Tuesday, January 26, 2010

The new debtor revolution: from Renee to Rambo

Two years ago Guambat noted the changed attitudes of consumer debtors who were going corporate on their debts and just walking away.

It was an evolutionary step for most Americans to simply give up on debt, especially home mortgage debt, hand in the keys to the house, and depart.

And it's still a matter of discussion and debate, e.g., the post from last December and this from just a day or so ago: Where we went wrong in housing, where Felix Salmon, indirectly through another interview, lauds Steve Waldman's blog, the only finance/market/economics blog link on the right panel.

But now the pacifist approach is giving away to the feral: Renee is going Rambo, if this story is any guide:
Better Off Deadbeat

While most Americans with unpaid bills dread the collector's call, Craig Cunningham sees them as lucrative opportunities. Many collection and credit card companies, intentionally or not, violate little-known consumer rights laws, and Cunningham's favorite pastime is catching them doing so and then suing them. In fact, it's a profitable side job.

Cunningham beats the debt collectors at their own game. He turns their money-making practice into a financial liability. He is a regular guy who has become a radical enemy of the banking system.

"Most people hear about the abuses that debt collectors do, but you just didn't hear about the second part of it, where people sue the collectors," he says.

Cunningham accused debt collectors of misrepresenting the amount he owed (an FDCPA violation that entitles a consumer to collect up to $1,000). He sued over prerecorded and auto-dialed calls to his cellular phone (a TCPA violation worth up to $1,500 per call). He also filed complaints that agencies failed to investigate his claims that his credit file contains inaccurate information, a breach of the Fair Credit Reporting Act worth up to $1,000 per violation.

Cunningham didn't feel that he was taking advantage of the system, at least not anymore than the next guy or the brokers and bankers at the time.

What he found was an instrument not of repair or reconciliation, but of vengeance.

Cunningham, a high school athlete, dreamed of making millions playing pro football, but he was accepted to U.S. Military Academy at West Point, where a degree would give him a more grounded back-up plan. The economics major also sought out an additional perk unique to West Point: stipends and absurdly low-interest loans. In his junior year, in 2002, Cunningham took out the maximum amount for a loan and dumped the $25,000 into the booming stock market.

Call it ironic, but the only house on the block that appears to be the foreclosed end to some sad financial story is in fact the home of one of the debt collection industry's emerging and persistent threats. Cunningham calls himself a private attorney general—someone who files private lawsuits in the public interest. Debt collectors call him a credit terrorist.

This is a well told story. It mentions some of the mentors of people like Cunningham:
Steven Katz, a former New York debt collector turned consumer advocate, who now lives in Phoenix. In 2005, Katz founded a message board called "Debtorboards," with the slogan "Sue your creditor and win!"

Katz doesn't believe that people are morally obligated to pay back their debts. That notion was invented by debt collectors as a way to beat people into submission, he says. "Bill collectors would love for you to send them a check and then explain to your kids because you have the moral obligation to pay your debt they're not eating this week," he says. "But they don't see the moral obligation to feed your children or yourself.

"People are brainwashed to think that paying a credit card is more important than paying for the necessities of life," Katz says. "If you're in a position where you have to make a choice, my argument is food, clothing and shelter come first... Nobody ever went to hell for not paying a debt."

And the other guys, the debt collectors:
Jack Gordon ran his own third-party collection agency for years until a spate of FDCPA lawsuits in 2008 forced him out of business. He is familiar with Cunningham's type.

"This is definitely, if I can use a really strong word, a cesspool," Gordon says. I would have to say they are far more radicalized element of society, and there's certainly I think reason for concern. You're dealing with somebody who's looking for an opportunity. They revel in either getting opportunities or making opportunities ."

And the professional debt collection institutions:
ACA International is the largest trade group representing third-party debt collection agencies. Tom Morgan is the Texas executive director for ACA International and he believes that FDCPA lawsuits will continue to rise as more and more people in this economy can't pay their debts. He views the agencies as a kind of indirect victim in the rising tide of consumer fury and desperation.

