Maryland’s Report Card

October 31, 2009

According to the Baltimore Sun:

On financial assets and income, which looks at poverty, bankruptcy rates, credit card debt and net worth, Maryland received a “C.” The state’s median household net worth of $163,788 is the fifth highest in the country. (Levere says the net worth figures come from government data before the recession, so next time around the figure will likely be less.)

Even with that wealth, Marylanders have piled on the debt. The median credit card debt is $3,391, with only four other states carrying larger balances. The median installment debt – which includes car loans – reached $16,250, putting Maryland again near the bottom in 45th place. And the state ranked 28th in bankruptcies. The study recommends that the state encourage savings by matching contributions that low-income residents make to certain savings and education accounts.

In the area of housing and homeownership, the state received a “C.” While Maryland did better than many states on homeownership, it fared poorly on the level of high-cost mortgage loans.

When is bankruptcy a good idea?

October 30, 2009

From Marketplace Public Radio:

TEXT OF INTERVIEW

STEVE CHIOTAKIS: A few weeks ago we introduced you to Kandy and Russell Hildebrandt. The couple got themselves trapped under a mountain of credit card debt.

Kandy Hildebrandt: Well, at its worst, when we started the program we were about $106,000 in debt. Most of that was personal credit cards.

They were able to climb out of the black — er, red — hole of debt the old fashioned way. Russell got an extra job and they cut back wherever they could. But many of you wrote in to ask why the Hildebrandts didn’t just declare bankruptcy.

Well, bankruptcy isn’t for everyone. Although there are a lot of people filing: more so than anytime since rules changed four years ago.

We asked Leslie Linfield of the Institute for Financial Literacy who should consider bankruptcy

Leslie Linfield: They’re being sued, they have credit cards that are going to judgment, their wages are at risk of being garnished, their home may be at risk for foreclosure. They owe more than they own, that’s insolvency. They tried alternative debt management options, and it hasn’t worked out.

Chiotakis: Options such as?

Linfield: So, they may have already tried to do a debt management program from a credit counseling organization. They may have already tried to a debt settlement program and that hasn’t worked out successfully. They’ve tried to negotiate with the credit card companies directly and that hasn’t worked. Bankruptcy is typically the final stop in the “I’m trying to get out of debt” solution. They pick up the phone, they call an attorney.

Chiotakis: I suppose a lot of people would fit that description that haven’t filed for bankruptcy, right?

Linfield: Absolutely and that is one of the things that we discover when we’re talking with individuals who are contemplating it. Many Americans will struggle trying to repay humongous debt loads and they probably should’ve consulted an attorney much earlier in the process.

Chiotakis: There are several types of bankruptcy, but two in particular — Chapter 7 and Chapter 13. What’s the difference between the two?

Linfield: These are the two most common chapters that individuals will file. Chapter 7 is a complete liquidation, where the idea is you take all your assets — those are the things you own — the court would sell them off to pay the creditors — and those are the people you owe. Now, there are certain exemptions, so you’re not living in a box necessarily.

And the other chapter is a Chapter 13, commonly known as the “wage earner’s plan.” So that implies you have to have some means, a job to be able to repay your creditors. And this chapter is very popular for those who are trying to keep their home, particularly in a foreclosure situation. And under Chapter 13, you go to the court, you work out a repayment plan and the creditors do get some payment back on the bills

Chiotakis: What will bankruptcy mean for your credit and finances going forward?

Linfield: Initially, it has a negative impact on your credit report and it will show there for 10 years. But as I like to tell people, time heals all wounds. Some things will survive your bankruptcy. You may keep your car, you may keep your home through a bankruptcy. You’re going to continue to make those payments. The way a credit score is calculated is it pulls much more heavily from more recent information than old. So as time passes and you’re making those payments, it’s going to reflect that as current and that’s going to be more positive.

Chiotakis: We talk about so many delinquencies and foreclosures and bankruptcies, of course, because of the financial crisis. Will these events, do you think, have that much weight on the credit score?

Linfield: They definitely will if you look at it individually. But this is an extraordinary time in our history. And as we look back, I think credit granters five years from now, 10 years from now are going to look back at this time in our history, they’re going to look at people as a grouping. And they’re going to remember this period of time in our history and remember that many people went through a very difficult time period. Creditors in the future will probably be more forgiving.

Chapter 13 Bankruptcy: The Process

October 7, 2009

From the Total Bankruptcy Blog:

Chapter 13 has helped many resolve their debts and save their homes from foreclosure. Here’s a bit more on the process and what you may expect:

Credit counseling briefing: This is a pre-filing requirement for all filers, and it’s designed to make sure your financial situation demands the protection of bankruptcy (and not, say, debt negotiation). Once your lawyer files your certificate of completion with the court, your case can officially begin.

