Bad Paper: The world of the debt collector

Jake Halpern wrote a New Yorker article, and then a book, Bad Paper (which I haven’t read), about the debt collection industry.  He was interviewed by Bloomberg’s Megan McArdle.

My mom was getting hounded by a debt collector for a bill that she did not owe.  She eventually paid it just to get him to stop harassing her.

I started investigating and found out that much debt-collection activities were in my hometown of Buffalo, New York.  I ended up writing a profile on a Buffalo-based debt collector who bought and sold and collected on debt for pennies on the dollar; that story ran in the New Yorker.

That New Yorker story got optioned by Brad Pitt’s production company.  So I went back to Buffalo with the screenwriter.

No one wanted to talk to a journalist back when I was doing the New Yorker piece, but now that I was with Brad Pitt, everyone talked.  One night, the screenwriter and I go out to dinner with a banker and a former armed robber who had gone into business with one another.

They tell me an incredible tale.  They purchased $1.5 billion worth of bad debt for pennies on the dollar. Their aim was to make a fortune.   All goes well on this unlikely venture until some of the debt is stolen and the former armed robber must delve into an underworld where debt is bought and sold on street corners.  This quest ends in a showdown with guns in the inner city of Buffalo, New York.

The world Halpern describes is lower on the economic food chain than the one described by Matt Taibbi in The Divide, but the process is basically the same.  A lender decides it is not worth the effort to collect on certain bad debts, and sells the debt to a collection agency for pennies on the dollar.

The problem is the lack of reliable information as to what is owed and for what.  Sometimes the collectors don’t know how much is principal and how much is accrued interest.  Sometimes unscrupulous lenders will sell the same debt to several collection agencies.

Halpern said he wound up having more sympathy with debt collectors than he expected.  It is one of the few occupations open to convicted felons.  The central figure in his New Yorker article was a former cocaine dealer trying to go straight.

What does he think needs to be changed about debt collection?

The passing scene: Links & comments 10/14/14

 Saudis Deploy the Oil Price Weapon Against Syria, Iran, Russia and the US by Yves Smith for Naked Capitalism.

The Saudi Arabian government says it will allow oil prices to fall to $80 a barrel, an action that will hurt oil-producing nations such as Iran, Russia and the United States.  Saudis control so much of the world’s oil that they can set prices by increasing or cutting back on production.

This will be good for American homeowners and motorists as we face another severe winter, but it makes domestic oil and gas production, and also renewable energy, less competitive in the marketplace.  To the extent that the United States is increasingly dependent on its energy industry, this hampers the economic recovery.

Yves Smith quoted sources who think the Saudis are doing this to punish the U.S. for failing to overthrow the government of Syria.

Americans Face Post-foreclosure Hell As Wages Garnished, Assets Seized by Michaelle Collins for Reuters (via Business Insider)

Thousands of Americans lost their homes to foreclosures years ago, and thought they had closed the door on this part of their lives.   Now they find debt collectors coming after them for the unpaid balance.

The most aggressive of the debt pursuers are the two government-owned mortgage companies, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

Whose side is the government on?

Ebola Vaccine Would Likely Have Been Found By Now If Not For Budget Cuts by Sam Stein for Huffington Post.

Dr. Francis Collins, the head of the National Institutes of Health, said the NIH has been working on a vaccine for the Ebola virus since 2001, and would have found one if not for cuts in the NIH research budget.

Whether a vaccine really would have been discovered is unknowable.  But funds for research on infectious diseases should be increased, not decreased.  The Ebola virus will not be the last mutant killer disease that is invulnerable to known antibiotics.

 

A predatory business model based on lawbreaking

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.

Matt 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.

Social Security backs down on debt collection

The U.S. Social Security Administration, criticized for seizing tax refund checks without notice based on debts of the taxpayers’ deceased parents, said it will stop trying to collect debts more than 10 years old.

