Bank of America fined for illegally adding on services to existing credit card accounts.
There are a small number of large national banks who dominate the credit card industry. Corporate acquisitions are decreasing that number. Co-branded credit cards and affinity/special interest credit cards from your professional association, a consumer group, your college alma mater, or your favorite sports team are owned and administered by one of these companies. Most of the large credit card banks or companies (CCCs) are national banks regulated by the Federal Reserve. According to a Federal Reserve June 2008 report to Congress:
- Credit card banks are defined by two criteria:
- the bulk of their assets are loans to individuals (consumer lending), and
- 90 percent or more of their consumer lending involves credit cards or related plans.
As of December 31, 2007, 17 banks with assets exceeding $200 million met the definition of a credit card bank. At that time, these banks accounted for approximately 69.2 percent of outstanding credit card balances on the books of commercial banks or in pools of underlying securities backed by credit card balances. Credit card earnings have been consistently higher than returns on all other commercial bank activities. According to the Federal Reserve and Business Week: The consumer credit industry increased from $133.7 billion of consumer debt obligations in 1970 to $2.5 trillion of consumer debt obligations in November, 2007, and from $1.3 trillion in June, 1997, to $2.5 trillion in June, 2007. In March 2008, the Federal Reserve Bank reported: Overall consumer credit rose at an annual rate of 3.25% in January 2008, while the amount of revolving credit alone increased at an annual rate of 7%. Credit card debt is the most common kind of revolving credit. US consumers now owe more than $2.5 trillion to creditors, of which close to $1 trillion is revolving debt, like credit card debt. A little more than 4.5% of all bank credit card accounts were past due in the fourth quarter of 2007. As long as accounts are growing and new accounts are being opened, the credit card business is very profitable. Even in bad times when fewer new accounts are opened, credit cards are still the most profitable part of a bank’s business. In addition to profits from high interest rates, according to bankrate.com, [credit card] fee income, the bulk of which comes from penalty fees, accounted for 31 percent of [credit card] profits in 2001, up from 28 percent in 2000.
National credit card banks usually charge off their open account bad debts six months after initial delinquency. That charge off activity is closely monitored by the Federal Reserve. According to cardweb.com, about six percent of credit card debt is charged off each year. When it comes to bad loans, credit card banks are like mortgage banks. Mortgage banks have difficulty dealing with their secured-debt foreclosures and lose money on them. Credit card banks deal with their unsecured bad debts by writing them off and losing money on them or getting it back through insurance. What comes back them in collections is new, found money, from which debt collectors can receive generous commissions.
The Concept of Contracting and Recontracting
Because you do not actually sign a contract with a credit card company, their contract with you is a one-sided unilateral contract. It is known as a contract of adhesion—a one sided document which you usually receive after you’ve made some charges to the card. According to dictionary.law.com a contract of adhesion is a contract (often a signed form) so imbalanced in favor of one party over the other that there is a strong implication it was not freely bargained.
The first and most important point about your contract is that it is unsigned. In fact, it does not even have your name on it. Your, or more correctly, their contract can be attacked for being unsigned and one-sided. Your account is an open-ended account or open account, an account that has a varying, revolving balance. [It is worth noting that most states statute of limitations on court action for the collection of debts differentiate open account debt from other debt, giving it fewer years to be pursued for collection in court.] Every month when you pay your credit bill, you re-contract with the credit card by signing a check made out to them. (I have never heard or read of a copy of an old check payment being used as a document to prove ownership of a credit card debt.) When you stop paying your credit card statement and dispute and deny the debt, you break the contract of adhesion. Then, debt collectors try to get you to admit to the debt and re-contract with them. But, short of a court judgment against you, you have broken the contract. To get out of credit card debt you need to understand this reality. This is an open-ended contract which is “renewed” each time you make a transaction on the card. The credit card company’s legal position is that because you have made charges to the credit card, you have agreed to the terms of the contract, even sight unseen. But, the federal Truth in Lending Act and the Uniform Commercial Code make this open-ended contract a fertile area for consumer dispute, even when no miscalculation exists. Many credit card bank fine print contracts arrive as junk mail after you have made your first charge on a new card and thereby tacitly contracted with the bank and accepted the contract terms sight unseen. The contract may include an arbitration clause. This constitutes an unsigned, pre-dispute mandatory arbitration (PMA) agreement. Until recently hese arbitration clauses were the bank’s underhanded attempt at controlling collection costs. (See arbitration forums later in this chapter and in Chapter 7.) Since there are no signed contracts, some credit card banks store scans of signed credit card applications, but the original is usually not filed. That would be labor intensive and unprofitable.
