responsible bank officers check the documents and sign notarized statements that all is in order, but this wasn’t done.  Chase assigned hourly employees as “robo-signers” and they were later notarized by people who hadn’t witnessed the signing.

A compliance officer named Linda Almonte fired when she called this to management’s attention.  She was ignored when she called the problem to the attention of the SEC.   The judgments were sold to a company called DebtOne and went to courts all over the USA to be executed.

Only one judge, Philip Straniere of the Richmond County (NY) Civil Court on Staten Island (a Republican, by the way) bothered to look at the papers to make sure they were in order.   He vacated the 133 judgments, not because he was aware of any of the basic problems, but simply because the paperwork was so sloppy that it was impossible to tell whether they were valid or not.

Taibbi wrote that there are three ways a credit card collection case can turn out.   (1)  The debtor doesn’t respond, and the judgment is executed.  (2)  The debt admits the debt and pays it.  (3)  The debtor challenges the debt, in which case the collection agency usually backs off.  It is rate that the collection agency has the documentation to prove its case, or that the case is worth going to court to win.

I think credit card companies should cease promiscuously distributing credit cards to everyone and his dog (credit cards have been issued to dogs) and restrict them to borrowers who are solvent and good credit risks.  But if they’re not willing to do this, they should write off minor credit card losses as a cost of doing business.

Why don’t they do that?  Because the biggest profits to credit card companies come not from interest, but from fees and penalties.  A poor credit risk may generate more profit than a good credit risk.  Even if the debt is sold in the end for a few cents on the dollar, it will have generated a lot of profit in the meantime.

It is common to speak of abuse of government power and abuse of corporate power as if they were two different kinds of things.  Not so.  Abuse of government power for monetary gain, and abuse of corporate power backed by government, are two examples of the same thing.

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The trouble with credit

April 8, 2013

2009-03-22-creditletters

2012-08-26-listen

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