Automatic stay: As soon as your case is filed, the automatic stay takes effect and prevents your creditors from making any collection actions. This means that foreclosure, garnishment, lawsuits and repossession are all halted. As long as you adhere to the terms of your bankruptcy case, the stay should last for the duration of your case.

The next three to five years: One of the papers your lawyer will file with the court will be a repayment plan. This plan provides a repayment schedule that you’ll stick with to catch up on your past-due balances while staying current with other payments.

Your bankruptcy trustee: This is a federal employee who will be assigned to your case to oversee your paperwork and distribute your money to your creditors every month.

The first payment: You must make your first payment (as part of the repayment plan) within 30 days of filing your petition – otherwise, the court may decide to dismiss your case.

Meeting of the Creditors: Within six weeks of filing your petition, you’ll have to testify to the completeness and accuracy of all information in your petition. While all your creditors are invited, most probably will not attend.

Financial management course: Before you’re eligible for your bankruptcy discharge, you must complete a financial management (debtor education) course. The course is designed to help you learn strategies for handling money, working with credit and generally making your fresh financial start a success.

Five years after filing: You’re required to make your final payment within five years of filing your petition. After doing so, you’ll receive your bankruptcy discharge and officially be out of bankruptcy.

The Next Four Years: You are not eligible for Chapter 13 bankruptcy protection if you’ve filed for bankruptcy in the past four years, so make sure you fill your bankruptcy lawyer in on your financial past when discussing your case.

Secret History of Credit Cards

October 6, 2009

So that’s why it’s different here than it is in Europe, for instance?

Here, unlike Europe, until very recently, we’ve had a huge consumer credit economy, because people could afford to take the chance. They could afford to get out there and spend next month’s paycheck, knowing at some underlying level that if they got laid off or if they got too sick or got hit with big medical bills, that there really is ultimately a way out, that the creditors can’t come, strip you down to naked, throw you back into poverty, leave you in the gutters; … that there is some safety net.

For the same reason, we have a lot more businesses start up in the United States than we have in Europe. Entrepreneurs can get out there and borrow a little money and … start a hot dog stand or go into consulting. … They can take those risks, knowing that there is some safety on the other side. It’s a big form of social insurance, not for the poor, but for the middle class, for people who are starting businesses, … people [who] are trying to hold together their families, their jobs; hardworking, play-by-the-rules people. Those are the people ultimately who end up in bankruptcy; people who took the risks we wanted them to take, but for them, it didn’t work out.

And they’re not faced by prison or servitude or social –

Not anymore. And you know why we don’t put them in prison anymore, or why it is we don’t put them in some kind of social servitude? We really want people out there working. We really want people to have a stake in their own futures. And the founding fathers, even before the Bill of Rights, put in a provision that says Congress will have the power to establish a uniform law of bankruptcies. … It was all about how we want to make sure that people have … the enthusiasm, the incentive, to get out there and try.

But we live, as you said, in a country where … if you get into debt, if you do that rationally and you’re not creating fraud at the same time, or practicing fraud, you go bankrupt. The credit card company has to take that risk in their fees, in their costs, and that’s an intangible; that’s one of the reasons why they charge these things.

Yes, bankruptcy is there, and it’s a safety net in the system, but it’s a very painful safety net for a lot of people to take. We interviewed more than 2,000 families for our most recent bankruptcy study, and about 85 percent of those families described their feelings about bankruptcy as something they were trying to hide. They were hiding it from their own parents; they were hiding it from their brothers and sisters; they were hiding it from their neighbors; they were hiding it from … their employers; in some cases, they were trying to hide it from their own children. They were doing that because bankruptcy is still a humiliating experience for many people to declare.

But the people who go bankrupt, our image of them is that they’re deadbeats, that they’re people who have used their credit cards profligately, buying whatever they cared to buy, and then they decide, “I’ll take my flat-screen TV, and I’ll go bankrupt.”

Credit card companies … refer to deadbeats as the people who pay off their bills every month, the ones who aren’t generating those big profits for them. So the folks who go bankrupt aren’t the deadbeats from the credit card company’s point of view. They’re the people all the way at the other end of the spectrum; they’re the people who produced the billions of dollars in revenue for the credit card companies, until they finally just gave up in exhausted resignation to people who said there’s just … no more blood left.

The families who file for bankruptcy file mostly in the aftermath of job problems. They keep making those minimum monthly payments, except for two out of every three [who have] had an extended period of unemployment, or they’ve lost their small businesses, and they just can’t make it anymore.

