A Modest Proposal (and unintended consequences . . . perhaps)

June 17, 2019

I posted on Facebook post last month about a proposed bill from Bernie Sanders and Alexandria Ocasio-Cortez about controlling credit card interest rates.

The post generated a lot of views, clicks, and shares along with some comments in response to my opinion that it will never pass.

A few of those comments were purely political.

Others sounded like they came from people who live in a country where a significant percentage of households have maxed out credit cards and are barely paying the interest and fees, never mind paying down the actual debt. People, in other words, who can’t help but notice they’re paying 21%+ interest at a time of historically low rates on other credit products like mortgages. Sound at all familiar?

Two comments, however, were about the unintended consequences of enforcing a nationwide 15% cap on credit cards which would, in essence, bring us back to the 1970s.

Here’s the history first. Before 1978 (I know, a million years ago, but bear with me for a moment) banks issued credit cards in the state they were chartered in (anyone remember Mechanics Savings Bank and CBT?) and, of course, needed to abide by the interest rate rules of that state.

So if you lived in Windsor and wanted a credit card, you went to your local bank, put in an application, probably talked to the manger who was also probably a neighbor, and you waited a couple of weeks or more to be approved. The bank was careful about who it approved for credit.

The highest interest rate the bank could charge under Connecticut Law at the time was 12%. In the 70s, only 38% of American households had at least one credit card.

Then came 1978 and the Supreme Court of the United States heard a case that changed it all. Most people would say it is one of the most boring cases in Supreme Court history. But the effects of the decision are fascinating and changed everything. One bank from Nebraska was deluging Minnesota residents with sales flyers offering credit cards with NO FEES! And they also seemed to approve everybody for an account.

Another bank, a stolid Minnesota institution, also offered credit cards but was bound by the state’s interest rate law and could only charge customers 9% interest. They charged a yearly fee to help offset the low interest rate.

The first bank was chartered in Nebraska, a state with very lax interest rate rules. They charged no fees but they made up for it with 18% interest rates and higher. Because they could charge so much more in interest, they could accept the risk of giving cards to people with so-so credit.

The stolid Minnesota bank maintained that all this was unfair competition and, besides, banks that did any kind of business in Minnesota needed to follow the interest rate law of the state.

The Supreme Court bought none of it. They ruled 9-0 in favor of Nebraska. Judge Thurgood Marshall stated that the Minnesota bank “did not have a legal problem but they did have a marketing problem.”

Banks now only needed to abide by the interest rate law of the state they were chartered in, not where their customers resided. You can thank the Supreme Court for all the junk mail you get from South Dakota, Nevada, and Delaware.

Ten years after the ruling, 56% of households in the U.S. had at least one credit card.

Today it is up to 75%.

The more credit cards out there, the more credit card debt. Add in the astronomical fees and high interest, and you are increasingly unable to keep balances down. Already almost half of all Americans don’t have a at least $400 on hand for emergencies. More and more people are accepting those offers from South Dakota, Nevada and Delaware but just to pay off the credit card balances they already have.

A cap at 15% interest just might help people get the balances down, get things under control – certainly a better shot at it than at 25.6%, $35 fees, over-limit or late fees, and more.

One commenter on the Facebook post pointed out (cynically or wisely, you decide), (a) the banks would adapt and substitute higher fees for the loss on the interest side, and (b) people with no credit, people with bad credit, people trying to rebuild their credit, would no longer be able to get credit cards.

The concern is people will “lose” credit – in my book I talk about a client who had his credit lines slashed by his bank. All of a sudden the guy who thought he had a few thousand dollars in available credit for a rainy day had none. This happened to a lot of people after the economy crashed in 2008—the credit card companies just didn’t have the money to lend anymore, or, they knew as people lost jobs they would rely on credit so the companies cut a bunch of us off before we could get deeper in the hole.

Put another kind of control on the credit card companies and I can see them tightening the belt again. If their business models work only if they can charge $35 for each fee and over 21% annual interest, they will definitely pull back if limits are placed.

