The Great American Credit Card Caper
Got Credit Cards? The odds are incredibly high that any adult living in the USA has one or more credit cards. Our airwaves are laden with ads touting the superiority of one piece of plastic (or the digital equivalent thereof) over another. In what might be the greatest bait and switch scheme of all time Americans owe in excess of 1 TRILLION dollars in “credit card” debt. That’s a lot of money owed to people you have never actually heard anything about. When I started in banking in May of 1980 the heyday of the “BankAmeriCard” was ending as its founding entity, Bank of America, had created a separate entity specifically for BankAmeriCard which later switched the name of their system and company to “Visa.”
Today, Visa and its main competitor, MasterCard, effectively issue an overwhelming majority of all credit card transactions. What follows? The Great American Credit Card Caper. Every time you use a credit card, the transaction results in 2 basic accounting entries. One represents the amount owed by the cardholder and the second represents the amount paid to the merchant or vendor. There are a number of smaller, related transactions as well including the requisite fees for “processing” (a process that, today, is automated close to or at 100%). A waterfall of events follow this initial debit-credit transaction. One of the most important however, is the generation of a monthly statement and the activities it triggers.
When you receive a monthly credit card statement you will see the name of the card issuer prominently displayed. Logically, this suggests that any amounts you owe are owed to the issuer, but you’d be very, very wrong to believe such a thing. In fact, the amounts you owe are almost certainly NOT owed to the issuer. Instead, starting in the 1980s, the amounts owed, which constitute receivables, are sold in the form of a security and offered to “investors.” Unbeknownst to you however is that, if you hold any sort of pension or managed investment, you are almost certainly also an investor. Here though we’ll focus on the amounts you “owe.”
When an issuer sells credit card receivables they will typically do so through a forward flow agreement (for an exciting read on the details of credit card receivables securitization take a gander at the FDIC’s manual on the topic at the FDIC ). What this means for you is that you do NOT owe any money to the credit card issuer but you do owe money to whoever they’ve sold your current and future receivables to. The issuer doesn’t give up everything of course (because Profits Uber Alles) and usually retains the servicing (accounting) for the credit card account for a “small” fee. In fact for a number of small fees, as they also get paid to chase delinquent accounts and a host of other fabricated transactions or statuses.
Due to the foregoing process you become married to your credit card receivables in a virtual and unrelenting relationship. When credit card receivables become delinquent one of the voluminous documents controlling a servicer’s treatment of delinquent accounts and charge offs comes into play. Accounts that are charged off almost never go away, even if the credit card user is adjudged bankrupt. Instead, charged off accounts are also securitized and often sold for pennies on the dollar to other investors (low risk high return types who feed off the sweat of workers and the dreams of young children).
The “collection” of delinquent and charged off credit card receivables represent the slickest of scams. The parasitic “debt buyers” will go so far as to file a lawsuit against the original account holder, whether the money is actually owed or not. The debt buyer in such lawsuits is almost always the plaintiff. When the complaint is read we find that the debt buyer was not the issuer but baldly claims it is a successor in interest to the issuer and thus suing as if it stands in the shoes of the issuer. No proof of ownership of the debt is ever provided by the debt buyer since that could require the fabrication of documents (something that actually takes place in a much higher percentage of finance-related litigation than reasonable people would ever presume). Instead, the debt buyer is taking the chance that the account holder will either not receive service of the suit or will simply disregard it, something those who’ve discharged the debt in bankruptcy will very often do. The debt buyer is then able to obtain a default judgment against the account holder (or someone with the same first and last name as the account holder) and record it in public records.
When someone finally learns about what’s happened they will often pay some amount to the debt buyer even if they don’t owe a penny due either to bankruptcy or not being the actual account owner since getting a judgment set aside can be a very lengthy and expensive process. Economically, many folks find it’s simply easier and cheaper to make the debt buyer go away, at least for now.
What most Americans fail to understand is that by tolerating and rewarding this Capitalist’s dream they are rewarding truly bad behavior. Debt buyers don’t care if you really owe the money, they only care about the fact that enough folks will pay to make their investment profit handsomely. If one were to pay $10,000 for a receivables pool which is virtually guaranteed to generate at least 10 times that amount, truth is irrelevant. The only real answer is to do whatever it takes to guarantee debt buyers will always lose, unfortunately that still seems to be the hardest thing of all.