Defined Terms and Documents       

Give credit (card) where it’s due

APRA is likely to finalise APS 120 by the end of 2016. APRA is expected to iron out some industry concerns raised after the first APS 120 draft and pave the way for the much awaited Master Trust framework in Australia.

We provide an overview of the market, its key characteristics and our thoughts on which issuers are likely to issue credit card-backed ABS in Australia (Asset Backed Securities). We will discuss credit card-backed ABS features in a separate report. Please note that we have collated the information in this report from various RBA and ABS reports, and have refrained from repeatedly referencing them throughout the text.

The aggregate outstanding credit card balance was just over A$51b as at August 2016 (Chart 1). This total value includes “outstanding balances owed on credit and charge cards as at the last day of the month whether or not the balance is incurring interest charges or penalties”. This data covers credit cards and charge cards issued to individuals or businesses by reporting financial institutions in Australia, inclusive of foreign banks operating in Australia and non-bank providers.

Of the aggregate A$51b balance, A$32b is accruing interest and this share has dropped over the years. However, the RBA notes that “around 75-80 per cent of transactions on credit cards do not accrue interest. That is, interest-paying ‘revolvers’ account for about 30-40 per cent of accounts, about 20-25 per cent of transactions”.

The number of credit card transactions per capita has increased gradually since the late 1990’s. But the extent of growth in the debit card usage has been greater than credit card over the same period (Chart 2). Credit card balances grew by just 1.4% during the year to August 2016 as opposed to the upwards of 10% growth rate observed prior to the GFC. The growth in aggregate balance has decreased since the RBA’s card payment reforms that began in early 2000s in order to bring competition and efficiency to the card payment system.

The credit card market price structure was distorted prior to RBA reforms of the market in the early 2000s. The true cost to the card holder was being subsidised via high interchange fees, where the merchant’s financial institution paid a fee to the card holder’s bank every time there was a credit card transaction. RBA reforms led to a reduction in merchants’ strategic interchange cost when the merchants accepted credit cards. The reform also increased the effective price to credit card holders because of improved price signals and in turn had a negative impact on its usage rate.

However, “interchange rates on premium and other higher-cost cards have risen as interchange fee schedules have become increasingly complicated” over the past decade or so. New card schemes have been introduced into the credit card market since around 2010. As a result, there has been significant growth in credit card usage in the premium segment.

The Financial System Inquiry recommended in 2014 that the RBA look into the card payment regulatory framework again, with particular focus on the interchange fee and surcharging.  Subsequently, the RBA implemented major changes to how credit card payments are processed and the extent of surcharges that businesses can charge to customers to use credit cards in Australia. The new rules are effective in stages from Sept 2016, with full implementation from Sept 2017.

The Veda Quarterly Consumer Credit Demand Index measures the volume of credit card and personal loan applications. The index therefore shows flow data of the consumer credit market (Chart 3). The index rose by 2.6% in Sept 2016 on a YoY basis.

When we segregate this index and look at credit market dynamics, Veda’s data shows that Credit card applications fell in the September quarter by -0.2%). Credit card loan applications have plateaued since 2015 as opposed to significant increase in personal loan applications during the same period.

“By jurisdiction, TAS (+2.2%) and the NT (+2.2%) experienced the greatest growth in credit card applications, followed by VIC (+0.9%) and SA (+0.6%). NSW (-0.3%) and QLD (-0.6%) recorded the smallest declines in credit card applications, while WA (-2.0%) and the ACT (-3.4%) recorded the largest fall in credit card applications in the September quarter”.

In aggregate level, outstanding credit towards credit cards and other personal debt ($144b) is only 9% of aggregate outstanding mortgage related credit (investor & owner-occupier). This portion has decreased significantly since the 1990s when personal outstanding credit used to be around 50% of outstanding mortgage debt.

Aggregate level RBA data also shows that the average transaction size and average credit card balance has fallen over the years.

At the household level, the most recent Australian Social Trends Survey (2014) shows that the proportion of Australian households with net credit card debt (household level debit balance after all credit card balances of household members have been summed) has decreased from 57% in 2003-04 to 53% in 2011-12 (Chart 5). It went up slightly to 55.3% in 2013-14 (not shown in Chart 5).