"While our members do get filed on from time to time, the FDCPA is so highly technical there are quote, technical, violations that can occur," Morgan says. "You know, somebody makes a mistake. But there's no intent, OK, to defraud people or to violate the law.

"Usually it's settled because the agency says, Uh, we didn't intend to do that. Our collector said the wrong thing and we fess up and say, 'I didn't mean to do it but I did it...

"And this is where some of our members feel aggrieved in that because there's a hyper-technical opportunity for a plaintiff's attorney to come in, it is cheaper to settle than to fight it. And sometimes they'd really like to fight it because they don't believe they are guilty, but it's so costly, so they settle it."

Guambat was fascinated, and you will be too when you read the whole story. It's quite long, but worth the time.

It's the dirty coal face of the moral implications that Steve Waldman wrestles with, as noted in Guambat's Still Walking Away post, and the more recent interview:
Shouting masses rarely make good choices. You don’t want to put a million people in an online chatroom and then take a vote. But elevating a class of “experts” to positions of privilege and relying upon their wisdom also fails, both on grounds of legitimacy and quality. You want very dynamic processes in which hierarchies arise and shift, where there are elements of mass choice and applied expertise. You need to be very careful in how you allocate the scarce resource of human attention. All voices must be heard, both to capture dispersed information and to sustain legitimacy, but the cacophony must be filtered by some process that it both effective and fair.

It occurred to me that financial markets seemed robust to this: markets are unstructured, everyone is “cheating”, seeking whatever edge they can get, and yet we use them to make some of our most consequential collective decisions: the large scale allocation of physical and human resources. And while financial markets are obviously imperfect, I thought that they seemed to work “pretty well”, in the sense that societies that used financial markets to guide economic decisions seemed to outperform other kinds of societies.

Real market institutions seem designed to hide information and shift consequences rather than reveal outcomes and allocate costs and rewards. I quickly shed a libertarian prejudice in favor of what is “emergent” or “natural”, and became a critic of a financial system ill-equipped to serve the purpose to which it is addressed. The housing bubble and obvious, persistent imbalances in the US economy during the mid 00’s helped to persuade me that my initial enthusiasm for financial markets was misplaced (although I remain hopeful that better conceived markets and market-like institutions could be powerful tools for collective choice).

Much of my thinking on economic and social issues comes back to T.S. Elliot’s proposition, “It is impossible to design a system so perfect that no one needs to be good.” Once upon a time, I chose to disagree. I thought it was the challenge of our day, and the grand project of modern economics, to build a system in which people pursuing their own self-interest would provide all social goods, in which the benevolent invisible hand would rule all and we’d have no need to rely upon ideas as shifty and manipulable as “virtue”. I have done a full 180 on this question. Economic self-interest and formal legal frameworks are simply insufficient to regulate a decent society. Elliot was right.

But it’s crucial to remember that “what is moral” is something we collectively decide, and not without constraints. A social order that routinely demands heroic sacrifice of people in the name of virtue will fail. Clever hypocrites will be rewarded while naive saints pay, and the overall tenor of society will not be virtuous. The most we can demand of fuzzy constructs like morality and social norms is what Arnold Kling calls “soft rule utilitarianism”, under which people accept modest personal costs on the theory that if everybody does so, we’ll all better off. But emphasis on the word “modest”, and expectations of reciprocity. Economic and legal scaffolding has to sit beneath informal social constraints so that in general it makes sense to be good. It is like the relationship between flesh and bone: You could not build anything as beautiful as a smile out of bone, but the smile will not survive if the jaw beneath is fractured and misshapen. We regulate the “bone structure” of our society explicitly via legal arrangements, and more subtly, via social and reputational incentives. There’s a kind of hygiene we have to attend to, in order to ensure that doing well and being good are not terribly inconsistent. Over the past few decades we’ve failed to attend to that hygiene, in large part I think because we let simplistic economic ideas persuade us that we didn’t have to, and that the pursuit of wealth yields virtue automatically and dirty is the new clean.

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

We might (or might not) wish to revise the norms surrounding bank loans to resemble those surrounding interpersonal lending. But that would be a forward-looking project, and would imply radically altering the behavior of future lenders, not simply exhorting borrowers to assume all responsibility and pay.

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