About half of the families who file for bankruptcy have serious medical problems. Sometimes it’s … Mom or Dad; sometimes it’s a child; sometimes it’s an elderly parent that they’ve been trying to support. And for about 20 percent of the families in bankruptcy, it’s divorce; it’s … family breakups that land them in the bankruptcy courts. Now, if you added that up, you saw it added up to way more than 100 percent, and that’s because, for many of them, it’s two out of those three, or even for a lot of them, three out of three … that are just more blows than they can take, and that’s how they end up in bankruptcy.

But let’s assume they didn’t have credit cards. What would they do? How would they make their medical payments? Doesn’t it give them a chance … to at least, if you will, avoid bankruptcy for a while? Doesn’t it allow them some, if you will, social relief for a while, to try and get their lives together?

It puts off the day of reckoning, but it puts it off at such a high price … that it increases the chances of an eventual crash. Many of those people would still borrow money. Some of them would take out second mortgages on their houses; some of them would take some cash advances; some of them would still have some access to credit cards. And if those were at 10 percent interest, at 12 percent interest, many of those families, when they got back to work, when the medical problems were over, when they stabilized in their two households where they had had one, might be facing three or four years of real trouble, but they’d have a chance to fly out the other side.

When these people are hit with credit cards, and the interest rates are running at 29 percent or 35 percent, they don’t have any chance. I had someone in my office not long ago who explained to me that he had filed for bankruptcy, and I had asked him what had gone wrong. And he said, “Well,” he said, “I’m a cameraman, and I fell and hurt my shoulder.” And he said: … “The real problem I guess started long before I fell. I used to work for one of the big news agencies, and now I’m an independent contractor. When I fell, that meant no more income.” And he said: “My wife is already at work. We carefully watched what we borrowed on credit cards … while I was out of work for several months.

“When I went back to work, we took every penny we could, and we paid back on those credit cards, and at the end of a year, we had paid back every dollar that we had borrowed, and we still owed more than we had paid back.” And he said: “I went to see a lawyer and said, ‘How can this be so?’ And the lawyer mumbled on about how, ‘Well, the interest rate went up to 39 percent, and they hit you with $50 and $75 late fees.’” And he said, “‘What can I do?’” And the lawyer said, “‘There’s nothing to do but go bankrupt.’”

Now, the credit card company would describe that fellow as having discharged more than $15,000 in debt, but that guy had paid back more than $15,000 in debt. What he had discharged were interest and late fees and other penalty payments that the credit card company had loaded on and loaded on and loaded on.

But statistically this year, it appears that people are turning away from credit cards towards debit cards. The bankruptcy rate may be flattening or going down slightly. So isn’t it an indication that the consumers aren’t so dumb; that they are figuring out there are better places to go to get financing, and that the credit card industry may have to adjust, because of the marketplace, to more rational behavior?

I hope you’re right. But this is a little like saying people have glanced left and glanced right and seen their neighbors and family members burst into flames, and they have decided that credit cards are a whole lot more dangerous than they thought they were. You’re right: Some people … are going to inch away from that.

And the companies say that what they’re really trying to do is rationalize lending practices and credit cards nationally. The one reason you have all these complex agreements and all these problems is the states get in the act, and they pass certain laws; … that there’s a need, really, to have uniform regulation of the credit card industry rather than this hodgepodge around the country.

What the credit card industry wants is uniform deregulation, uniform protection from any state regulator that might move in and say, “What you’re doing is an unconscionable contract, or a violation of our own usury laws, or our own consumer protection laws.” The credit card companies are trying to maximize their profits. And in an era in which interest charges and fees are effectively deregulated around the country, the best way to maximize their profits is to change the interest rate after you’ve borrowed the money, to load on the maximum number of fees, and to write contracts in a way that will conceal rather than reveal how much this credit will really cost and what kinds of risks it runs.

But people in different states, for instance, know, in Florida, in Texas, that they can, in a sense, protect their homes … completely in bankruptcy, so they’ll go to a credit card company and use credit so that they can discharge in a bankruptcy proceeding as opposed to, let’s say, taking out an equity loan. It’s free money to them, in that sense, and they keep their asset. And what the companies are saying is that the consumers are not stupid; that’s why they have high fees, high interest rates in certain cases, and why, in fact, they need to reform the bankruptcy laws themselves.

What credit card companies are saying is that the consumers are being just as rational and profit maximizing as we are.

You know what the problem is? There’s no evidence that that’s so. Consumers in Texas and Florida who could take out a lot more in credit card debt and then waltz into the bankruptcy courts, in fact, are not doing it. The academic studies on where credit card debt is being taken out and where default rates occur and how much people are paying in interest shows no difference between states like Texas and Florida, which would protect the debtors, and states like Massachusetts and Illinois and Arkansas, which would not protect the debtors.