While a significant number of households use credit cards, the level of debt in relation to credit cards is low in comparison to other forms of household debt. The ABS household survey shows that the average amount owing on a credit card was A$2,700 in 2013-14 (mean value). The low relative debt associated with credit cards (Chart 6) despite high usage is likely because households tend to use credit cards for convenience and for supplementary benefits like reward points, free travel insurance, etc that the user accumulates for its usage.

The household level credit card debt of A$2,700 is also small relative to household income. The mean weekly household disposable income was $998 in 2013-2014 (adjusted for size and composition of household).

A greater proportion of households in the higher income category have credit card debt than low income groups (Chart 7). In addition, credit card holders in the highest income quartile tend to hold cards with premium status.

In terms of distribution by States, household level survey data (based on HILDA) shows that 27% of the households in Queensland had credit card debt as at 2014. While this share is the highest among the five States (excluding Tasmania), QLD households’ exposure to credit card debt has fallen from 36% in 2002.

Chart 8 shows the average interest charged for credit cards based on a sample of cards that are tracked by the RBA. The average interest rate for standard cards has been steady at just under 20% since around 2010. In comparison, the average interest rate has been around 13% for low-rate credit cards. We note that while credit card interest rates historically moved in line with changes in the cash rate, they have not been adjusted lower to the same extent as the fall in cash rate since the end of 2011.

The credit card interest rates in Chart 8 are, however, based on advertised rates and not the actual rates paid by the borrowers. The borrowers may benefit from special promotions offered by the issuers where there is no interest rate during the first 12 months. According to the RBA’s 2013 Consumer Use Survey, less than 30 per cent of credit card holders paid interest on credit card debt.

Credit card monthly repayment rates as a percentage of outstanding balance are high. The repayment rate has increased steadily since the GFC and the current 12-month average is 52% (Chart 9). 
I think the previous sentence is saying that 52% of credit cardholders do not pay any interest over a 12 months period. You, me, and your friends and my friends and all the financially literate.  Borrowers tend to repay their credit debt fast by the end of the month rather than incurring interest costs. Credit card usage is more driven by benefits and perks associated with using them.

Visa and MasterCard dominate the market in terms of credit card schemes. Their share of the credit and charge cards market has fallen since the early 2000s and “coincided with the launch of bank-issued American Express cards in 2004 (by NAB and Westpac) and 2009 (by ANZ and CBA)”.

American Express’ market share increased from 13.8% to 18.3% between 2002 and Aug-2016.

In terms of actual issuers of credit cards, banks’ lending to households for credit card purposes comprised A$41b as at August 2016. Among the banks, CBA has the highest amount of loans for credit card purpose, followed by Westpac.

Besides the 4 major banks, Citi has a chunky amount extended towards credit cards.

In the non-bank space, a vast array of retailers also offer store bought cards these days, where the borrowers benefit from loyalty programs.

Latitude Finance Australia is a major non-bank issuer of credit cards. The GE Consumer Finance business became Latitude Finance Australia in November 2015 when a consortium acquired the Australia and New Zealand business worth A$8.2b. From Fitch’s recent report, ‘Australian Sales Finance and Credit Cards Trust’ and ‘New Zealand Sales Finance and Credit Cards Trust’ of Latitude Financial have an approximate A$3.5b and NZ890m amount, respectively. The structure is backed by revolving consumer credit cards and sales finance.

When we exclude aggregate credit card loan exposure by banks to households from the total outstanding credit card balance of $51b (August 2016) we are left with roughly $10b of credit card loans. We estimate that this balance comprises of corporate credit cards and credit card loans that are extended by the non-banks. If you are wondering why credit cards extended towards corporates are so small relative to households, it is because charge cards are generally extended towards the corporate segment. Balances on the charge cards are due by the statement date and cannot accumulate over time like credit cards.  Unfortunately, the data is not granular enough for us to separate out non-bank lending from the $10b.

The share of non-performing credit card loans and other personal loans in banks’ portfolio has decreased in recent quarters. Credit card arrears are a leading indicator of household financial stress. Credit card and personal lending is riskier relative to mortgages, as those types of loans are typically made on an unsecured basis. Credit card loans thus underperform housing loans. The share of 90+days past due housing loans in banks’ books are much lower than credit cards (Chart 12).