The thing is, I’d much prefer bank customers getting it together and planning a way out from the debt. That’s the way you deal with it. A cap is well-intentioned but, really, who doesn’t think the banks will find all manner of ways around it?

It’d be like the government dictating that Lucy had to hold the ball for Charlie Brown from here on out. She’d agree, smile, and wink because she knows they didn’t tell her how to hold it, and there’s a dozen different ways of doing that while still insuring poor ol’ Charlie never kicks a field goal.

The federal government doesn’t need to pass a law for you to start handling and managing your debt better. You don’t need me to tell you what to do—you know you should have a savings account, you know you shouldn’t live “beyond your means.”

The issue is whether you WILL ever do it, whether you will ever cut out credit card use, have a plan for future purchases, increase your income so you can live the way you want without pawning away your future.

I have some great tools for you to get started. Let me know when you’re ready.

About Got Debt 2.0 (the preface)

May 28, 2019

I published the first edition of Got Debt, Dispatches From the Front Lines of America’s Debt Crisis in October, 2017. At the time the economy wasn’t treading water, wasn’t booming. It was just, or so it seemed to me, moving along in a hopeful direction while I was still cleaning up the detritus left from the Recession.

The economy eventually did take off – at least according to the media in all its forms. Unemployment dropped like a rock, the stock market soared, economic indicators indicated “great things,” everybody was working, houses were selling – although nowhere near the rate of the early 2000s, but we all know how that worked out so lower growth there was just fine.

Through all this good news I noticed a few things. For one, I was as busy as ever with foreclosure and debt cases and they weren’t leftovers from 2008, they were new. The economy may have been zipping along but homes were still going into foreclosure, credit cards were being maxed out, late payments piled up as before, banks were issuing default notices, and collection firms, lean and mean after consolidation and some house-cleaning during the Recession, were enjoying a golden age.

It doesn’t take a rocket scientist or a lawyer who deals in consumer debt every day to realize that wages – the regular working wage of the regular middle-class worker – hadn’t changed at all. At least not in comparison with inflation.

The dollar is not going as far as it did and that’s a trend that doesn’t look like it’s going to change anytime soon, despite constant promises from politicians.

People continue to supplement lagging incomes with credit. Still. They’re just doing it today a little more quietly than during and immediately after the Recession. Debt back then was front page news, now it’s stuck – when it’s mentioned at all – back in the “Consumer Help Team” section.

Debt is still there, the crisis is still there, the coverage is not and as the coverage goes, so goes the awareness.
Not too long ago, I read a review of a terrific movie, Hell or High Water, a movie very much about foreclosure. It was shot on location in West Texas and Eastern New Mexico. The cinematography is brilliant – as noted in the review.

The reviewer loved the movie, loved the performances, loved everything but had this criticism (I’m paraphrasing): “They really overdid it with the boarded up buildings, empty houses with foreclosure signs, billboards for pawn shops and companies that buy distressed homes.”

I’ve been to conferences in Texas – Florida as well – and I can personally attest that the filmmakers didn’t overdo anything, they simply shot what was there on the side of roads not interstates.

The review simply wants us to believe what is not supported by fact – the Recession is over and that foreclosures and crushing debt are fading away with it.

Debt is still everywhere and it affects almost everyone in one way or another. Pretending it’s not is not only irresponsible, it is setting the stage for another recession and new generations afflicted to be by it. I share here the story of the law firm that used to foreclose on medical debt, and when that became public and the firm fired by the hospital after the shameful news broke, how it moved on to focus on collection of old credit card debt- a more “under the radar” type of work as there is less general sympathy for the person who couldn’t pay a credit card than someone who couldn’t pay a medical bill. So has gone the story of crushing debt—we have become desensitized to it, and so overwhelmed by our own situations we have no empathy left for others. It has become old news, it’s that simple.

Hence this new edition.

Foreseeing Effects

First semester of law school everyone takes Torts. It’s an interesting course, rarely boring as you’re reading about some pretty gruesome medical malpractices, product liabilities, personal injuries.

