CREDIT BASICS

1990 - American Debt surpassed $1 trillion

2011 - American Debt $2.43 trillion

Credit card debt 793.1 billion
(5/11)
(5/11)
Basics:
-adjective
1. of, pertaining to, or forming a base; fundamental: a basic principle; the basic
ingredient.
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American Debt:
Facts and Fees

Facts

Credit Card Debt Facts

Credit Card Fees

Circulation
Facts:
Total U.S. revolving debt (98 percent of which is made up of credit card debt): $793.1
billion, as of May 2011 (Source: Federal Reserve's G.19 report on consumer credit, July 2011)
 Total U.S. consumer debt: $2.43 trillion, as of May 2011 (Source: Federal Reserve's G.19
report on consumer credit, July 2011)





Average credit card debt per household with credit card debt: $15,799
Average total debt in 2009 (including credit cards, mortgage, home equity,
student loans and more) for U.S. households with credit card debt: $54,000.
(That's down from $93,850 in 2008.)
Average total debt in 2009 (including credit cards, mortgage, home equity,
student loans and more) for all U.S. households: $16,046. (That's down from
$35,245 in 2008.)
Total U.S. consumer revolving debt fell to $866 billion at the end of 2009, down
from $958 billion at the end of 2008. About 98 percent of that debt was credit
card debt. (Source: Federal Reserve's G.19 report, March 2010)
About 56 percent of consumers carried an unpaid balance in the past 12 months.
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

The average balance per open credit card -- including both retail and bank cards - was $1,157 at the end of 2008. That's up from $1,033 at the end of 2006, a
growth of nearly 11 percent in two years. (Source: Experian marketing insight snapshot,
March 2009)

As of March 2009, U.S. revolving consumer debt, made up almost entirely of
credit card debt, was about $950 Billion. In the fourth quarter of 2008, 13.9
percent of consumer disposable income went to service this debt. (Source: U.S.
Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are
Squeezing Consumers and Undermining the Recovery," May 2009)
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
"As household wealth has declined in the downturn, more American families are
facing financial distress due to high debt burdens. In 2007, before the recession
began, 14.7 percent of U.S. families had debt exceeding 40 percent of their
income." (Source: U.S. Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card
Company Practices Are Squeezing Consumers and Undermining the Recovery," May 2009)

In 2007, fewer than half of U.S. families (46.1 percent) held credit card debt.
That's virtually unchanged from 2004's 46.2 percent number. (Source: Federal Reserve
Survey of Consumer Finances, February 2009)
Credit card debt facts:
 Average credit card debt per household with credit card debt: $15,799
 The mean, or average, unpaid credit card balance last month was $3,389.
(Source:
"The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 45 percent of consumers said their unpaid credit card balance had gotten
"lower" or "much lower" in the past 12 months. Only 26 percent said it had
gotten "higher" or "much higher." (Source: "The Survey of Consumer Payment Choice," Federal
Reserve Bank of Boston, January 2010)

As of March 2009, U.S. revolving consumer debt, made up almost entirely of
credit card debt, was about $950 Billion. In the fourth quarter of 2008, 13.9
percent of consumer disposable income went to service this debt. (Source: U.S.
Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are
Squeezing Consumers and Undermining the Recovery," May 2009)


The typical consumer has access to approximately $19,000 on all credit cards
combined. More than half of all people with credit cards are using less than 30
percent of their total credit card limit. Just over one in seven is using 80 percent
or more of their credit card limit. (Source: myfico.com)
Eighty percent of consumers currently own a debit card, compared to 78 percent
who own a credit card and 17 who own a prepaid card. (Source: "The Survey of
Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

Approximately 60 percent of consumers have a rewards credit card. (Source: "The
Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 21 percent of consumers currently have a contactless debit card, while 26
percent have a contactless credit card. (Source: "The Survey of Consumer Payment Choice,"
Federal Reserve Bank of Boston, January 2010)
Fees: Credit cards

Penalty fees from credit cards will add up to about $20.5 billion in 2009,
according to R. K. Hammer, a consultant to the credit card industry. (Source: New
York Times, September 2009)