Why is that so? It’s because most people, when they take out money on a credit card, do their dead level best to pay it back. They don’t sit and rationally calculate: “Well, now, let’s see: If I maxed out on how much I could make on this and take out the maximum amount, I could declare bankruptcy in just 24 more months and … enrich my wealth.” That is a dream of the credit card companies, or maybe it’s their nightmare, or maybe it’s just their best public relations ploy. There is absolutely zero empirical evidence to back up this claim from the credit card companies. In effect, the credit card companies are sitting around saying, “That’s what I’d do if I had the option.” But it’s not what American consumers are doing. They borrow the money, and they kill themselves trying to pay it back.

Why have credit card profits risen sharply year after year after year, when all those laws are out there protecting people at least in a handful of states? And the answer is, because Americans borrow the money; they do their best to pay it back, and somebody tells them they have to pay it back at 39 percent interest. Their response is to say, “Who are you kidding?” No. Their response is to say, “I’ll do my best. Would you take $50? Would you take $75 this month?” and to pay and to pay and to pay.

I hear you, but then I look at the realities. The companies want to reform the bankruptcy laws because they say they’re being abused.

No, the companies want to reform the bankruptcy laws because it’s a way to further increase the profits. It’s a way to cut off the last exit door for middle-class families in financial trouble.

Congress doesn’t agree with you. They uniformly vote in favor of the bankruptcy bill. Democrats, Republicans, liberals, conservatives … they all see it as a great reform, and one the country needs.

Well, let’s be clear about Congress and who’s had a chance to talk to Congress. The consumer financial services industry has been the single biggest contributor in the 2000 election cycle, in the 2002 election cycle, and they’re on target to do it again in the 2004 election cycle. George W. Bush’s single biggest contributor to his [2000] presidential campaign was MBNA, the second biggest credit card issuer in the country.

And let’s be clear who’s on the other side: It’s a bunch of middle-class families who are in financial trouble. They don’t give money to political action committees; they don’t hire a bunch of lobbyists; they don’t take out a lot of newspaper ads; they don’t get a big public relations campaign going. … This is about as lopsided as you can get in Washington. Sen. [Russ] Feingold, of McCain-Feingold, once remarked that the bankruptcy bill should be the poster child for why we need campaign finance reform in America. It’s a great big multibillion-dollar industry talking to Congress, whispering in their ear. …

You believe that the bankruptcy bill … its heaviest weight is on women? What do you mean?

Well, it falls on women for two reasons. The first is that women often show up as creditors in bankruptcy. When ex-husbands file for bankruptcy, they tend to owe alimony and child support, and they owe MasterCard and Visa. And what the bankruptcy bill is designed to do is to let MasterCard and Visa have a few more legal perks that will let them elbow straight on against women trying to collect their child support. And frankly, I believe, in any head-on-head competition between MasterCard and Visa and some woman trying to get her child support … I put my money on MasterCard and Visa. And I think MasterCard and Visa would do the same; that’s why they want to see the changes in the bill.

Now let me be clear: The bill sponsors were really appalled when some people pointed that feature out, and so they made a … visual change to the bill saying, “We’re going to increase the priority of child support collections listed right now as seventh in the list, and we’re going to move it up to first in the list.” And that really sounds terrific … unless you really know what bankruptcy law is, because what they did is, they moved it ahead of things like American fisheries and American granaries and payments that have to be made to your employees; … in other words, not the sort of things that ex-husbands are ordinarily paying. They made a big show of changing a number … while they let the credit card companies in the back door so that they could elbow [out] women who were trying to collect child support and alimony.

…What really matters for women trying to collect child support is what’s going to happen to them post-bankruptcy. Are they going to have a clear shot at their ex-husbands because their debts survived bankruptcy, or are they going to be competing with MasterCard and Visa, who are also going to have a clear shot at the guy?

… But when you get right down to the fine print, it’s all about helping the people who gave the political contributions. It’s all about helping the people who have the real muscle in Washington, and that’s the consumer financial services industry. There’s not a single women’s group, there’s not a single consumer group that thinks that this bill is going to help women. They’re all opposed it.

And Sen. [Hillary] Clinton?

Sen. Clinton, when she was first lady, [was] responsible for stopping the proposed bankruptcy legislation. The White House had been quietly supporting it, and it was First Lady Clinton who talked with her husband and persuaded him that the bankruptcy bill was hard on women, hard on families, hard on older Americans, and was a bad idea in general. And the last act that President Clinton took with Congress was to veto the bankruptcy bill. Mrs. Clinton took credit for that in her autobiography, and by golly, she deserves it. She stood up –

And today?