An important concept in tort law is ‘reasonable foreseeability.’ Basically -very basically – it boils down to ‘was it reasonably foreseeable that not having your two-ton truck’s squealing, grinding breaks fixed might eventually result in losing them coming down a steep hill and getting into an accident?

I thought of this earlier this week when I noticed a comment on the Facebook page. We had posted a whiteboard cartoon explaining the crumbling foundation crisis in Eastern Connecticut. The caption mentioned that HUD Secretary Ben Carson had just toured a home with a crumbling foundation and had promised some federal relief. The comment was brief and to the point: ‘Another thing to bail out, I’m sick of this state.’

I get this viewpoint, I really do – I pay taxes in Connecticut, too. And, I wish it were that simple. But, of course, it is not. Because while this crisis – and it is a crisis – snuck up on us over more than a decade, it’s effects – from here on – are most certainly foreseeable.

First, 34,000 homes in 41 towns in Eastern Connecticut may be affected. Homeowners insurance will not cover the condition, banks and mortgage companies have no solutions, the costs of repairs – if at all feasible – are usually prohibitive. Government resources and funds are needed.

To take a complicated situation and greatly simplify, it goes like this -dozens of homes in a small town have crumbling basements:

Instantly they lose whatever equity the homeowners have built up over the years;

The homeowners cannot, obviously, refinance or obtain a home equity loan to fix the problem – if it is fixable;

The house cannot be sold;

The tax assessment by the town drops like a rock;

The more houses – and, remember, there are 34,000 homes that may have this problem – a town has with the problem, the more it’s tax base drops;

The more the town’s tax base drops, the more cutbacks to services, the more cutbacks to schools;

Cutbacks in services and schools inevitably mean lower rankings for livability and schools;

The lower the rankings, especially for schools, the lower the desirability for new homebuyers;

The fewer new home buyers, the lower the assessments;

And we start all over again;

Except, by now, since this effects 41 towns, the consequences are seen on a statewide basis, as about one-third of the state can no longer contribute much to Connecticut’s already hurting economy.

If we don’t come up with solutions to this problem – wide ranging, creative solutions – the effects are all too foreseeable and they will be felt by everyone.

The Politics of Debt

Last month we posted an article on Facebook about the Consumer Financial Protection Bureau. The article, I think it was from the Washington Post, was a simple, concise recitation of the many hurdles the CFPB has been facing over the last year or so. It talked about their actions against Wells Fargo and the fact they have not pursued a single matter in the the last year. Moribund under it’s new director, was how the article put it, I think.

It was a straightforward article, it reported that the CFPB wasn’t working and speculated on whether or not it had a future.

We posted it with a heading wondering about the future of CFPB an the effect that could have on clients and law firms that do what I do. Short and sweet, the caption on that came with the link said it all, or so I thought. I should note that we’ve posted about the CFPB in the past and always received thoughtful, insightful comments.

As we began to with this post. Then, it was shared.by at least 6 of our followers (thank you!). Then some of the people it was shared to shared it as well. Which was all great … until about three days in.

That’s when we started getting vile comments. Really nasty stuff. For a while we erased the offensive comments and banned their ‘authors’ from the page. But, it got to be too much and we had to drop the post from Facebook. That’s why we can’t show an image of it here.

The comments, some remarkably, if not terribly creatively profane, revolved around the very invocation of Elizabeth Warren’s name, though a few went deeper into the ‘libtards’ plot to destroy banking and Wall Street.

Here’s the thing: before we erased, blocked, and banned we checked out each offender’s home Facebook page. It’s stunning, by the way, how many people ignore Facebook’s privacy settings and leave everything out there for anyone.

There was not a banker, broker, arbitrager, Axe Capital employee, investment banker, mortgage company exec, wolf of wall street, master of the universe, or even one of their lawyers in the lot of them. They were all regular people – a few retired state employees, a couple of people on disability, a mechanic, a teacher, and the like. They had very little in common other than having time to comment on a Facebook post from a law firm in Connecticut and despising, violently, the CFPB.

Okay, they had one more thing in common – they were the exact same demographic that Wells Fargo targeted in their schemes over the last few years. The schemes the CFPB identified, punished, shut down.