While the arrears rate of credit cards are higher than mortgages, credit card debt (excluding other personal loans) represents less than 2.0% of banks' total domestic gross lending vs residential loans accounting for around 60% of banks’ total domestic gross loans and advances.

Losses on credit card debt issued by the banks has ranged between 2% and 3% since 2011 (Chart 14). Historical losses on credit cards have been higher than other personal lending. Notably, the write-off rate for the major banks' housing lending has been less than 0.1%.

On face value, credit card performance within banks’ loan portfolio seems better than that experienced by the pool backing ‘Australian Sales Finance and Credit Cards Trust’ of Latitude Finance Australia. According to Fitch, the pool backing Australian Sales Finance and Credit Cards Trust experienced an average charge-off rate of 4.1% as of August 2016. But this could be driven largely by the performance of the ‘sales finance’ component of the pool which has characteristics like personal loans.

The 3 major banks are relatively regular issuers of RMBS - residential mortgage-backed securities. ANZ announced that it is looking to issue an RMBS after being absent for over a decade.

The major banks have the infrastructure (including data reporting) already setup for RMBS.

We noted earlier that credit card loans account for a smaller share of the banks’ lending. Setting up infrastructure for credit cards will come at a cost. We thus don’t envisage that the major banks will issue credit card-backed ABS anytime soon. They are more likely to start by issuing RMBS out of a Master Trust structure than credit cards. Depending on how that is received by investors, setting up the infrastructure related to credit card-backed ABS may come into consideration. Hence, in the near to medium term, we don’t expect any bank issued credit card-backed ABS. However, for non-banks like Latitude Financial, this could be an option (as they are not subject to APRA rules).

Securitization of credit card debt

In 1986, Bank One helped pioneer credit card securitization, packaging $50 million in debt and issuing securities linked to them. Because securitization pools the assets (the debt) and sells fractions of interests in the pool to investors, it reduces immediate risk to individual investors and promotes riskier lending models. Other banks followed, selling card-backed securities to hedge funds, pension funds and other investors. Outstanding card debt securitized by the major banks and credit card companies hit $400 billion in 2007.

As in the subprime mortgage industry, securitization was a financial boon to the banks at the direct expense of the working class. As securitization boomed in the 2000s, banks sent out card offers to households with incomes below $50,000, a relatively new market. USA Today reported on October 6 that this initiative, which peaked in 2001 at a record 2.1 billion offers, became a source of dramatically increased revenue.

According to a 2006 study cited by USA Today, those with incomes below $25,000 are twice as likely to pay interest rates of more than 20 percent than those earning $50,000, and five times more likely to pay such rates than those making over $100,000. Those who pay late or exceed their credit limit, even once, can be hit with rates up to 32 percent.

Securitization was a mechanism to drive up debt and dramatically increase profits, by collecting from the poorest layers.

The banks had to find a way to pressure workers into payment. In 1993, only $1.3 billion in debt was sold to third-party collectors, but this would skyrocket to $110 billion by 2005, with most of the debt from credit cards. The market capitalization of publicly traded ARM stocks more than tripled, from $878 million in January 2000 to $3.1 billion in May 2006.

Unlike mortgage debt, revolving debt did not result in losing one’s home. Aside from a punitive use of credit scoring and escalating fees, the banks had no direct way to pressure customers. After initial collection, the remaining debt would be “charged off” and sold. Collection hardball had to be outsourced.

Debt buyers typically pay between 3 percent and 16 percent of the face value of the debt, and then own the entire amount actually collected. Most debt sold is credit card debt, but this field has now expanded to telephone debt, water bills, car loans and the fastest growing field—medical debt. The big players buy million-dollar portfolios from banks, utility companies, auto financers, hospitals and municipalities.

Debt buyers

Most debt buyers will work an account for a set period, then resell the remaining uncollected assets to another debt buyer. The next buyer will similarly attempt the collection for a certain time frame, and then resell again. This cycle continues until the legal statute of limitations for collections is reached. (This varies by state from 2 to 10 years).