Sen. Clinton, when she was elected, the financial services industry brought this bill back. And so one of the very first bills that came up after Sen. Clinton had taken office was the bankruptcy bill. Oh, [there were] a couple of cosmetic changes to it, … but it was the same bill that had been there at that point already for four years. And Sen. Clinton voted in favor of the bill.

Better bill?

No.

Why?

The financial services industry is a big industry in New York, and it’s powerful on Capitol Hill. It’s a story of how much influence this industry group wields in Washington that … they can bring to heel a senator who obviously cares, who obviously gets it, but who also obviously really feels the pressure in having to stand up to an industry like that.

Today, the bankruptcy bill seems to be on hold, and what we understand is that it will not come back up before Congress until after the election. Will it pass?

Anyone who is a sensible gambler would say of course it’s going to pass. Just look at the facts: All the money is on one side, and the bill is complex and technical and difficult to read. … Of course it will pass. But it hasn’t so far. There are just enough in the Senate and the House who take one more look at that bill and say: … “How can we do this to American families? How can we do this at a time when job insecurity has risen, when millions of middle-class families have no health insurance, when family savings have plummeted to almost zero … and families are using debt to put groceries on the table? How can we … take the last escape route, the last little bit of a safety net for middle-class families and just rip it out from underneath them?” So far there’s always been just enough in the House and in the Senate or in the White House … to keep the credit industry’s bankruptcy bill from becoming law.

You know, in 2002, a lame-duck Congress came back to try to ram through the bankruptcy bill led by someone who had already lost his seat in part because of his support for the bankruptcy bill, [Pennsylvania] Congressman [George] Gekas.

And they went down to the last night of the last … hour that they were in session in this lame-duck [Congress], and at the last minute, the deal broke apart, and so … no bankruptcy bill passed in 2002. Now, they came back in 2003, and the first thing that happened is the House passed another bankruptcy bill, but … so far, not the Senate.

Because they say … when we talked to them, the bankruptcy bill got set aside because what they wanted to do was to have federal preemption of state regulations on credit card companies that were being passed. And that became their high priority in Congress.

I was just going to say … part of the reason the bankruptcy bill wasn’t [run] through this year is that the consumer financial services industry found something it wanted even more than the bankruptcy bill, and that is, it wanted to use federal regulation — and I use that word advisedly — to block off any attempts by state attorney[s] general and state regulators to regulate the credit card companies. So they regarded getting a “get out of jail free” card in every state in the union as a higher priority than getting the bankruptcy bill that would allow them to continue to collect from families forever. Doesn’t mean that they won’t still go for the bankruptcy bill; they’ve just … made it second on their list for now.

[What they want is] once they have settled on the state where they have put their nominal headquarters, that state’s interest rate should govern for the other 49.

OK.

So state-law interest rates for the state they choose should regulate what interest rates will be, but from there on out, only federal law should put any restriction on what they’re able to do, and if the federal law doesn’t have any restrictions on what they can do, then the law becomes [such that] no one in any of the states is permitted to impose any restrictions.

So they want it both ways?

That’s exactly right. That’s how you maximize profits.

So … people like myself who pay their credit card bill off every month, are we, in a sense, being subsidized by the people who don’t pay their bills off completely, but pay these interest rates, make these payments?

The top 20 percent of the income spectrum, the folks who use credit cards as a convenience, they go out there and use them all around the world and all around the country. And they use them [for everything from buying] pizzas to buying tennis shoes to … buying cars now. Those people take advantage of what is … a system that costs many, many millions of dollars to run, and that’s that credit card system. They take advantage of it, but they don’t pay for it.

…So who’s making all the money for the credit card companies? All the money is being made by the middle-income folks, the ones who are using their credit cards and then making minimum monthly payments and paying the extra fees and the extra charges that are ladled on. … They’re the ones who both make the system overall profitable, and they’re the ones who make sure that there are credit card outlets, [that] people will take credit cards all over the country; indeed, all over the world. In other words, you are being subsidized in this credit card world by people who make one-tenth as much money as you make.

And by the way, do you have a credit card?

Of course I have a credit card. Who wouldn’t have a credit card today?

What kind of credit card do you have?

I have an L.L. Bean MBNA [Visa card]. I get free points at L.L. Bean, so I can pay for my mukluk boots or whatever they are. …

Eighty-five percent of the credit card company’s profits come from people who are making payments over time. It comes from interest and fees. … It doesn’t come from something that the merchant is paying or … annual fees … that the top 10 percent [pay], because they’re not paying it.