Here’s another thing: I deal in debt and foreclosure every day and I can attest to the fact that debt – personal debt – has nothing to do with anyone’s political affiliation. it has a lot to do with sudden unemployment, unforeseen death, divorce, illness, and a dozen other out-of-the-blue-soul-and-financial-crushing events very few people have  a (or can) plan for.

Politicians and lobbyists can divide along ideological lines and fight things like the CFPB out in Congress and in the airwaves of public opinion. But when someone, a regular someone, is blindsided by, well, life, and is facing losing their home (and more), there are no ideological lines.

There’s just trying to fix it.

Black Mirror, China, and Moving On

This piece is the result of a perfect confluence of a couple of scattered news articles that flitted across my news feed over the last week and a 12:30 am TV commercial.

First, the commercial: two friends hanging out when one gets a text, YOUR CREDIT SCORE HAS CHANGED! “Whoa,” the other friend exclaims, ‘why’d you get that?” “I get instant updates on all my credit reports,” replies the other, “don’t you know credit scores can change anytime?”

No, the friend didn’t know that, but he’s filled in now, credit scores can change any time, who wouldn’t want to be on top of it? It’s implied, not very subtly, that it’s the height of irresponsibility not to track one’s credit score 24/7.  Luckily, XYZ company is there for you and, get this, it’s free to start!

The news items were about China – they are expanding their efforts to bring their brand of capitalism to the world and they have begun to institute a system of ‘social credit’ scores for their citizens, a program that has just started but is slated for a nationwide roll-out in 2020.

‘Social credit.’ I first became aware of the concept like a lot of people did, through the Netflix and BBC show, Black Mirror.  The first episode of the third season, Nose Dive, was about a not so distant future where every one of our social interactions, from buying a coffee at Starbucks, to standing in line in an airport, to who you interact with in the office, are rated on a 1 to 5 scale. Your place in society is determined by your average score, the higher the average the better the car you can lease, community you can live in, job you can apply for.

It’s scary in that ‘it can easily happen’ sort of way that China seems ready to turn into reality. The whole, ‘let’s grade everyone on everything they do’ motif feeds into a ‘let me see what I’m rated today’ that can quite easily become an obsession that just gets in the way of, well, life.

But, that’s not why I’m writing about this today. What all this did was remind me, vividly, of a constant theme of this blog and my book, the effect shame and embarrassment have on potential clients. We have long been conditioned to consider a dropping credit rating, an unpaid bill, a certified letter or 1-800 call, a law suit, a foreclosure, anything about money that negatively reflects on us, mortifying.

And, indeed, there is a public shaming element to ‘social credit’, it’s implicit. But, we’re not there yet and hopefully never will be. In the meantime, despite this, I am constantly explaining to new clients that what they are going through has, indeed, happened to other people, often. That it’s not a matter of being embarrassed or shamed, it’s a matter of just taking care of the issue in the best possible way and moving on with one’s life.

No one who matters is judging you, credit scores can be repaired, the banks, lawyers, court clerks, judges, and collection companies are all on to the next case, there are no institutional memories.

Embarrassment and shame and a dozen other emotions serve only one purpose – they inhibit people from seeking help at the time professional help is most effective. This goes for foreclosure defense as well as family law issues and dealing with the IRS and a host of other matters.

Good lawyers have seen everything in their area of practice, they deal with everything, they will not judge. Most of all, they won’t be rating you on or off social media.

A Tale of Two RVs

There was an great article in Wired Magazine about a week ago about Amazon’s CamperForce. If you’ve never heard of it, it’s the official designation (really) for the army of retired folk in RVs who travel the country for seasonal work at Amazon Fulfillment Centers around the country.

It’s an amazing thing. Amazon recruits at campsites around the country. Retired folk get 3 months or more of more than full-time employment (there’s tons of overtime if anyone wants it), Amazon gives out a lot of freebies (including ibruprofen), and Amazon gets a mature work force that is diligent and responsible.

