California Credit Law Blog

We often receive calls from panicked homeowners who need advice about the ballooning mortgage they can no longer handle. The government was supposed to set up agencies for help with that sort of problem, but reports indicate the success rate is dismal. One problem is that the company servicing the mortgage almost never holds the mortgage note, as these loan have been "sliced and diced" and then resold. Since the servicer has no skin in the game, there is little incentive to work with the homeowner so they can remain in their home. Even worse, the servicer often benefits from foreclosure because its fees come off the top of the sale proceeds.

Now the New York Times is reporting that some of these banks don't even bother to take possession of property after foreclosing, because the repossession costs exceed the real estate's diminishing value.

Banks estimate that 40% to 50% of the property value is lost during the foreclosure process. Two factors contribute, the soft housing market and that vacated houses are often vandalized or stripped. If the property value isn't sufficient, the bank may simply stop the foreclosure process, leaving the vacant (and often vandalized) property in the homeowner's name. The bank may just dismiss the foreclosure complaint. Or it may take a judgment of foreclosure, but then fail to schedule the property for sheriff’s sale. Either way, the homeowner is still liable for property taxes and obligated to maintain the property. It's a lose-lose scenario, for both the bank and the homeowner.

Continue reading "Banks Walking Away From Foreclosed Properties, Leaving Displaced Homeowners Holding the Bag" »

The economic pundits couldn't disagree more on how to fix the economy. Most agree, however, that at least part of the crisis was due to consumer overspending and under-saving. Folks thought the equity in their houses would continue to rise forever, so they used that equity, often with disastrous results. But now the experts tell us that people have to start spending again (buy cars! go out for dinner!) so the economy will recover. It's enough to make anyone feel guilty and confused about spending on anything that's not an absolute necessity.

But sometimes a small splurge is good for your health. Given the choice of a spa treatment worth $80 or $85 in cash, most people would take the $85. Obviously, $85 would pay for the spa treatment with $5 left over for a latte. But a recent study reported in the New York Times revealed that a substantial minority of the study participants would prefer to just take the treatment. Those folks seem to know that they "need" that spa treatment. They don't want the option of spending spa money on something responsible and boring, like groceries, the mortgage or their credit card balance.

Even more interesting, it develops that an occasional splurge on a satisfying experience is appropriate treatment for a malady called hyperopia. That's the medical term for farsightedness (and the opposite of myopia, nearsightedness), because it results from people looking too far ahead. Folks who suffer from hyperopia are so obsessed with preparing for the future that they are unable to enjoy the present. These people end up looking back sadly on all their lost opportunities for fun.

Remember Aesop's fable of the Grasshopper and the Ant? The industrious (and hyperopic) Ant toiled all summer so she would have a safe and warm winter. Her friend, the fun-loving, carefree (and myopic) Grasshopper, sang the summer away and then had to beg the Ant for food. Although the fable teaches us that we should encourage our inner Ant, sometimes it's good to savor the present and enjoy the moment like a Grasshopper.

Charging too much on your credit cards is a good way to get into financial trouble. So, in this economic climate, it's best to keep those cards in your wallet, right? According to an article in MSN Money, not necessarily so.

Banks are apparently taking a hard look at customers who don't use their credit cards -- or who don't use them anough -- and simply canceling those cards. The banks reason that closing rarely-used accounts lowers their risk profile, because getting rid of unused accounts limits the bank's liabilities (potential available credit) compared to the bank's assets. Also, simply maintaining those accounts is an expense. But closing an account also means that the customer's available credit is reduced. You may not need that credit, but your credit score can take a big hit when an account is closed.

Credit scores are based on a complex formula. According to Craig Watts, spokesperson for Fair, Isaac, about 30% of your score is based on your credit utilization ratio -- the amount of your debt in relation to the amount of your available credit. Watts says a person with a solid credit score of 720, for example, whose utilization ratio increases from 35% to 75% after a bank closes an account is likely to see her credit score plummet by several dozen points. The resulting score would be far less than the 760 (or higher) consumers now need to get the best rates from lenders. (See Mark Anderson's January 6 post.)

The ironic conclusion is that credit may become more expensive for the consumer who thought she was being responsible by not using her credit card!

Law Professor Elizabeth Warren proposes that Congress create a Financial Product Safety Commission to help protect consumers from predatory and deceptive financial products. To illustrate the need for such a commission, Prof Warren points out that if a consumer goes into an appliance store looking for a toaster that has a 1 in 5 chance of exploding, you won't find one. But if you go to a mortgage broker, you can buy a loan that has a 1 in 5 chance of ending up being foreclosed with you losing your house in the process.

Introduced by Senators Schumer and Durbin, the bill would create a commission responsible for identifying practices that undermine sound markets and to educate consumers on the responsible use of financial products and services.

Prof Warren is the chairwoman of the Congressional Oversight Panel monitoring the Treasury's economic rescue plan and the author of numerous articles and books on the ways in which consumers get into financial trouble.

Most of the time, survivors are not liable for the debts of their deceased relatives. If Uncle Waldo dies and leaves a $10,000 credit card debt, Niece Lauren is not obligated to pay it. The usual exeption is when Uncle Waldo has assets, his estate is probated, and the credit card company makes a timely claim against the estate assets.

But the New York Times reports that several debt colletion companies, including Minneapolis-based DCM Services, are specializing in collecting deceased people's debts, despite that usually there is no obligation to pay them.

According to the article, collecting on the debts of the dead is one of the healthiest parts of the debt collection industry. Maybe the survivors feel the deceased will rest easier if his debts are paid; maybe the survivors are concerned they will need the creditor's services in the future.

To help ease the survivors' minds, these debt collectors are even trained in the five stages of grief. One company explained that if a survivor was still in the denial or anger stage rather than advancing to the bargaining stage, the collector will offer to transfer him to a human resources company. There, “master’s level grief counselors” are available. After a week--presumably enough time for the survivor to recover somewhat--they are contacted again.

People pay for things they are not obligated to pay, all the time. But if you have a death in the family and are contacted by a collector, you should first ask whether you are liable for the debt. If you are making a voluntary payment, you should appreciate that it's voluntary and not something you'll be dunned for later if left unpaid.

Capital One Bank and the credit reporting agencies (Equifax, Experian and TransUnion) recently settled with our client who was the victim of identity theft. It took years for the identity theft victim to get Capital One to stop trying to collect on the account it opened for an imposter.

The story began when Capital One sent a pre-approved credit card application to our client at her former college apartment. Someone in the building got the application from the mail and used it to get a VISA card from Capital One in our client's name. The imposter took $500 from the account, but Capital One quickly learned the account was fraudulent--a law enforcement agency told it that professional identity thieves had opened the account--so it closed the account and charged off the account balance.

That should have ended the matter, but it didn't. A year later, Capital One sent another credit card application to our client at the same old address. The imposter again used the application to apply for credit in our client's name and again Capital One issued the imposter a VISA card. This time it gave the imposter a $20,000 credit line and sent "convenience" checks that the imposter used to withdraw almost $18,000. When the imposter failed to make the payments, Capital One located and began to dun our client. She disputed the account, retained a different lawyer, wrote lots of letters. Nothing worked. Capital One sued her to collect on the account.

Then she contacted us.

Continue reading "Capital One Settles With Identity Theft Victim" »