One-fourth of the students surveyed in US PIRG's 2008 Campus Credit Card Trap
report said that they have paid a late fee, and 15 percent have paid an "over the
limit" fee. (Source: U.S. PIRG, "Campus Credit Card Trap")
In the first 3 months of 2009, 27 percent of card offers carried an annual fee, up
from 18 percent in 2008, according to the financial research firm Tower Group.
(Source: ConsumerReports.org Money Blog, August 2009)

Thirty-one of the 39 credit cards did not charge an annual fee. That marked a
larger number of credit cards with no annual fee than in 2008, when 35 of 41
cards had no annual fee. The cost of those fees ranged from $18 to $150. (Source:
Consumer Action credit card survey, July 2009)
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
The average late fee was found to have risen to $28.19, way up from $25.90 in
2008. Consumer Action reported that late fees reached up to $39 per incident.
(Source: Consumer Action credit card survey, July 2009)

92 percent of cards included a fee for exceeding the credit limit, including 100
percent of all student cards. The amount of the over limit fee is $39 on most
accounts. (Source: Pew Safe Credit Cards Project, March 2009)
Circulation:
Total cards in circulation in U.S. Through year-end 2010, unless otherwise noted.
(creditcards.com)
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
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American Express credit: 48.9 million (Source: AmericanExpress.com)
MasterCard credit: 171 million (Source: MasterCard)
MasterCard debit: 123 million (Source: MasterCard)
Visa credit: 269 million, as of Sept. 30, 2010 (Source: Visa)
Visa debit: 397 million, as of Sept. 30, 2010 (Source: Visa)
Discover cards: Unavailable
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Secured
 Unsecured
 Installment
 Non-installment
 Revolving

Secured Loan: This is a very low risk loan for the lender. The loan is guaranteed by
some type of valuable commodity, generally known as collateral. If your client fails to
repay the loan they forfeit the collateral. The lender may either repossess and/or sell
the collateral to recoup the loaned amount and costs. Examples of collateral include:
real estate, automobile, certificate of deposit, jewelry, or items purchased with the loan
proceeds. A Home Mortgage Loan is a unique type of secured loan used to purchase a
house.
Unsecured Loan: This is a higher risk loan for the lender. In this case, the lender extends
credit based on borrower’s ability to repay (client’s credit history and current financial
status). There is no collateral to encourage repayment and the interest rate reflects the
lenders increased risk of loss, which in general means the interest rate is much higher
than with a secure loan.
Installment Loan: This type of loan can be either secured or unsecured. Funds
borrowed must be repaid in payments or installments over a specified period of time.
Some installment loans will have a series of small payments for an agreed upon time,
then a large lump payment at the end of loan, known as a balloon payment.
Non-installment: Can be either secured or unsecured. Funds must be repaid in ONE
payment by a specific date or time. Examples of this would be a doctor bill, utility bill, or
’90 days same as cash’ loan.
Revolving Debt: This is also a higher risk loan for the creditor. This type of loan is
usually unsecured (although some are secured with a cash deposit). Payments are made
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each month and may vary as the balance is reduced. Ordinarily, a ‘credit limit’ is
assigned to the account and as payments reduce the balance funds become available to
be borrowed again. For example: credit cards, department store or merchant affinity
cards.
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

Charge Cards
◦ Travel and
Entertainment
 American Express
 Diner’s Club
 Carte Blanche
Bank Cards
◦ Credit Cards
◦ Merchant ‘Affinity’
 Department Store
 Airlines
 Oil Companies
Charge cards are paid off monthly and the lender is highly intolerant of late payments,
the company will revoke privileges quickly due to late payments on their cards or if
there are credit report indicators of financial setbacks (late payment on other debts).
Credit cards are issued by banks, credit unions, savings and loans under the VISA or
MasterCard logo. With these types of cards, merchants make an agreement with VISA
and MasterCard to accept cards as a form of payment. Merchants agree to pay 1-4% of
amount charged as a service fee to the bank which issued the cards. Merchants agree to
pay this up-front fee because it allows customers to make purchases on credit which
increases sales and people generally spend more money when using credit. There is also
no collection risk for the merchant, getting paid for the purchase is guaranteed and
usually occurs within two to three business days. Banks encourage installment
payments so interest is charged on balances and revenue is successfully raised for the
bank. Banks profit on both ends - when the merchant accept the card and pays the
fees, and when your client uses the card and pays the interest.
Merchant ‘affinity’ cards are sponsored by the merchant. Issued through the merchants
‘own’ bank or through an ‘associate’ bank. These cards include department store cards
(Sears and JC Penney), airline cards (Delta, Southwest), oil cards (BP, Phillips), boutique
or chain store cards (The Avenue, Neiman Marcus), etc. These cards are normally used
only at the issuing store or issuing store’s sister stores.
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APR
 Interest Calculation
 FEES