That’s good first step. How about promising to use due process of law before trying to collect any debts? And how about observing the legal principle that children are not responsible for the debts of their parents?

http://www.washingtonpost.com/politics/social-security-stops-trying-to-collect-on-old-taxpayer-debts/2014/04/14/9355c58e-c40f-11e3-bcec-b71ee10e9bc3_story.html

Government seizes tax refunds without warning

The U.S. Treasury and Social Security Departments are intercepting federal and state tax refunds because of alleged overpayments to taxpayers’ parents decades ago.   The theory is that the children benefited from the overpayments, so they owe the money.

The intercepts mostly come without warning, and without the government providing any documentation that the money actually is owed.  The first warning the taxpayer gets that there is a problem is when the tax refund check is intercepted.

Be that as it may, there is nothing in the law that requires or authorizes Treasury or Social Security to ignore due process of law.  This is the decision of some unknown, unaccountable person hidden deep within the bureaucracy.

At the very least, taxpayers should be notified in advance as to just what the supposed overpayment was, and when and how it was made, and be given a chance to make an objection.

Experience tells me that unelected people in positions of authority in government seldom back down from mistakes.  But since nobody in Congress stands behind the original enabling legislation, there should be no problem in repealing it.  Should there?

http://www.washingtonpost.com/politics/social-security-treasury-target-hundreds-of-thousands-of–for-parents-old-debts/2014/04/10/74ac8eae-bf4d-11e3-bcec-b71ee10e9bc3_story.html

The government is following the worst practices of mortgage foreclosure servicers and bill collection agencies, in acting without warning and with lack of documentation and due diligence to make sure they’ve got the right person and the debt is really owed.

http://www.newrepublic.com/article/117213/debt-collector-malpractice-someone-elses-debt-could-ruin-your-credAit

I expanded this post somewhat a few hours after I published it.

[Update 4/15/14]

The U.S. Social Security Administration, criticized for seizing tax refund checks without notice based on debts of the taxpayers’ deceased parents, said it will stop trying to collect debts more than 10 years old.

That’s good first step. How about promising to use due process of law before trying to collect any debts? And how about observing the legal principle that children are not responsible for the debts of their parents?

http://www.washingtonpost.com/politics/social-security-stops-trying-to-collect-on-old-taxpayer-debts/2014/04/14/9355c58e-c40f-11e3-bcec-b71ee10e9bc3_story.html

The profit motive is not an ethical principle

Here are links to articles I found interesting about what happens when the profit motive overrides professionalism, social responsibility or obedience to law.

Coming Corporate Control of Medicine Throws Patients Under the Bus

Yves Smith describes the corporate model for medical care, which is to set a limit on how much time a physician can see an individual patient, so as to maximize the number of patients seen in a day.  This means weeding out patients with complicated problems or without good insurance.

Who’s Getting Rich Off Student Loans?  College Endowments

Daniel Luzer of the Washington Monthly tells how college endowment funds invest in student loan servicing and collection companies such as Sallie Mae.   The perverse incentives are that the higher the college tuition, the greater the interest payments and the more profitable the investment.   Sallie Mae is the nickname for a government lender that was privatized in 2004 and became SLM Corp.

When Your Boss Steals Your Wages: The Invisible Epidemic That’s Sweeping America.

Lynn Stuart Parramore of AlterNet reports on the practice of wage theft, which includes not paying for all hours worked, not paying overtime, not paying minimum wage and confiscation of tips.   A survey of 4,000 low-wage workers in New York, Chicago and Los Angeles found that 26 percent were paid below minimum wage and 76 percent were denied overtime pay for working more than 40 hours a week.

The Vicious New Bank Shakedown That Could Seriously Ruin Your Life.

Lynn Stuart Parramore reports on how banks such as Chase JP Morgan are committing the same kinds of abuses in collecting credit card debt that they used in collecting mortgage debt.  What they do is “robo-sign” lawsuit claims without checking records to make sure the information is correct, and give “sewer service” (throw the legal papers in the sewer)  of the claim to the debtor.  The result is that debtors’ wages are garnished even though, in some cases, they may be paid up, and lots of fees and charges are added to their debt without their knowledge.