I recently had the opportunity to view “Maxed Out,” a feature-length documentary directed by James Scurlock.
The movie is one-sided, in that it gives scant recognition that some debtors have brought their financial problems crashing down upon themselves with no one else to blame. On the other hand, this movie presents a point of view that is not generally considered by the media. Not all debtors are irresponsible. There are many debtors who are generally innocent, who got tripped into debt by sophisticated and despicable measures used by disreputable creditors, with Congress turning the blind eye.
On the issue of irresponsible creditors, Exhibit A, featured in the movie, was a severely disabled woman who lived in a nursing home. She had no income, but was offered $30,000 in credit through the mail.
Here’s what else I learned from Scurlock’s movie:
1. Credit card companies make 4 billion offers of credit cards every year. Fees for these cards have risen 160% over the past five years. The average household now bears over $9,000 in credit card debt, costing the average household $1300 in interest every year. One analysis of people going through bankruptcy showed that for each dollar in principle borrowed, the average person going through bankruptcy owed two dollars in interest and fees.
2. What is overall problem? According to Elizabeth Warren (a professor at Harvard Law School and a recognized expert on the issue of consumer debt) we are in great danger of turning our nation into a two-tiered society, and none of us is completely safe. A single tragedy can turn any middle-class person into a poor person. Warren cautioned that there is a new type of credit card coming out that is linked to the debtor’s pension fund. If one falls behind on the credit card, the company has access to one’s retirement funds.
3. Many people are driven into debt for honorable reasons. A pawn shop owner featured in “Maxed Out” mentioned that 15 different families came into his store to hock their personal belongings so that they could afford to send body armor to relatives serving in Iraq. In other words, not all debtors are irresponsible. Many of them were thrown into debt because of an illness or the sudden loss of a job. Nonetheless, many people take the view that all debtors are irresponsible. “Maxed Out” showed that the people filing for bankruptcy were tarnished as undeserving of help by President Bush and members of Congress who voted for the Bankruptcy “reform” bill. The bottom line regarding blameworthiness? The truth is that there are debtors who are blameworthy and others who aren’t. As I’ve written before, the willingness to group all desperate debtors together is a sign of a feebleminded intellect.
4. According to Elizabeth Warren, the big banks admitted to her that they don’t want to cut out their most marginal borrowers (those who struggle the most to make the payments). They want to continue handing credit to them. Why? These desperate people are the banks’ most profitable customers. These are the people who end up paying enormous amounts to the banks in fees and penalties, as well as interest payments.
5. Credit card companies can’t wait to offer credit cards to college students who are living away from home for the first time. No job? No problem. Many of these kids run up thousands of dollars of debt quickly, paying off the debt by taking out many new credit cards or by getting help from their families. The film features interviews with the sad mothers of two separate students who had become so desperate at the credit card debt they were amassing at college that both of the students hanged themselves.
6. Our national financial health resembles the financial health of our families. Each American families share of our national debt is now $90,000. By 2005, the United States government had spent every cent of the Social Security trust fund.
7. Once you’re in debt, beware that credit reporting companies are not well motivated to fix inaccuracies in your credit report. Credit reports are rife with errors. Many an innocent person has had his or her credit tarnished by errors that credit reporting companies are ill-motivated to correct.
After the screening of the movie, several consumer attorneys spoke to the audience at the theater (I viewed “Maxed Out” in St. Louis).
One of the speakers, Professor Mike Greenfield, raised the issue mentioned at the top of this post: “Shouldn’t consumers be paying their debt?” The general answer, in his opinion, is “yes,” but the easy availability of credit makes the issue more complex.
For attorneys representing debtors, there is no legal basis for arguing that aggressive marketing by creditors can serve as a defense to the debt. On the other hand, our lawmakers formerly believed in interest rates caps, but no longer. There are now “no limits on what a credit card company can charge, according to Congress.” We need to start having that conversation again, according to Professor Greenfield, and to start re-considering limits on interest rates and fees, as well as techniques that we should allow for hooking potential debtors. We need to consider, on a national level: “What is a fair and reasonable fee?” Greenfield reminded the audience that, for payday loans, consumers can be charged 500% annual interest or more.
Another attorney on the panel, Diane Thompson pointed out that there is a scientific basis for a cognitive obstacle experienced by many people who simply don’t understand the meaning and consequences of borrowing money over time. It is this cognitive inability to understand that allows people to refinance into new subprime adjustable rate mortgages (ARM’s) that are much more dangerous than the ARM’s of previous years. In the new explosive versions of ARM’s, the interest people pay on their home loan does not potentially rise or fall depending upon the cost of credit. In these new explosive ARM’s, the interest rate can only go up, and it can do so dramatically in a short period.