Interest:
-noun
1. A charge for the use of credit or borrowed money. Such a charge expressed as a
percentage per time unit of the sum borrowed or used. (e.g.: 12% per month of the
outstanding balance)
APR:
-noun
1. The annual rate that is charged for borrowing, expressed as a single percentage
number that represents the actual yearly cost of funds over the term of a loan. This
includes any fees or additional costs associated with the transaction.
Credit card:
-noun
A card issued by a financial company giving the holder an option to borrow funds,
usually at point of sale. Credit cards charge interest and are primarily used for shortterm financing. Interest usually begins one month after a purchase is made and
borrowing limits are pre-set according to the individual's credit rating. Credit cards have
higher interest rates (around 19% per year) than most consumer loans or lines of credit.
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Rate of interest charged by
creditor on an annual basis
 Cost of credit (include
initiation or origination fees)
 Monthly rate determined by
dividing APR by 12
 Fixed or variable rate

APR’s must include any initiation or origination fees on a loan. APR’s may be fixed (set
rate determined by creditor), or variable (rate changes – higher or lower – in accordance
to economic indicators also known as indexes change). With a variable rate the
consumers must understand the index used, for example the Prime rate, plus the
additional percentage points charged or margin, and how often this financial indicator
‘snapshot’ is reviewed, monthly, semi-annually or annually. Creditors are required to
disclose all this information.
Loans or credit agreements can vary in terms of interest-rate structure, transaction fees,
late penalties and other factors. A standardized computation such as the APR provides
borrowers with a bottom-line number they can easily compare to rates charged by
other potential lenders.
By law, credit card companies and loan issuers must show customers the APR to
facilitate a clear understanding of the actual rates applicable to their agreements. Credit
card companies are allowed to advertise interest rates on a monthly basis (e.g. 2% per
month), but are also required to clearly state the APR to customers before any
agreement is signed. For example, a credit card company might charge 1% a month, but
the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also
takes compound interest into account.
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Simple and
Compound Interest
 Adjusted Balance
 Average Daily
Balance
 Previous Balance
 Two-cycle Balance