The money is coming from middle-income folks, the people who pay a little now and a little more next month and a little more the next month. People like you and me, we’re just freeloaders in the system. We pay off our bills in full every month, and the card companies, why do they even leave us with cards? Do you remember the big dustup a few years back [when] they were going to take the cards away from us? And we as a group, people who pay off their cards in full every month, got quite outraged about that.

So much for free markets. They decided that was a very impolitic thing to do, that it’s good to have high-income people using credit cards and attached to credit cards and seeing credit cards as a good thing. And besides that, there’s always just the chance that you’ll lose your job, that someone will get sick, or that you’ll end up divorced and that you’ll stumble. And if you stumble, they really do stand at that point to make a real profit on you. So … they hand out those credit cards up and down the line, but they count on people in trouble to make those minimum payments that build up those profits.

So what do you want? Do you want to get rid of the credit card industry?

Certainly not. I like my credit card. Don’t take my credit card away from me. I just want … some minimum regulation, just like the consumer product safety regulation, and that is the regulation that says you can’t change the terms after I borrowed the money, and there are caps on what kind of fees can be imposed and what kind of interest can be imposed. They can be high, but they can’t be that high.

And you’ve got to have right there on every credit card statement, “If you make the minimum monthly payment, here’s how long it’s going to take you to pay it off, and here’s how much you’ll pay in interest over that period of time.” In other words, I believe in contracts, I believe in the freedom of both sides to come in and enter these contracts; but I think the consumer has a right to know what the terms of the contract are going to be, and I think the consumer has a right to have some minimal protection in the kind of contract that can be written. That’s all.

Assuming what you say [is correct], that they are this billion-dollar industry that contributes more money to both sides of the aisle than anybody else, and they get what they want in Congress whenever they want it, what’s going to happen if we continue down this road?

Only so many million middle-class, hardworking families can go bankrupt, only so many million middle-class, hardworking families can lose their homes, see their cars repossessed, have to give up their wedding rings and other things that they’ve built up over a lifetime, before they say, “I’ve had enough,” before they start to say, “I want to know how my senator is voting on consumer protection in financial services.”

This is a real pocketbook issue for American families, and when there are only a few thousand families in trouble, you get one level of response from Congress, maybe when there are only a few million. But we’re talking about a system now where, if we go in the path where we are headed, between this year and the year 2010, one in every seven families with children in America will have declared bankruptcy. At some point, we’re going to see the tip on the other side, and the senators and the representatives are going to be lining up to support legislation that supports families, because after all, let’s remember, the financial services industry may have all the money, but families have all the votes.

Aren’t these regulators doing something?

So if they have so much regulation, why is it that not one single credit card in America today has the little line on it that says if you make the minimum monthly payment, it will take you this many years and this many months to pay off your credit card bill, and you’ll spend this much in interest? If they’re so deeply regulated, why isn’t someone telling them to have a fair contract between two sides, [that] you at least have to give them that much information? Why isn’t that happening?

But they say in response that you’ve got a skewed view here. When you take out a 20-year mortgage, and it has set payments, or a car loan with set payments … that’s why you have that statement. But when you’re dealing with a credit card, you, the consumer, have the freedom to borrow or pay back as much as you want every month. They will take the minimum payment, but they’ll take anything above that, so it’d be misleading to give you a number that may not be relevant at all.

It would be misleading to give you the basic information to make the decision on whether to make the minimum monthly payment or to make a higher monthly payment? It’s misleading to learn that there are a whole lot of credit cards out there in the U.S. today that are negatively advertised, which means that they answer to the question, how long will it take you to pay off this bill if you make minimum monthly payments? And the answer is, you’ll never pay it off if you make minimum monthly payments. … They say that this would somehow be misleading? … Lowell, what it would be is not profit-maximizing. Because there are many people who, if they understood that minimum monthly payments means never paying it off, or minimum monthly payments means paying it off in 34 years, well, a lot of people [would] … put a little more wood on the fire, [would] try a little harder to pay down, but that wouldn’t maximize the profits of the credit card companies. They just don’t want people to know, and that’s all one can describe about why they don’t tell. They don’t tell because they don’t want the customer to know, because an informed customer is not as profitable a customer.

And to what extent is the behavior of the credit card industry driven by this phenomenon of securitizing these loans, of selling off these loans to third parties as investments?

Well, securitization, as this is called, has had two real effects. The first is, it’s just pumped billions of more dollars into the industry. In other words, investors who don’t know one industry from another and frankly don’t care, but are looking for maximum return to their dollars, look around and say, “Well, I could do oil, I could do pharmaceuticals, … whoa, or I could do credit cards, because that’s where profits are high.” And so it means more money keeps flowing into the consumer credit industry, more money than into marketing, trying to get people to take out more credit cards, and more money into that phalanx of lawyers to write the credit agreements in ways that maximize profits for the credit card companies and trick as many of the customers as they can.

