Bringing Expired Debt Back to Life
As posted on December 31, 2011 on www.wsj.com
By Jessica Silver-Greenberg
No one was more surprised than Thomas Carpenito with the credit-card invitation that landed in his mailbox earlier this year.
The 27-year-old deli owner from White Plains, N.Y., had about $10,000 in old debts and a credit rating 200 points below "good." He recalled thinking the post office had delivered the letter to the wrong house.
Far from a mistake, the offer was part of a controversial and growing partnership between debt collectors and banks that profits both. To get the new credit card, Mr. Carpenito agreed to repay $400 on a seven-year-old debt that had expired under New York's statute of limitations.
"It was totally worth it," he said. Having no credit cards made Mr. Carpenito feel "like dirt," he said, especially when out on dates. His new credit card, stamped with the MasterCard Inc. logo, was offered by Jefferson Capital Systems LLC, the debt-collection arm of CompuCredit Holdings Corp., in Atlanta.
CompuCredit, a leader in the business, collected about $15 million in newly resurrected debts and fees by issuing credit cards to people with banged-up credit in the first nine months of this year, according to a securities filing. It also has drawn scrutiny by federal authorities for allegedly deceptive practices.
Many U.S. banks, hungry for new revenue streams, are eager partners. They receive fees and higher-than-average interest rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses to banks if borrowers stop paying.
Some lenders say borrowers have a moral obligation to pay their debts even if they are no longer legally responsible. Others are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.
Collectors aren't afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless debts—purchased for pennies on the dollar—when people agree to start making payments on them. The credit-card agreements essentially create assets out of thin air.
The cards, born a decade ago, are gaining new momentum as debt-collection firms look for new ways to collect, said William Weinstein, chief executive of Weinstein & Riley, a Seattle debt collector.
No one knows how many of these credit cards, usually stamped with the MasterCard logo, are in people's wallets. MasterCard declined to comment.
Genesis Financial Solutions, of Beaverton, Ore., said it was opening about 100,000 new accounts a year in its "Balance Transfer Program." Unlike typical balance-transfer offers, where consumers are lured with low interest rates to move credit balances, Genesis borrowers move expired debts onto the new card.
Irving Levin, the chief executive of Genesis, said the company's credit cards were an opportunity for consumers in a "very much underserved segment."
"I got a bunch of cards when I was younger, and the companies were basically giving them away," said Mr. Carpenito of his past debt troubles. "I couldn't really handle the bills, and I fell way behind."
Federal authorities have declared some of the offers deceptive because they failed to clearly explain to people they needn't pay back even a penny of the past debts because the obligations had expired under statutes of limitations set by individual states.
Mr. Carpenito's credit card from CompuCredit carried the name of Monterey County Bank, a unit of Northern California Bancorp. In 2010, the Federal Deposit Insurance Corp. accused Monterey of helping Tighorn Financial Services LLC disguise efforts to resurrect expired debts through new credit-card offers. Tighorn, a debt collector based in Sioux Falls, S.D., didn't return calls for comment.
Bank officials last year agreed to a $3 million settlement without admitting or denying wrongdoing. "Our bank no longer participates in any balance transfer card programs," Charles T. Chrietzberg Jr., Monterey County Bank's chairman, president and chief executive, said in an email in response to questions.
Mr. Carpenito's credit card is now underwritten by another lender. In November, CompuCredit's debt-collection arm got a credit line from another bank, PrivateBancorp Inc. in LaSalle, Ill., according to a securities filing, "to facilitate the growth of this segment's operations."
CompuCredit didn't respond to requests for comment.
Last month, its chairman and chief executive, David Hanna, told investors that the "current economic environment could lead to increased opportunities…as consumers with less access to credit create additional demand."
In 2008, CompuCredit agreed to return more than $114 million to customers after the Federal Trade Commission accused the company of deceptive practices that included failure to disclose high credit-card fees and failure to tell customers that accepting a Majestic credit card—emblazoned with a Visa Inc. logo—essentially enrolled them in a debt-repayment program. The company didn't admit to any wrongdoing in the settlement.
Visa, which declined to comment, is no longer in the debt-collection credit-card business, according to lawyers for debtors who have gotten card offers.
People who stop paying bills earn lousy credit ratings but eventually are freed of old debt under statutes of limitations that vary by state and range from three years to 10 years from the last loan payment.
But if a debtor agrees to make even a single payment on an expired debt, the clock starts anew on some part of the old obligation, a process called "re-aging."
So if borrowers again fall behind on their payments, debt collectors can turn to their usual tools: letters, phone calls and lawsuits. By restarting a debt's statute of limitations, the collectors have years to retrieve payments.
Regulators scrutinize offers to see whether they clearly state that borrowers are agreeing to repay part—or in some cases all—of an expired debt if they agree to a new credit card.
The pitches usually come in the form of a letter.
"Make your fresh start today," said one Emblem credit card offer viewed by The Wall Street Journal. A sentence near the top of the offer said, "This communication is from a debt collector."
Kindra Weaver, an office administrator who lives in Artesia, N.M., said she had no idea the $300 she paid in March for a Milestone credit card from Genesis Financial Solutions settled a debt long past the statute of limitations.
But she said she would happily do it again. "No one else wanted to even work with me," said Ms. Weaver, 26 years old. "I lost my job at one point and couldn't make ends meet. But I feel so much better about my life now that I was able to pay and get back on track."
Ms. Weaver has a $300 credit limit that can go up if she stays current with her monthly payments. Her credit card carries an annual interest rate of 19%, compared with an average rate of 13.7%.
Milestone credit cards are issued by Mid America Bank & Trust Co., a 91-year-old bank in Dixon, Mo. A regulatory filing shows the bank collected $1.1 million in "credit card program fee income" in the first nine months of 2011. The bank had profits of $1.2 million over the same period. Mid America declined to comment for this article.
Card Acquisition LLC says on its website that the Sioux Falls company's Affirm credit card can help debt collectors wring profits out of seemingly lost causes. The cards give "the debtor a positive way to settle their debt," the website said. Company officials didn't respond to calls for comment.
Participating banks say borrowers with poor credit—stemming from lost jobs or other financial catastrophes, for example—deserve another chance.
How to restart lending to them is "a question at the very center of the recovery," John D. Hawke Jr., the nation's top regulator of national banks from 1998 to 2008, said in an interview.
Last year, West Virginia Attorney General Darrell McGraw barred Jefferson Capital Systems, the debt-collection unit of CompuCredit, from offering state residents an Emblem credit card through the company's "Fresh Start Solution Program."
Mr. McGraw said the program was "abusive" because people didn't realize they were agreeing to pay debt that had expired. Other issuers still can do business in West Virginia. Some companies are concerned regulatory scrutiny could slow growth.
Angela Hoover, a 47-year-old laboratory assistant from Strasburg, Pa., said she was ready to sign up for an Emblem credit card in November. After reading the offer letter three times, she realized she would have to pay $434 in old debts before she could get the card.
The letter's "legal hogwash" was confusing, she said. "I am just grateful I didn't accept it."