Interest is charged by lenders as compensation for the loss of the asset's use. In the case
of lending money, the lender could have invested the funds instead of lending them out.
With lending a large asset, the lender may have been able to generate income from the
asset should they have decided to use it themselves.
Using the simple interest formula:
Interest is charged on the balance outstanding.
Simple Interest = P (principal) x I (annual interest rate) x N (years)
Borrowing $1,000 at a 6% annual interest rate for 8 months means that you would owe
$40 in interest (1000 x 6% x 8/12).
Using the compound interest formula:
Interest is charged on the balance outstanding plus interest. (Interest is charged on
interest)
Compound Interest = P (principal) x [ ( 1 + I(interest rate) N (months) - 1 ]
Borrowing $1,000 at a 6% annual interest rate for 8 months means that you would owe
$40.70.
The interest owed when compounding is taken into consideration is higher, because
interest has been charged monthly on the principal + accrued interest from the previous
months. For shorter time frames, the calculation of interest will be similar for both
methods. As the lending time increases, though, the disparity between the two types of
interest calculations grows.
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Adjusted Balance Method
A finance/accounting method where costs are based on the amount(s) owing at the end
of the current time period (once credits and payments are posted). Most savings
accounts use this system. Interest earned in the account is calculated at the end of the
month once all the transactions have been posted.
Example:
APR
Monthly rate
Previous balance
Subtract payments or credits
New balance
Finance charge
16%
1.33% or $13.30
$1,000.00
- $ 250.00
$ 750.00
1.33% or $9.98
Average Daily Balance Method
A financial accounting method used where costs (and interest) are based on the
amount(s) owing at the end of each day. Most department store credit cards use this
system. Interest payable is calculated daily, this results in less interest payable because
payments on the card lower the interest payable immediately.
Please note that the interest rates on department store credit cards are usually higher
than normal credit cards, so this isn't to say that there is a huge interest savings.
Example:
APR
Monthly rate
Previous balance
New purchase on 13th day
Payment rec’d on 20th day
Average daily balance
Finance charge
16%
1.33%
$1000.00
+$ 100.00
- $ 300.00
$ 950.00
1.33% or $12.64
Previous Balance Method
A financial accounting method that bases costs (and interest) on the amounts owing
from the previous time period. Most credit cards use this system: whatever your client
spent last month is owed this month.
Example:
APR
Monthly rate
Previous balance
New purchase on 13th day
Payment rec’d 2nd day
New balance
Finance charge
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16%
1.33%
$1000.00
+$ 100.00
-$ 300.00
$1000.00
1.33% or $13.30
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Double-Cycle Billing
A method used by creditors, usually credit card companies, to calculate the amount of
interest charged for a given billing period. Double-cycle billing takes into account not
only the average daily balance of the current billing cycle, but also the average daily
balance of the previous period. Double-cycle billing can add a significant amount of
interest charges to customers whose average balance varies greatly from month to
month. This type of billing is also referred to as "two-cycle average daily balance".
Double-cycle billing has long been used by credit card companies to increase the
amount of interest charged to customers. For the most part, many credit card
customers are unaware of how this billing method affects their interest charges. The
practice came to the general public's attention in 2006 during a United States Senate
report on credit card practices.
Double-cycle billing is the balance computation method that allows credit card issuers to
apply interest charges to two full cycles of card balances, rather than the most recent
billing cycle's balances. Also known as two-cycle billing, this practice effectively
eliminates the grace period for people who paid off a balance in the previous month.
The Credit CARD Act of 2009 banned double-cycle billing effective Feb. 22, 2010.
Retroactive interest rate hikes on existing balances are banned (by the Credit CARD
Act of 2009), except when:
•An introductory or "teaser" period ends.
•The interest rate is tied to an index and is variable.
•The card user completes the terms of a workout plan for debt repayment or fails to
comply with terms of a workout plan.
•The card user is more than 60 days late making a monthly payment. The card issuer
must give the reason for the increase and must restore the interest rate to the previous,
lower level after six months if the cardholder has made on-time payments during that
six-month period.
•Military service members end active duty. Federal law caps credit card APRs for
service members at 6 percent as long as they are on active duty. The Federal Reserve
Board added a provision that allows credit card issuers to increase interest rates on
cards owned by service members to restore APRs to previous levels.
Per the Credit CARD Act of 2009:
Interest rates cannot increase during the first year on new accounts except under the
five exceptions listed above. Promotional or "teaser" rates must last for at least six
months. Every six months, the card issuer must conduct reviews of accounts in which
interest rates have been increased based on market conditions, the creditworthiness of
the card user or other factors. If those factors have changed, card issuers must, if
warranted, reduce the interest rate.
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Universal default -- the practice of increasing card users' interest rates based on their
payment records with unrelated accounts, such as utilities or other credit cards -- is
banned for existing credit card balances.
Benefits to your clients of paying a little extra every month
Let's say John and Jane each has $2,000 of debt on their credit cards, which require a
minimum payment of 3%, or $10, whichever is higher. Both are strapped for cash, but
Jane manages to pay an extra $10 on top of her minimum monthly payments. John pays
only the minimum.
Each month John and Jane are charged a 20% annual interest on their cards'
outstanding balances. So, when John and Jane make payments, part of those payments
go to paying interest and part go to the principal.
Here is the breakdown of the numbers for the first month of John's credit card debt:





