The American way of debt: Turning a profit by preying on the poor

By Nancy Hanover  - 14 October 2009

The increasingly desperate financial crisis facing large sections of the American working class has been writ large in statistics. In September, 15.1 million people were unemployed, with over 5.4 million out of work for six months or more. Counting discouraged and involuntary part-time workers, the unemployment figure in America is now 17 percent, while those still holding a job are down to an average of 33 hours a week, a record low.

Millions in the US are facing impossible levels of personal debt, rising credit card delinquencies, utility shutoffs, foreclosures and homelessness.

But a section of business has turned the growth of poverty into a gold mine. Standing behind the big banks are several layers of an increasingly complex and parasitic finance industry. In the middle of this food chain are the professional debt buyers and securitized investors. At the bottom are the collection agencies, the scavengers who relentlessly pursue individual workers.

Revolving household debt has soared since 2006. Once those falling behind the cost of living could no longer tap into home equity, they turned to credit cards, a much more expensive form of credit. Revolving debt is now estimated to be over $970 billion, with average credit card indebtedness per household now $10,678, up 30 percent from 2000, according to CardWeb.com, a research firm.

US News and World Report puts average total household consumer debt at $22,231, not including other debt, such as student loans, which adds another $10,208, according to a May 2009 report. This debt load has provided fodder for the explosive growth of collection agencies.

Collection agency profits have grown between four and six times over the past several years, according to Securities and Exchange Commission (SEC) statistics. All indications are that tactics have become increasingly aggressive, and sometimes criminal.

One story behind these statistics was related last year on Credit and Collection World’s Web site. This industry source states, “Emilio Saladiages, 62, of Newark, New Jersey, asked to speak to a manager at Rent A Center about the incessant collection letters and calls he had been receiving regarding missed payments on furniture rentals.

“When no one would speak with him, he doused himself with lighter fluid and lit the fluid with a cigarette lighter, self-immolating in front of customers and employees of the store,” the Web site reported.

Credit and Collection World went on to state that Rent A Center, ubiquitous in poor neighborhoods, is notorious for its collection tactics. The state of California reached a $7.75 million settlement with the company for violations of the Fair Debt Collection Act.

While this is a particularly horrendous example, the size and scope as well as the brutality of the collection business has dramatically expanded. This business (known by the acronym ARM, for accounts receivable management) has grown nationally from 47,000 agencies to over 430,000 in the last 10 years, and is expected to swell an additional 23 percent by 2016. The Labor Department’s Bureau of Labor Statistics puts this industry’s growth rate at the number one position.

Much of this business borders on illegality, employing a policy of deliberate harassment and abuse. As an industry, it has long garnered the most business practice complaints by the Federal Trade Commission (FTC), but the past few years have seen violations skyrocket. “We’re sitting on the largest volume of complaints for any single industry—at more than 100,000 a year,” said Peggy Twohig, associate director of the financial practices division at the FTC.

There is a vast edifice of debt in place in American finance. Every form of debt is securitized, sliced and diced in the now-notorious manner of subprime mortgages. The banks have created these subsidiary industries and are dependent upon them. Not only have they have spun off securities in the accounts receivable industry we examine here, but they trade in virtually every kind of debt: motorcycle loans, recreational vehicle loans, franchise loans, boat loans, non-performing loans, equipment leases, home equity loans, trade receivables and student loans. These are all sources of speculative profit.

At bottom, all of this debt represents a claim on surplus value extracted from the labor of the working class. The working class must be made to pay—hence the abhorrent policies and tactics of the debt collection industry. These abuses are not excesses of a few cowboy entities, but reflect the parasitic character of capitalism and the specific requirements of the banking industry.

The ARM industry

What is this business and how did it develop? Of course, debt collection has a long and notorious history, judged by its “pound of flesh” literary association. A hundred years ago, the Chicago Tribune ran a headline that still sounds topical: “New Evidence of Extortion and Lawlessness by Many Collection Offices. Will Go to Grand Jury.”

But the ARM industry has evolved in recent years. Until the 1990s, credit card firms and other creditors rarely sold off unpaid debt. Instead, they hired third-party firms or lawyers to collect the bills, usually on a commission basis. This changed with the elephantine growth of credit card debt.

The first general-purpose credit card was issued in 1958 by the Bank of America. With it, the revolving credit line was born (as opposed to the installment payment plan). The credit card business was not immediately profitable, however, because of the restrictions imposed by states.

Enter the Supreme Court

State laws against usury prohibited banks from charging more than nominal interest until a 1978 Supreme Court ruling. The Marquette Bank opinion permitted national banks to extend interest rates on consumer loans from the state where credit decisions were made to apply to borrowers nationwide.

That decision allowed the banks issuing cards to circumvent state laws. All they needed was one state where rates were unregulated. In an arrangement to purportedly bring jobs to the state, South Dakota’s state government allowed Citibank to draft the necessary legislation and, with bipartisan support, the bill was introduced and passed into law in one day.

Usury law was eliminated in South Dakota and Citibank’s credit card division moved in. The previously unheard-of interest rate of 18 percent was established for all of Citibank’s customers, and the credit card industry as a whole entered a decade of enormous profits.

The percentage of US families using revolving consumer credit increased from 16 percent in 1977 to 37 percent in 1995, in tandem with the stagnation of wages and a dramatic rise of social inequality. Large swathes of American society attempted to offset the rising cost of living by borrowing.

In 1996, the Supreme Court made another decision that significantly increased profits for the credit card companies, allowing penalty fees, calculated at even higher rates, to be tacked on to consumers’ bills. Penalties would account for $18.1 billion in revenues in 2007. As inflation continued to mount and incomes to fall, the amount of credit card debt carried by Americans grew to $937 billion by 2008.

But it was not just the tremendous growth of credit card debt and usurious fees alone that created the debt-buying industry. It was the government’s bailout of the savings and loan industry in the early 1990s, under the elder George Bush, that created the impetus for the emergence of the industry.

Purchasing $125 billion in worthless S&L securities, the administration bailed out the wealthy speculators, then empowered the Resolution Trust Corporation, an agency of the Federal Deposit Insurance Corporation (FDIC), to sell large portfolios of the S&Ls’ delinquent credit card debt. These were purchased by new entities, which were to become the largest publicly traded ARM firms.