What is that cognitive limitation? It was discussed in detail in the bestseller written by John Paulos, Innumeracy: Mathematical Illiteracy and Its Consequences (1988). Paulos introduced the term “innumeracy” to refer to “an inability to deal comfortably with the fundamental notions of number and chance.” Paulos bemoaned that innumeracy “plagues far too many otherwise knowledgeable citizens.”
On the issue of consumer debt, also note that Danny Schechter has also produced movie “In Debt We Trust.” The following excerpts are from a review of Schechter’s movie:
massive market meltdown, a collapse of the sub-prime mortgage market, bankruptcies by leading financial lenders, billions of dollars in losses by top banks and financial lenders, and predictions of more pain to come for nearly two million Americas facing foreclosures.
Centuries ago, we had debtors prisons. Today, many of our homes are similar kinds of prisons, where debtors struggle for survival with personal finance pressures.
it is urgent that our media push these issues from the business pages to the front pages and humanize them so we can try to wrestle our lives back from the ravages of a relentless debt machine.
Here’s another predatory lending issue: Payday lending. See if you can pick the bad guy in this revealing debate, Mike Calhoun, Center for Responsible Lending or Lyndsey Medsker, Community Financial Services Assn.
. Go to C-Span, then put the word “Medsker” into the “video search” box. Look for the show dated, 3/24/2007, Then click on this 31 minute video For more on payday lending, see the Center for Responsible Lending. The CRL focuses on many other debt issues too. Here is what CRL predicts as the result of the onslaught of subprime lending over the past few years:
finds that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates, and we project that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.
The reason for this net loss? From 1998-2006, only 9% of subprime loans went to first-time homebuyers, but over 15% of subprime loans ended (or will end) with borrowers losing their homes through foreclosure. Why should we care about foreclosures? First of all, many of the people losing their houses have been the victims of predatory lenders “flipping” real estate loans. Second, Here’s what happens to neighborhoods where foreclosures are common:
People living near to these homes in and must suffer from the conditions. Foreclosed homes fall into disrepair and are abandoned. They become magnets for a host of problems and dangerous conditions. According to the this website from the City of Buffalo, such neighborhoods
become locations for people to hang out free of charge, such as gangs, prostitutes and squatters. As such there is likely to be drug activity, violence, unsafe conditions, unsanitary conditions such as rodents, and arson.
Flipping scams lead to high foreclosure rates and abandoned homes and thereby destroy neighborhoods. Abandoned homes are at a greater risk of a variety of dangerous conditions. Arson, vandalism, illegal activity, unsanitary conditions such as rodents, stripping and selling of housing materials and demolition cost the City, and ultimately taxpayers of Buffalo, a high cost in providing these services.
What is true in Buffalo is true everywhere. Irresponsible lenders (and those debtors who are irresponsible) are throwing entire neighborhoods into blight. They are exploding the dreams of many people who would like to own their own homes. The irresponsible lenders have been getting away with what they are doing thanks to winks and nods from Congress and payola to Congress.
All of this is so very depressing.
But back to the screening of Maxed Out in St. Louis. According to the panel that spoke after the movie, the many horrible examples of predatory lending leading to millions of people drowning in debt offers a thin silver lining. That silver lining is the new attention that is now being paid to these predatory lending issues by some media sources.
While I find a reason such as getting into debt in order to buy body armors for family members in Iraq to be very honorable, albeit quite naive (which, by the way, leaves me dumbfounded with how much incompetency from the government people are willing to put up. Buying your own body armor or have your family buy it for you is not what I would call taking personal responsibility, more like, being the government's assclown.), I see no reason to excuse the financial irresponsibility of homebuyers, neither with innumeracy nor with the shrewdness of their creditors, unless you're ok to count stupidity as one. What does innumeracy have to do with using your brain and think about the long-term consequences of your financial commitment? These people in my opinion are foremost mindless greedy consumers. They want a big car, because everybody has one. They want a big tv, because everybody has one. They want a big house, because everybody has one. That's the attitude that makes you fall prey to the sharks at the banks. Also, usually it's two people who buy a house together, how high is the probability that you have two people suffering from innumeracy? I know we are all irrational once in a while, but with this kind of irrationality I somehow can not sympathize as it seems based on extreme materialism and mental laziness.
Having said this, I don't think they deserve to be pushed into powerty, because for one that would be inhuman, but also because there are others who are responsible as well. It's the government that should not have condoned the creation of situations destined for financial desaster and it's society that has failed to raise responsible citizens.