This aptly named “zombie debt” became an industry in itself during the 1990s, Forbes magazine explained in an October 2008 feature article. As credit card companies targeted those sections of the working class who couldn’t pay off their balances, a ballooning volume of debt was created. This debt was laundered among collection agencies for dwindling pennies on the dollar, depending on its age.

According a May, 2009, report in the Baltimore Sun, sums targeted for collection can often be based on entirely bogus debts. The newspaper described an identity theft victim who was contacted repeatedly by a series of debt collectors about a $5,045 bill that was not hers. Even after she sued and won a $40,000 settlement, the debt was sold again and she had to begin the battle anew.

As one of the industry’s leading debt-buyers, Unifund, put it, “[we] popularized the concept that long-delinquent distressed debt is regenerative.”

As household debt hit stratospheric levels, the US Congress made another major government policy decision at the behest of the credit card industry. In 2005, Congress revised the bankruptcy law, making it much harder for households to escape the grasp of bill collectors. The new law made most people ineligible for debt relief and instead forced them into 3-5 year repayment plans on auto, credit card, medical and other bills that previously were discharged in the bankruptcy process. Additionally, it drove up the cost of bankruptcy from $800 on average to between $1,400 and $2,400.

The mechanics of collection

The collection process itself is highly automated, utilizing, in the industry lingo, “appropriate diagnostics and analytics.” Forecasting models are used, scoring individuals based on zip codes, credit agency information and as much investigative fact-finding as possible.

Having been deemed a good mark, the individual is uploaded in the computer for predictive dialing. Literally billions of collection calls are made through computer-generated phone banks. At the collection agency level, each collector is auto-generated a series of non-stop calls based on when the computer predicts he or she has completed the last call.

If a debtor is not reached on the first attempt, the agency will begin the skip tracing process. One agency advertises its expertise as follows: “First thing we should do is ‘Categorize the Skip.’… An Intentional Skip [is not likely to leave] behind the typical ‘trails’ that skip tracers look for. Many Intentional Skips are aware of what is necessary, what they must do, to avoid being found…but usually are not willing to make an entire identity change and will frequently leave a trail that can be followed.

“If the person is an Intentional Skip, and they know how to hide, you just have to hope that person ‘slips up’ somewhere. It gets difficult if the person [is] aware of how to avoid paper trails, they do not stay in touch with old friends, family and relatives, they work under the table for cash only, they change their occupations frequently, they dropped all their old hobbies, they took on a new look, and they adopted new behavior patterns.”

The site goes on to elaborate the policy of searching every source of data: hunting and fishing license applications, divorce records, workmen’s compensation data, amateur radio records, etc. It gives a sense of the ruthlessness with which the unfortunate debtor is pursued.

For the younger generation, collection agencies are now creating Facebook accounts, a technique called “facebait.” Once they have been “friended,” the collectors identify themselves to all the debtor’s friends as a debt collector in an attempt to embarrass and harass the victim.

The fraud of debt settlement

Another relatively new player in the collection field is the “debt settlement” specialist. This scam is, if possible, even more parasitic and vicious. The service is widely sold to the most desperate individuals. Marketing themselves as customer advocates who will sympathetically assist the debtor and negotiate his liabilities down, these firms are profit-making entities that take charge of a family’s entire finances.

With “debt settlement,” the payments go to the settlement firm, not to the client’s debt—a point often not mentioned to clients. Usually there is an up-front premium.

Monthly payments are sent to the firm to be aggregated until a sufficient amount can be used to negotiate a payoff. Meanwhile, a worker’s credit score will continue to deteriorate. The firms count on the fact that most people drop out before the payoff. Even should he successfully complete the program, the individual is liable for taxes on the reduction! Victims of these schemes have few ways to retrieve their money.

In many states, once a creditor obtains a judgment, it can immediately restrain a bank account. As a result, workers are unable to pay rent, utilities or other expenses. Such policies are deliberately used to bully people into turning over large sums of money. A common complaint of consumers is that, having authorized a debt collector to make a single, specific withdrawal from their bank account, they find that all the funds are withdrawn or multiple withdrawals are made.

