[lbo-talk] LAT: Credit Card Co's already profiting from the bankruptcies they say cost them

Michael Pollak mpollak at panix.com
Fri Mar 4 06:06:19 PST 2005


http://www.latimes.com/news/nationworld/nation/la-na-bankruptcy4mar04,0,7113947.story?coll=la-home-headlines

THE NATION

Credit Card Firms Won as Users Lost

They sought new laws but found ways to make money even on people who went bankrupt.

March 4, 2005

LA Times

By Peter G. Gosselin

Times Staff Writer

WASHINGTON -- In the eight years since they began pressing for the

tough bankruptcy bill being debated in the Senate, America's big

credit card companies have effectively inoculated themselves from many

of the problems that sparked their call for the measure.

By charging customers different interest rates depending on how likely

they are to repay their debts and by adding substantial fees for an

array of items such as late payments and foreign currency

transactions, the major card companies have managed to keep their

profits rising steadily even as personal bankruptcies have soared,

industry figures show.

As a result, while they continue to press for legislation that would

make it harder for individuals to declare bankruptcy, the companies

have found ways to make money even on cardholders who eventually go

broke.

At the same time, under the companies' new systems, many cardholders

-- especially low-income users -- have ended up on a financial

treadmill, required to make ever-larger monthly payments to keep their

credit card balances from rising and to avoid insolvency.

"Most of the credit cards that end up in bankruptcy proceedings have

already made a profit for the companies that issued them," said Robert

R. Weed, a Virginia bankruptcy lawyer and onetime aide to former

Republican House Speaker Newt Gingrich.

"That's because people are paying so many fees that they've already

paid more than was originally borrowed," he said.

<snip>

"The bottom line is that there are people out there who are able to

pay their bills who are not paying," said Tracey Mills, a spokeswoman

for the American Bankers Assn., which represents most of the major

credit card companies.

But consumer advocates, many academics and some judges and court

officials argue that the bill would sharply reduce the number of

Americans able to file for bankruptcy, even in instances where doing

so would buy them time to repay their debts.

The critics argue that people unable to file would be at the mercy of

increasingly aggressive efforts by lenders -- especially credit card

companies -- to raise fees and boost collections.

People like Josephine McCarthy, for instance, a 71-year-old secretary

at the Salem Baptist Church, less than a mile from where the Senate

bill is being debating.

According to papers in her recent bankruptcy, McCarthy discovered at

about the time of her husband's death in 2003 that the couple had a

$4,888 balance on a Providian Financial Corp. Visa card and another

$2,020 balance on a Providian Mastercard.

Over the two years from 2002 until early 2004, when she filed for

bankruptcy, McCarthy charged an additional $218 on the first card and

made more than $3,000 in payments, the court papers show. But instead

of her balance going down, finance charges -- at what the bankruptcy

judge termed a "whopping" 29.99% rate, together with late fees,

over-limit fees and phone payments fees -- pushed what she owed up to

more than $5,350.

In the case of the second card, the papers show that McCarthy charged

an extra $203 and made more than $2,000 in payments, but again fees

and finance charges pushed the balance up.

<snip>

Credit card companies have come in for harsh criticism in recent years

for their penalty fees and the "risk-based pricing" under which they

charge customers different interest rates depending on their credit

histories and their likelihood of paying.

Consumer advocates have accused firms of not adequately disclosing

such controversial practices as universal default, when a company can

jack up a cardholder's annual percentage rate, often to more than 30%,

based on the cardholder's performance with another creditor, not the

card company.

Regulators and law enforcement officials have accused companies of

deceptive practices. In 2000, the U.S. Office of the Comptroller of

the Currency and the San Francisco district attorney's office ordered

Providian to pay $300 million in restitution after customers

complained that the company didn't credit their payments on time and

then imposed late fees.

A stream of court cases involving credit card companies has produced

public outrage in various parts of the country.

In Cleveland, a municipal court judge tossed out a case that Discover

Bank brought against one of its cardholders after examining the

woman's credit card bill.

According to court papers, Ruth M. Owens, a 53-year-old disabled

woman, paid the company $3,492 over six years on a $1,963 debt only to

find that late fees and finance charges had more than doubled the size

of her remaining balance to $5,564.

When the firm took her to court to collect, she wrote the judge a note

saying, "I would like to inform you that I have no money to make

payments. I am on Social Security Disability.... If my situation was

different I would pay. I just don't have it. I'm sorry."

Judge Robert Triozzi ruled that Owens didn't have to pay, saying she

had "clearly been the victim of [Discover's] unreasonable,

unconscionable and unjust business practices."

Efforts to reach Owens were unsuccessful. A spokeswoman for Discover

said she could not comment on the case.

Analysts said that lost in the uproar over particular practices and

cases is the fact that the credit card industry has almost completely

remade itself in the years since it began pushing for passage of the

bankruptcy bill -- a makeover that has left some analysts wondering

why the industry needs the changes in bankruptcy law.

"The idea that companies are losing their shirts on bankruptcies is a

lot of bull," said Robert B. McKinley, chief executive of CardWeb.com,

a Frederick, Md., consulting group that tracks the credit card

industry. "With these rates and fees, the card industry is a gravy

train right now."

<end excerpt>

Full at: http://www.latimes.com/news/nationworld/nation/la-na-bankruptcy4mar04,0,7113947.story?coll=la-home-headlines



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