The point of the film (which I got to see), and the point of this post is that not everybody who is struggling in credit card debt is trying to get bigger and better consumer items. Some of the struggles are the result of credit card companies taking unfair advantage. Take for example, when credit card accounts are closed. When a consumer begins to have trouble paying credit cards, the credit card company does not close the account, at least not for many months. While they keep the account open they don't just get to charge interest, they charge late fees and then over the limit fees. Often the late fees (as high as $43) are the reason the consumer went over the limit, it wasn't because of purchases. So as long as the company keeps the account open, they get to bill another late charge each month, and another over the limit fee each month (again, as high as $43), in addition to the interest. This is why the struggling consumers are offered so much credit despite poor payment history: because credit card companies can bill more to them. And enough people make enough attempts to pay, that it is hugely more profitable than someone who stays under the limits and pays every bill on time.
You make good points of the results of predatory lending. Both loan brokers, banks and borrowers are partners in a dance that can put neighborhoods in stress. What you need to point out is that most borrowers never had to let it get to the point of no return. Many where duped not by bad credit, but by lack of empowerment. Borrowers of various classes let themselves be controlled by loan salespeople and the loan institution. Wink and nods by government is the norm. At http://www.loantactics.com we have had several people who live in Buffalo get out the circle of greed. The cycle needs to broken, it can only do so when people get what blogs like yours are saying.
"When a consumer begins to have trouble paying credit cards, the credit card company does not close the account, at least not for many months."
Unless they all had problems with paying their credit card due to emergencies I see no reason why they should have trouble paying their credit cards. You know you only have a limited amount of money available to you and you know the fees are high. Is it rocket science to keep within the limits of your budget?
There's a rising number of teenagers with credit cards and debts. How come? Sure, you have unscrupulous credit companies, but is it it really too much to expect a teenager to understand some basic principes like, if you lend money, you have to pay it back, usually with interest? And what are they using the money for? Surely not to buy body armor or to pay their health insurance.
What I wanted to say before I hit the "enter" key by mistake is, a lot of people with credit cards debts have been plain irresponsible and deluding themselves. The banks have given them the opportunity to live beyond their means, but the ones who decided to spend the money were they themselves.
Devi's comment reminds me of something I found astonishing when I once went to get a loan to buy a car. Aware of the insanely high cost of credit card debt, I have always paid off my card bills in full every month. Paradoxically, this actually *lowered* my credit rating, because, the lender told me, I had "effectively no credit history." Apparently, when you pay off your credit cards every month, the credit reporting agencies don't enter anything into your credit history, so it remains blank.
I tried to make it clear that there are plenty of horribly irresponsible debtors out there. Yes, they buy on impulse until they are buried their bills. They don’t plan or budget. They assume that financial emergencies won’t ever affect them. They have huge numbers of children, assuming that those children will somehow be taken care of somehow by someone (instead of doing the financial planning). And, yes, they buy big-screen TV’s and new cars when their old TV’s and cars are perfectly functional. They buy houses they can’t afford, because they never took the time to consider the utility bills, the need for expensive repairs or skyrocketing property taxes.
Let’s assume all of this.
The bottom line is that these people exist. Call them afflicted by optimism or by “innumeracy,” or just call them plain “stupid” or “irresponsible.” Severe financial stress is destroying many families. It’s getting them kicked out of their homes. The stress of receiving bills they can’t pay every month is breaking up marriages (financial stress is the number one cause of broken marriages). It’s hurting their children in hundreds of ways. It’s causing people to go without necessities, as they struggle to pay for those big screen TVs, etc. All of this is hurting the rest of us, because we must deal with the fall-out from all those broken marriages and disoriented children who are no longer living in stable environments and not thriving in school. Children who don’t thrive in school add further stress to our criminal justice system.
Again, the bottom line is that people with these problems exist in huge numbers. It is not a solution to say: “Those people are stupid.” I believe that the are spurred on by the toxic advertising environment in which they live, *** an environment that hammers the evolutionarily honed Achilles heel, the deep urge to engage in wasteful consumption to achieve cheap versions of social status and to advertise for mates ***.
But, again, the bottom line is that these people exist and, for whatever reason, they are self-destructing in the current social environment. The question is whether we should do something about this. The government jumps in when people don’t “get it.” We have the FDA and the FTC. We paint lines on highways for those people too stupid to figure out where to drive their cars using instincts. We force people to put their kids in school, for those people too stupid to think to do this on their own. We have federal withholding for those people too stupid to think ahead to escrow money they will owe the government in April. We force people to pay into social security for those people too stupid to save for the day they will retire—if we hadn’t done this, many older folks would currently be on welfare. We didn’t sit around calling those people names. We recognized that government had a role to play because many people out there were intellectually or emotionally too vulnerable to take care of themselves. We have enacted hundreds of smart government systems so that “stupid” people (all of us, some of the time) can survive.