The second way securitization matters is it takes credit card companies out of the business of working with people. Once upon a time, your lender kept the debt, and that meant if you borrowed money from the first national bank at your local town, they carried that on their books, and … they cared whether or not you paid back. They watched, and if you had a special problem, they could look at you individually and say: “We know you; we understand the limits of the problem. We’ll take a little now, counting on a big payment when the crops come in, when you’re able to sell your business, when … something turns around in your life.”

Once it’s securitized, it’s not in your individual lender’s hands anymore. It’s made it out into a big anonymous pool, and the anonymous pool is managed by a set of rules. And the set of rules is not a set of rules that says: “Let me look at you; let me understand your individual circumstances; let me see how I can work with you … so we both can get out of this clean. You pay me back in full what I’m owed, but I have a little flex in the schedule.” … Nope. Once it’s securitized, you’re just one more number in a computer program. Try calling a credit card company to say, “I need to talk to you about this problem I have,” and most credit card companies … oh, they may hire minimum-wage people, they’ll listen on the other end of the line, but most of them have no authority to work out, no authority to make distinctions between the people who aren’t trying hard, the people who have problems that will never be fixed, and the people who have just hit a rough patch and need a little flexibility in the schedule.

So it’s taken out the ability even of the credit card issuer to renegotiate the loan … to make it more possible for the customer to pay?

That’s right. In fact, another way to think of this is it’s not really a credit card issuer so much as just one more middleman now. So here are the customers on the one side, and there are these big computer-driven securitization pools, and … Bank of America, whatever, … Citibank is just moving the paper back and forth between the two. But there’s not really a lender there who has put its own money up and is waiting for you to pay to get its own money back.

Isn’t it really simplistic to say that credit cards, … if you will, … [are] pushing the bankruptcy rate higher and higher? Isn’t it America’s lifestyle? Isn’t it in the … consumer culture that we want all these things?

I wish it were. I went into this research with my finger out and sharpened, ready to say to American families, “Bankruptcies are up because you’re spending too much on stuff.” … The problem is, when you look at the data, you really actually look at the numbers … what were a mom, dad and two kids in the early 1970s spending on clothing compared with what a mom, dad and two kids are spending on clothing today? You know what I found? Adjusted for inflation, today’s family is spending 22 percent less than the family a generation ago.

How about food, eating out? Surely families are spending much more today than they did a generation ago. No. What the numbers actually show is that they’re spending about 21 percent less than they spent a generation ago. Appliances — today they’re buying microwave ovens and espresso machines. … Turns out, families today are spending 44 percent less on appliances than they spent a generation ago. We could go through the whole list — furniture, … floor coverings, tobacco. … We spend a little more on alcohol, but all those other things are down, down, down. …

In other words, families aren’t going broke because of ordinary consumption. It’s just not what the numbers show. Where are families going broke? The mortgage, that’s up about 70 times faster than a man’s wages over the last 30 years. Health insurance, also up about 70 times faster. A second car, because now Mom and Dad are both in the workforce, and they’re more likely to live in a more distant suburb. Child care … and after-school care, college tuitions. … Today’s family has put two people into the workforce, but for the medium-earning family, they’ve got 75 percent more money than their parents had a generation ago. But by the time they make those four basic purchases — the mortgage, their health insurance, their cars and their child care — they have less money to spend on everything else than their parents had a generation ago. American families are under the gun financially, but they’re under the gun because of big purchases, mortgages, health insurance … two cars, child care. … They’re not under the gun because they spent too much when they went to the mall. Families are just trying to make it in the heart of the middle class, and expenses have just shot out of the reach of the medium-earning family.

What is usury, and what’s the history of it in this country?

Well, the history of usury starts at the Bible. There are multiple references going back to Deuteronomy about the evils of usury, about those who have money lending it at excessive rates to those who don’t. It really just means a cap on what lenders can charge. It’s sort of like consumer product safety [regulation]. Creditors and debtors … can make their decisions within a range, but they can’t go crazy; they can’t go over the top. We’ve had usury laws in the United States since colonial times, but in the early 1990s, we just very quietly got rid of them.

And they’re key to the financial health and development of the credit card industry?

Absolutely. The consumer credit has been available in the United States for decades in many ways, for centuries, while we had usury laws. Sears, Roebuck was famous in the early 20th century for selling to people on credit to be able to boost its sales.