Credit Card Bank Operations and Customers
The way these banks are organized and run affects how they respond to customers and accounts in arrears as well as their ability or willingness to document accounts for collection purposes. Another reason credit card banks are very profitable is their high level of automation. They run on enterprise wide computing systems which:
- Receive payments for cardholders,
- Issue money to merchants,
- Debit card holder accounts,
- Issue monthly statements calculating interest.
Payment processing is contracted out to MasterCard or VISA or another service. Credit card banks save money with automated data processing and by providing customer service through call centers. There is difficulty dealing with any administrative task that is not part of a computer program. Responding to your personal communications in writing and keeping a record of them are difficult, money-losing tasks for a credit card company. Customer service call centers receive inbound calls and conduct outbound calls by automatic dialer. It is unlikely that someone even actually dials your number. Rather, an automatic dialer [Those calls we all receive where no one is on the other end of the line can usually be attributed to automatic dialers.] is working to contact you and put you on with the next available call center customer service representative (CSR) to remind you of your overdue balance. Similarly, when you call in, your call is routed to the next available CSR who reviews your account on their computer screen and, if necessary, calls up the bank policies that apply to its particular batch as classified by information processing. There are other advantages to customer relations by call center. Any agreement reached on the phone is non-binding, which is good for the bank, but not you. Whatever a call-center representative tells you can be denied or later negated by “someone in authority.” Computing is “batched” (batch processed) wherever possible. Meaning individual accounts are grouped together by the same attribute and then treated as a group. For example, those accounts that are one month in arrears are in one batch. Those accounts that are two months in arrears are another batch. The consumer is treated according to the policies applicable to their particular batch. What this all means to the consumer is there is very little chance that an actual person has personal knowledge of that consumer’s account. In addition there is no physical ledger with account entries, just a series of monthly digital statements accounting for your ongoing credit charges and payments. These digital operations shortchange the need for personal knowledge to attest to an affidavit about actual documents pertaining to a credit card account. In addition they make it difficult for the bank to document how they arrived at what you owe by accounting individually for all transactions and interest calculations. (In this Credit Card Lending pdf put out by the Office of the Comptroller of the Currency there is no mention of this bank data processing schemes)
Personal knowledge and physical documentation are both legally significant in the collection of credit card debt. Credit card companies regularly check your credit report. Until 2010 they were using the practice of “universal default” as a rationale for raising your interest rate and or decreasing your credit line. Universal default means if you have a problem with another account at another bank, then you have a problem with this account. The Credit Card Act of 2009 put an end to that, but they still regularly run your credit for “internal” purposes.
Delinquent and Charged-off Accounts
What happens if you stop paying your monthly credit card statements? Your debt begins to age. First you are contacted by mail, then eventually by phone and reminded of your debt and your obligation to it. This continues, sometimes more aggressively as time goes, sometimes with offers to help you and usually with a concerted effort to push your fear buttons. When “help” is offered, it is merely a ruse to “re-contract” with you to keep your debt active. Usually after six months of non-payment, your account is charged-off by the credit card bank. That means they have taken a “loss” on it. Just before that point it is not uncommon to receive a phone call from the bank offering to settle for less than the full amount, as much as 50 percent less. (I was offered 25 percent on one card.)
After your debt is charged-off, it is typically sold to a junk debt buyer or a company that is a combination of a junk debt buyer and collection agency, sometimes with a law firm’s name (to scare you) associated with it. A credit card bank is willing to sell your account for around 10 cents on the dollar to a junk debt buyer. How much, then, are they willing to invest in collection attempts before selling it? To get out of credit card debt remember the credit card banks work on the premise that most people who are in arrears, have no resources to pay their debt. Therefore, they only pay commission on what is collected.
Making a creditor account for the specific amount they say you owe in credit card debt is a good way to defeat their claims against you.