It is my belief that government has a role here. Government should step in to regulate the lending industry far better than it does. For example, lenders should not be allowed to charge 400% on loans. They should not be allowed to triple the amount owed by debtors by piling on huge penalties and interest after it is clear that the account needs to go into suit. They should not be allowed to foist ever more credit upon distressed debtors. Mortgage lenders should be required to fully disclose the existence and danger of exploding ARMS and prepayment penalties and yield spread premiums. At some point, enough is enough, and there should be, sooner than later, a time for an accounting (between creditors and debtors) that will declare the cause a lost cause without destroying families.
My main point is that the status quo is intolerable and there’s lots of blame to go around. There’s a triangle of people to blame: A) debtors (though, again, many of them are innocent in the sense that they suffered catastrophic injuries and job losses that threw them into debt), B) greedy creditors and C) law-makers who have been bought off by the creditors so that the creditors can gleefully continue to suck the last drops of blood out of all of those human turnips.
Not sure if Erich's comment was directed at me, but I think I was the only one who commented negatively about the indebted credit card owners.
That's what I also wrote:
"Having said this, I don’t think they deserve to be pushed into powerty, because for one that would be inhuman, but also because there are others who are responsible as well. It’s the government that should not have condoned the creation of situations destined for financial desaster and it’s society that has failed to raise responsible citizens."
Which is basically the same what you said, albeit in less words. It makes sense for various reasons to help them, but I'm not willing to find all kinds of different excuses, like innumeracy, for them. There's something just plain wrong if people think they can borrow money and spend it like there's no tomorrow.
projektleiterin – your well-articulated comment gave me the chance to clarify that I really do understand that many of the financial catastrophes out there start with horribly bad judgment on bahalf of many (probably most) consumers. I didn't want anyone anyone (not just you) to confuse me for the people who think that consumers can do no wrong (some of those people really exist). I also wanted to make it clear that even when horrible judgment triggers the onslaught of debt, there is still a compelling moral argument that we shouldn't let the creditor vultures capitalize to the extent that families already on the ropes are knocked out.
Then we agree to agree, Erich. 🙂
It somehow really upsets me when I see this decline of values in society. Marx once said that religion is the opium of people, nowadays this has been replaced with mindless consumerism (not that I would consider religion to have been a better substitute). If I could I would take away their rights for their own good and reign as a benevolent dictator. 😀
Even responsible debtors get screwed royally. Several years ago, After gettting a substantial payraise, I bought a nice home entertainment system. The total price was about $2000. Ididn't have the cash up front so I went with the store financing. The storeused an acceptance company to garantee reasonable payments, and I was set up with a 3 year loan and payments of $65 monthly.
Soon aftwards, I received a credit card through the mail, in my name, from a private bank I'd never heard of, along with the usual paperwork. A week later I received notice that the credit card was canceled. I thought nothing about this until I got the first statement with a notice that my loan had been purchased by the same private bank that had issued the credit card.
I sent in a $65 payment. and when the next statement came, it was obvious what had happened. Te acceptance corp had sold the load to this bank that had 18 subsidiaries in differennt states. They issused a credit card in my name, with a credit limit of $1800 and charge the full amount of the loan (with 3 years of interest) which came out to over $2300. Since this was over my credit limit, the laws in the state where the credit card was issued allow them to charge 31% interest. In addition, they tacked on credit life insurance (underwitten by a subsidiary in a different state ) which I explicitly did not request, and the account was set up as a revolving credit account. So the interest, credit life , and a couple of fees were added to the balance before the $65 payment was deducted. When I payed more than the minimum, I was assessed with penalty fees and the balance increased. It took several months and several letters which they denied receiving, to get the credit life coverage removed (this was only after threatening to call the FBI on theperson that had accepted the last register letter, after which , the credit life coverage was removed an replaced by 3 mysterious fees that were never explained. I finally got the loan refinanced through a legitimate company, at which time the payoff had actually risen to over $3000. only one day after quoting the exact payoff amount to the new company, they called and claimed they needed an additional $70 to close the account.
This shady company is still in business. I received several calls from a telemarketer trying to get me to refinance my home with the company, Finally I told the telemarketer what I thought about the company and that I had no intention of doing any business with the bank, or any of it subsidiaries, or affiliates.
Sadly enough, Republican dominated administrations have reduced the restriction on lending institutions, allowing this type of racketeering to flourish. Of course I haven't seen the Dem do much to stop it either.