Mm-hmm.

But in those days, it was capped by state laws. States had consumer regulations that said they could charge, they could make their decisions, but there would be a cap on how much they could charge customers. And because there was a cap, there was no reason to put in the contract, and we can change the rate whenever we want to, or we will pile on $50 charges and $75 charges, or we won’t tell you what the rate is. … Because it was capped, there was just a limit on what they could do, so most customers understood their credit card contracts.

So we had consumer credit … governed by usury laws, and consumer credit continued to grow throughout the 20th century. But it took off when they figured out that the best profits were not to be made from lending money to good customers; the best profits could be made from lending money to bad customers. And as soon as they figured that out, consumer credit goes through the roof, and so do profits. That’s the effect of a deregulated industry.

OK. And … as a responsible corporate citizen, Citibank, for instance, recently announced that they’re going to spend $200 million educating credit card customers, educating people about how to use this instrument that they’ve put out there in the marketplace.

You know, I’d like to save them $200 million. What I’d ask them to do is just reprogram their computers to put two little lines on every credit card statement, one that says if you make the minimum monthly payment, this is how long it will take you to pay off, and if you make the minimum monthly payment, this is how much interest you’ll pay over time. They could go a long way towards educating a lot of consumers that way, and they could save their $200 million.

And you think that would really make a difference?

I do think it would make a difference. It wouldn’t make a difference to everybody, but it would make a difference to some people.

To the people who are caught in a jam because there’s a family crisis, there’s no place else to turn?

The only way you help those people is you put a cap. You say to Citibank: “From the first day, you can’t charge more than” — pick your number — “18 percent interest, 20 percent interest. … You can’t go into the stratosphere on your interest rates, and you can’t keep loading people up with charges. Fifty dollars, $75, $99 — that’s what’s killing families.

I’m thinking of … various economists who would say that you just don’t believe in the future; you don’t believe in increased productivity; you don’t believe in the … model, for instance, of the U.S. economy which, in spite all the naysayers, continues to expand, and consumer credit in particular has been key to that expansion over the last 20 years.

Families cannot expand their earnings fast enough to make up for the 29 percent interest rates. They just can’t do it. It’s not possible. … Our economy may grow fast, it may hit another boom, and we may grow ourselves out of all kinds of debt problems, but the individual family can’t count on increasing its income next year by 29 percent.

Look at where American wages have been for the last 30 years. A fully employed male today earns 1 percent more than a fully employed male earned 30 years ago. Inflation adjusted, there’s been 1 percent growth in wages in 30 years. When people take out credit card loans at 29 percent interest, they’re spending tomorrow’s wages, and there’s no way that those wages are going to go up fast enough that they’re going to have the money to pay it back other than by cutting their future purchasing.

Or going bankrupt.

The alternative is always massive default. But let’s think about what that means. … We’re sending more and more consumers out to the financial edge, spend[ing] tomorrow’s paycheck and the next month’s paycheck and the next month’s paycheck, and there they hang. Only two things can happen: Either they have a lot of time in which they earn … and don’t spend, and the economy sags back down over a long period, or they massively fall off the edge and into bankruptcy.

I’m putting myself in the position of a bank. Why do I want to drive people into bankruptcy where they can discharge their debt?

You’ve got the problem that there are multiple lenders. If someone only had one bank or one loan shark, which is how it usually works, that bank or that loan shark would be interested in keeping you alive. But the problem we have is that multiple banks are all feeding off of the same American families, and so … each bank maximizes its profits by eating the most from every single consumer today. And if that means, as a group, that consumers are in trouble next month, next year … not my problem. No one of them can solve the problem. If bank one doesn’t eat everything it can from the consumers, then bank two will eat everything it can from the consumers. … That’s why the only real answer here is some kind of regulation on the most outrageous of the practices. You’ve got to rein all of the creditors in at the same time. Otherwise, they’re competing with each other, both for customers and for profits.

When we talk to the bankers, they say … there’s the [Office of the] Comptroller of the Currency; they have a complaint section. There’s the Federal Trade Commission; they regulate fraudulent practices. There’s the FDIC [Federal Deposit Insurance Corporation], which … insures the banks. They’re all looking, as well as state regulators. So there are places to go for help..

Oh, the federal regulators have been very active recently. But the way they’ve been active is, they have been suing the state regulators to tell them to keep their hands off the credit card companies. In other words, our regulators are there, many of them. … [But] most of them are political appointees, and most of them see their principal job as protecting the safety and soundness of the banks, and that means seeing that the banks are profitable. Their customer is not the American family; their customer is the profitable bank that issues credit cards. That’s who they are designed to protect, and that’s who they are protecting.