Accounts Receivable Management is an industry that was reinvented and became a major economic player as the American working class sank under a growing burden of debt in recent decades. It was established under the protection of the Supreme Court and shielded by links with government officials. Today, despite the systematic and well known nature of abuse, it remains well protected politically and highly profitable, poised to take full advantage of the growing misery of millions of Americans.

When considering supporting selling off your debt book to super funds and insurance funds world wide, read the below extract from The American way of debt: Turning a profit by preying on the poor:

"Securitization of credit card debt

In 1986, Bank One helped pioneer credit card securitization, packaging $50 million in debt and issuing securities linked to them. Because securitization pools the assets (the debt) and sells fractions of interests in the pool to investors, it reduces immediate risk to individual investors and promotes riskier lending models. Other banks followed, selling card-backed securities to hedge funds, pension funds and other investors. Outstanding card debt securitized by the major banks and credit card companies hit $400 billion in 2007.

As in the subprime mortgage industry, securitization was a financial boon to the banks at the direct expense of the working class. As securitization boomed in the 2000s, banks sent out card offers to households with incomes below $50,000, a relatively new market. USA Today reported on October 6 that this initiative, which peaked in 2001 at a record 2.1 billion offers, became a source of dramatically increased revenue.

According to a 2006 study cited by USA Today, those with incomes below $25,000 are twice as likely to pay interest rates of more than 20 percent than those earning $50,000, and five times more likely to pay such rates than those making over $100,000. Those who pay late or exceed their credit limit, even once, can be hit with rates up to 32 percent.

Securitization was a mechanism to drive up debt and dramatically increase profits, by collecting from the poorest layers.

The banks had to find a way to pressure workers into payment. In 1993, only $1.3 billion in debt was sold to third-party collectors, but this would skyrocket to $110 billion by 2005, with most of the debt from credit cards. The market capitalization of publicly traded ARM stocks more than tripled, from $878 million in January 2000 to $3.1 billion in May 2006.

Unlike mortgage debt, revolving debt did not result in losing one’s home. Aside from a punitive use of credit scoring and escalating fees, the banks had no direct way to pressure customers. After initial collection, the remaining debt would be “charged off” and sold. Collection hardball had to be outsourced.

Debt buyers typically pay between 3 percent and 16 percent of the face value of the debt, and then own the entire amount actually collected. Most debt sold is credit card debt, but this field has now expanded to telephone debt, water bills, car loans and the fastest growing field—medical debt. The big players buy million-dollar portfolios from banks, utility companies, auto financers, hospitals and municipalities.

Debt buyers

Most debt buyers will work an account for a set period, then resell the remaining uncollected assets to another debt buyer. The next buyer will similarly attempt the collection for a certain time frame, and then resell again. This cycle continues until the legal statute of limitations for collections is reached. (This varies by state from 2 to 10 years).

This aptly named “zombie debt” became an industry in itself during the 1990s, Forbes magazine explained in an October 2008 feature article. As credit card companies targeted those sections of the working class who couldn’t pay off their balances, a ballooning volume of debt was created. This debt was laundered among collection agencies for dwindling pennies on the dollar, depending on its age.

According a May, 2009, report in the Baltimore Sun, sums targeted for collection can often be based on entirely bogus debts. The newspaper described an identity theft victim who was contacted repeatedly by a series of debt collectors about a $5,045 bill that was not hers. Even after she sued and won a $40,000 settlement, the debt was sold again and she had to begin the battle anew.

As one of the industry’s leading debt-buyers, Unifund, put it, “[we] popularized the concept that long-delinquent distressed debt is regenerative.”

As household debt hit stratospheric levels, the US Congress made another major government policy decision at the behest of the credit card industry. In 2005, Congress revised the bankruptcy law, making it much harder for households to escape the grasp of bill collectors. The new law made most people ineligible for debt relief and instead forced them into 3-5 year repayment plans on auto, credit card, medical and other bills that previously were discharged in the bankruptcy process. Additionally, it drove up the cost of bankruptcy from $800 on average to between $1,400 and $2,400.

The mechanics of collection

The collection process itself is highly automated, utilizing, in the industry lingo, “appropriate diagnostics and analytics.” Forecasting models are used, scoring individuals based on zip codes, credit agency information and as much investigative fact-finding as possible.