It’s a fascinating read about two subcultures – RVers and CamperForce. What jumped out at me, though, was the story within the story, the story of the two main protagonists, Chuck and Barb. Chuck and Barb had a nice condo in Myrtle Beach, a business, and were enjoying life before the Recession hit. They lost their retirement funds in 2008 courtesy of Wells Fargo, the business – adventure tours – tanked with the economy. They tried for four years to pay their credit cards, mortgage, and bills, pouring everything into a vain effort to save their condo and salvage their credit scores.

They lost everything, sold their possessions,  Barb’s brother sold them a 29-foot 1996 National RV Sea Breeze motor home for $500. It had a dead generator, dry-rotted tires, and a leak in the gas line. They got it up and running, barely, it leaked everywhere in heavy rain. They wandered the country surviving on Chuck’s (early) social security payments and odd jobs. Amazon’s CamperForce was a godsend.

Somewhere along the line Chuck and Barb ran into a couple of other RVers, also on the road because of the the Recession. Their new friends were fairly new to the road too. They were about to join the CamperForce for the first time, though their needs were nowhere near those of Chuck and Barb. They had a state-of-the-art RV and threw great cookouts.

The two couples were roughly the same ages. They both lost their houses to the Recession. But, here’s the difference between them – the thing that struck me so hard – Chuck and Barb’s friends walked away from their house in Oregon. When the value of their home tanked well below the amount they owed, they did the math, assessed their other assets and debts and walked. No years and every penny they had to save the house when they knew they didn’t have the assets, equity, and income to do more than tread water until the inevitable occurred.

It is the perfect example of something I’ve been preaching for a long time now, something I write about extensively in my book – you can plan before and during a foreclosure. Nothing is written in stone as long as you explore all the options. Nothing.

About Crumbling Foundations

There was a meeting this past Saturday I wanted to let you know about…

The Connecticut Coalition Against Crumbling Basements held an open meeting at Ellington High School this past Saturday to discuss the funds allocated in the State budget for assistance with crumbling foundations and other updates.

The news everyone wanted to discuss was the $100 million that has been allocated for repairs, replacement and testing over the next five years. The questions were along the lines of “How much will I get to fix my foundation?” and “Can I be reimbursed for the costs of testing my foundation?”

The Legislature has essentially created its own insurance company (“captive” insurance, the are calling it) to make sure the funds are used properly. A board of directors of this “company” will be formed and it will be a non-profit entity.

Homeowners can apply to be reimbursed for some costs of testing from a fund out of the State budget money, and others can apply to have their testing paid for. Email me for the information on that- I picked up an info sheet at the meeting.

Other updates include progress by Representative Joe Courtney on reinstatement of the income tax exclusion for waiver of debt from a primary residence foreclosure, so that homeowners who have been foreclosed on or who have “walked away” from their homes, and owe more on their mortgage balances than their homes are worth will not also have to pay income tax on the amount that is “waived” or written off by their mortgage companies. This is an important piece of the puzzle because in the case of many families I’ve spoken to, homeowners are not willing to wait for funds to come through for replacement, or will not be able to afford the other costs associated with repair or replacement. In their cases because of the condition of their foundation, they will likely owe more on their mortgage than their homes are worth and so in addition to having lost any equity they had in their property, if they walk away, they do not want to also owe a debt to their mortgage company or a debt to the IRS. He is also pushing for tax deductions for the cost of any repairs performed. Rep. Courtney hopes to have an update on these issues by December and as soon as I find out anything I will share it with you.

It was a hopeful meeting filled with thanks to the people who have kept the issue in the public eye and on the radar of our elected officials. I encourage you to follow the Connecticut Coalition Against Crumbling Basements on Facebook (click here) for continued updates and meeting notices.

US News and World Report also covered the issue recently. To read that article, click here.

A big issue that remains is families not coming forward to report they have the problem. The idea is that if everyone who has the issue would speak up, everyone’s voices would be heard and more help may come faster. If you know anyone (friends, neighbors, family, co-workers, etc.), encourage them to come forward by contacting the Conn. Department of Consumer Protection directly or by clicking here.

Call me with any questions! Thanks and stay in touch.