Having been deemed a good mark, the individual is uploaded in the computer for predictive dialing. Literally billions of collection calls are made through computer-generated phone banks. At the collection agency level, each collector is auto-generated a series of non-stop calls based on when the computer predicts he or she has completed the last call.

If a debtor is not reached on the first attempt, the agency will begin the skip tracing process. One agency advertises its expertise as follows: “First thing we should do is ‘Categorize the Skip.’… An Intentional Skip [is not likely to leave] behind the typical ‘trails’ that skip tracers look for. Many Intentional Skips are aware of what is necessary, what they must do, to avoid being found…but usually are not willing to make an entire identity change and will frequently leave a trail that can be followed.

“If the person is an Intentional Skip, and they know how to hide, you just have to hope that person ‘slips up’ somewhere. It gets difficult if the person [is] aware of how to avoid paper trails, they do not stay in touch with old friends, family and relatives, they work under the table for cash only, they change their occupations frequently, they dropped all their old hobbies, they took on a new look, and they adopted new behavior patterns.”

The site goes on to elaborate the policy of searching every source of data: hunting and fishing license applications, divorce records, workmen’s compensation data, amateur radio records, etc. It gives a sense of the ruthlessness with which the unfortunate debtor is pursued.

For the younger generation, collection agencies are now creating Facebook accounts, a technique called “facebait.” Once they have been “friended,” the collectors identify themselves to all the debtor’s friends as a debt collector in an attempt to embarrass and harass the victim.

The fraud of debt settlement

Another relatively new player in the collection field is the “debt settlement” specialist. This scam is, if possible, even more parasitic and vicious. The service is widely sold to the most desperate individuals. Marketing themselves as customer advocates who will sympathetically assist the debtor and negotiate his liabilities down, these firms are profit-making entities that take charge of a family’s entire finances.

With “debt settlement,” the payments go to the settlement firm, not to the client’s debt—a point often not mentioned to clients. Usually there is an up-front premium.

Monthly payments are sent to the firm to be aggregated until a sufficient amount can be used to negotiate a payoff. Meanwhile, a worker’s credit score will continue to deteriorate. The firms count on the fact that most people drop out before the payoff. Even should he successfully complete the program, the individual is liable for taxes on the reduction! Victims of these schemes have few ways to retrieve their money.

In many states, once a creditor obtains a judgment, it can immediately restrain a bank account. As a result, workers are unable to pay rent, utilities or other expenses. Such policies are deliberately used to bully people into turning over large sums of money. A common complaint of consumers is that, having authorized a debt collector to make a single, specific withdrawal from their bank account, they find that all the funds are withdrawn or multiple withdrawals are made.

Accounts Receivable Management is an industry that was reinvented and became a major economic player as the American working class sank under a growing burden of debt in recent decades. It was established under the protection of the Supreme Court and shielded by links with government officials. Today, despite the systematic and well known nature of abuse, it remains well protected politically and highly profitable, poised to take full advantage of the growing misery of millions of Americans.

Case histories

The following reports and personal stories are gleaned from the legal record and ARM industry news reports. They paint a picture of the brutality with which the poorest sections of the population are being victimized. Not only are workers who are behind in their payments abused, harassed and fleeced, once they have fallen into substantial debt they are burdened with exorbitant fees and penalties that make it virtually impossible to get out of debt. The elderly, college students, the unemployed and even the dead are special targets.

* Last week, New York Attorney General Andrew Cuomo announced charges of grand larceny against 12 debt collectors in Buffalo. A chain of companies, owned by Tobias Boyland, had employees pose as police and threaten consumers with jail time unless they paid alleged debts on the spot.

Cuomo charged the companies with stealing “tens of thousands” of dollars by terrifying those unfortunate individuals who picked up the phone. Frightened at the prospect of arrest and humiliation, consumers authorized withdrawals from their checking accounts, wired money or sent money orders to the collection companies.

The Buffalo area, once a center of steel production that has been decimated by plant closures, has become a major debt collection center, with 120 firms employing more than 5,200 people.

* In September, Ohio Attorney General Richard Cordray described to the Akron Beacon Journal instances in which debt collectors called elderly people, “telling them they are worthless and they should get a job and that they have committed a crime and will be arrested.” He has filed a lawsuit against National Enterprise Systems, Inc., of Solon, Ohio, on their behalf.

* New York City Councilman Dan Garodnick said, “We’ve even heard of cases where debt collectors would threaten to have residents deported,” according to a report in the Village Voice from last March.

* Earlier this month, Internet payday lender Cash Today, Ltd, and its network of companies settled with the state of Nevada for $1 million in damages for unlawful debt collection. Consumers had been led to believe that a one-paycheck loan would cost between $35 and $80. However, if a payment was missed, the company would call them at home and at work, threatening them with arrest or imprisonment, cursing and informing co-workers, all violations of the Fair Debt Collection Law.

* The State of Maryland announced this week that it was issuing a cease-and-desist order against one of the largest debt buyers in the country, Encore Capital, and its subsidiaries. The company faces penalty and restitution demands of more than $40 million. Encore had made the news in March after awarding its top executives nearly $1 million in bonuses. The company had reported a 25 percent increase in earnings for 2008 by shifting to credit card debt.

* In August, California secured a judgment against CashCall, Inc., for infractions including: causing borrowers to incur bank fees by repeatedly presenting checks despite knowing that there were insufficient funds in the account; making excessive and verbally abusive telephone calls at all hours of the day and night; threatening law enforcement proceedings without any basis to do so; charging 139 percent annual interest on loans without disclosing it; improperly discussing private financial information with borrowers’ friends, colleagues and neighbors, etc.

* The Washington State attorney general’s office is suing Topco Financial Services for calling debtors names such as “loser,” “scum,” “blight on society,” “lowlife,” and “terrible parents,” and threatening to “bitch-slap” a debtor. When one debtor said she was undergoing tests for cancer, a Topco representative, according to the suit, replied, “Aren’t you dead yet? I’m going to collect the money from you dead or alive,” and, “Why don’t you just die from cancer because you are a low-life deadbeat?”

The abusive and illegal policies are not just limited to smaller “cowboy” firms. One target of an FTC investigation was Capital Acquisitions and Management Corp. (CAMCO), an industry leader with a $1.75 billion portfolio of consumer debt.

The FTC received over 2,000 formal complaints against the company. CAMCO harassed thousands of customers to pay old, unenforceable debts or even debts they didn’t owe. It sometimes tried to find people with the same name in the same geographic area and collect the debt from them.

Even if the consumer was not the actual debtor, CAMCO threatened jail, seizure of property or garnishment of wages, the FTC said. CAMCO collected millions every year “and perhaps as much as 80 percent of the money” came from consumers who never owed the original debt, the state government reported in its complaint. When it was closed down, CAMCO auctioned off its receivables to another debt buyer.

In March the New York Times reported, “Dead people are the newest frontier in debt collecting and one of the healthiest parts of the industry.” The newspaper explained that since probate records are public, they enable the eagled-eyed debt collector to file a claim. Firms such as DCM Services specialize in “emphatic active listening” when calling the bereaved regarding the deceased’s debt. Playing on the family member’s sense of morality, DCM will ask if anyone in the family is in a position to pay the debt, despite the fact that survivors generally have no legal obligation to do so.

Inside ARM, an industry Web site, gives additional details on a recent case, the basis of one of the largest collection awards documented. A California jury awarded Manuel and Luz Fausto $500,000 in damages over harassment by Credigy Services Corporation. The couple had opened a Wells Fargo credit card in 1992 and made regular payments on the card, but the balance kept increasing. They requested the account be frozen, but a local Wells Fargo branch declined their request.

The Faustos received help in paying the balance from a local business that promised to negotiate a discounted payoff. The couple then thought that two money orders, which they issued in the late 1990s, had paid off the entire debt.

But in 2006, Credigy contacted them demanding almost $17,000. A Brazilian affiliate of the collection agency made over 90 threatening calls and sent numerous letters to their home, even after a cease-and-desist notice was sent to the company. Only after Luz Fausto recorded the last phone call made by the collectors that threatened the Faustos’ livelihood, and the couple filed suit, did Credigy stop calling."