Principal: $2,000
Interest: $33.33 ($2,000 x (1+20%/12))
Payment: $60 (3% of remaining balance)
Principal Repayment: $26.67
Remaining Balance: $1,973.33 ($2,000 - $26.67)
These calculations are done every month until the credit card debt is paid off.
In the end, John pays $4,240 in total over 15 years to absolve the $2,000 in credit card
debt. The interest that John pays over the 15 years totals $2,240, higher than the
original credit card debt.
Because Jane paid an extra $10 a month, she pays a total $3,276 over seven years to pay
the $2,000 in credit card debt. Jane pays a total $1,276 in interest.
The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by
more than seven years!
The lesson here is that every little bit counts. Paying twice your minimum or more can
drastically cut down the time it takes to pay off the balance, which leads to lower
interest charges.
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Annual fees (membership
fees)
 Late fees
 Over the limit fees
 Payoff fees
 Transaction fees
 Question fees

Annual fees
Some cards have annual fees and some cards don’t. These fees can range from $20 to
$250. These fees are most often found on cards with lower interest rates to help the
lender make more money.
Late fees
These fees are usually charged to your clients’ accounts due to payments received after
the due date. These fees can range from $15.00 to $50.00 or more. When these fees are
applied by the bank, if your client’s account is already close to the limit (especially on
low-limit accounts), these fees can easily cause the account to go over the limit.
Over the limit fees
A fee charged when your balance goes over your credit limit (also known as over the
limit fee). When cardholders attempt to make purchases that will put them over their
credit limit, card issuers used to routinely decline the transactions. In recent years, many
card issuers changed their policies and automatically enrolled consumers in programs
that allowed the transaction, but then added hefty fees. The Credit CARD Act of 2009
ended the practice of automatically enrolling consumers into over-limit fees, and
requires that credit card issuers give account holders the option to opt-in to over-limit
fees. Without the consumer's consent, they cannot charge over-limit fees. The act also
forbids issuers from charging a fee higher than the amount a consumer is over the limit.
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Payoff fees
Payoff fees can be generated in two ways:
1. Penalty charge for paying off the card each month and not carrying a balance or,
2. Flat rate for lump sum payoff
Transaction fees
These fees are used by banks to increase revenue. They can be per card usage
transactions; or a charge for a specific transaction (e.g.: 5% of the amount for a cash
advance or a balance transfer).
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
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

FICO – Fair, Isaac
and Company
Equifax – BEACON
Experian –
Experian/Fair, Isaac
Risk Model
Trans Union EMPIRICA



Changes over time
‘Defines’ risk factor
Different creditors
use the FICO score
in different ways
Credit Score
-noun
1. A statistically derived numeric expression of a person's creditworthiness that is used
by lenders to access the likelihood that a person will repay his or her debts. A credit
score is based on, among other things, a person's past credit history. It is a number
between 300 and 850 - the higher the number, the more creditworthy the person is
deemed to be.
A FICO score is the most widely used credit scoring system. FICO is an acronym for Fair
Isaac Corporation, the company that provides the credit score model to financial
institutions. There are other providers of credit scoring systems as well. Consumers can
typically keep their credit scores high by maintaining a long history of always paying
their bills on time and not having too much debt.
A credit score plays a large role in a lender's decision to extend credit and under what
terms. For example, borrowers with a credit score that is under 600 will be unable to
receive a prime mortgage and will typically need to go to a subprime lender for a
subprime mortgage, which will typically have a higher interest rate.
Because the formula draws on the information on the credit report, as the credit report
is updated, the FICO score will display a different level of risk to the creditor or
‘snapshot’ if you will. While the FICO determines a number for the score (highest
indicating less risk), and lenders may refer to the FICO score, different creditors have
different levels of risk they deem acceptable. Some creditors formulate their own
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scores, using the credit bureau FICO score and other information about the consumer.
In addition, your credit score may be different for all credit reporting agencies.
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Included:

Not included:
◦ Amounts owed
 All accounts
 Balance on certain types
of accounts
 Percentage with
balances
 Payment history
 Percentage of balance to
available credit
(revolving and
installment)
 Length of credit history
 Types of credit used
 New credit
Race, color
Religion
National origin
Sex & marital status
Age
Occupation
Employment history
Residence
Currently charged interest
rates
◦ Child support liability
◦ Information not on credit
report
◦ Credit counseling
◦
◦
◦
◦
◦
◦
◦
◦
◦
The Equal Credit Opportunity Act
Lenders are barred from denying credit based on:
Race/national origin
Religion
Age
Job status rating
Marital status
Pregnancy
Child support liability
Spouse’s income information
What’s in your FICO® score
FICO Scores are calculated from a lot of different credit data in your credit report. This
data can be grouped into five categories as outlined below. The percentages in the chart
reflect how important each of the categories is in determining your FICO score.
These percentages are based on the importance of the five categories for the general
population. For particular groups - for example, people who have not been using credit
long - the importance of these categories may be somewhat different.
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Payment History
 Account payment information on specific types of accounts (credit cards, retail
accounts, installment loans, finance company accounts, mortgage, etc.)
 Presence of adverse public records (bankruptcy, judgments, suits, liens, wage
attachments, etc.), collection items, and/or delinquency (past due items)
 Severity of delinquency (how long past due)
 Amount past due on delinquent accounts or collection items
 Time since past due items (delinquency), adverse public records (if any), or
collection items (if any)
 Number of past due items on file
 Number of accounts paid as agreed
Amounts Owed
 Amount owing on accounts
 Amount owing on specific types of accounts
 Lack of a specific type of balance, in some cases
 Number of accounts with balances
 Proportion of credit lines used (proportion of balances to total credit limits on
certain types of revolving accounts)
 Proportion of installment loan amounts still owing (proportion of balance to
original loan amount on certain types of installment loans)
Length of Credit History
 Time since accounts opened
 Time since accounts opened, by specific type of account
 Time since account activity
New Credit
 Number of recently opened accounts, and proportion of accounts that are
recently opened, by type of account
 Number of recent credit inquiries
 Time since recent account opening(s), by type of account
 Time since credit inquiry(s)
 Re-establishment of positive credit history following past payment problems
Types of Credit Used
 Number of (presence, prevalence, and recent information on) various types of
accounts (credit cards, retail accounts, installment loans, mortgage, consumer
finance accounts, etc.)
Please note that:
 A FICO score takes into consideration all these categories of information, not
just one or two. No one piece of information or factor alone will determine
your score.
 The importance of any factor depends on the overall information in your
credit report. For some people, a given factor may be more important than
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for someone else with a different credit history. In addition, as the
information in your credit report changes, so does the importance of any
factor in determining your FICO score. Thus, it's impossible to say exactly how
important any single factor is in determining your score - even the levels of
importance shown here are for the general population, and will be different
for different credit profiles. What's important is the mix of information, which
varies from person to person, and for any one person over time.

Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including
your income, how long you have worked at your present job and the kind of
credit you are requesting.
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Telephone calls and letters
 Revocation of privileges
 Damaged credit rating
 Repossession of collateral
 Collection agencies
 Legal action
 Bankruptcy
 Stress

Creditor Recourse
It is important to understand the potential consequences of unpaid debt. Basically
lenders have worked hard over the years to develop a system to help reduce their risk of
default from borrowers. They have created terms in their agreements that make it in
the best interest of the borrower to make their agreed upon payments timely and
consistently. One of the most important motivators for making payments and making
them timely is for the purpose of establishing and or maintaining a positive credit rating.
It is extremely unfortunate when borrowers don’t completely understand how the
system works. Not playing by the rules can result in devastating consequences to a
person’s debt load and to their credit rating. Unresolved debt doesn’t just go away. It
usually starts with late fees, over limit fees, interest rate increases, collection calls and
letters. Some creditors may revoke privileges of credit temporarily, while others may do
so permanently. From there it can escalate into larger issues which have legal
ramifications such as foreclosures, repossessions, liens, judgments and garnishments.
If a consumer is past due on payments, the information may have already been reported
to the credit bureau(s). Although some creditors run approximately one month behind
in reporting, consumers should not rely on this possibility. If a creditor threatens to ruin
a consumer’s credit, in all likelihood the information has already been reported.
Collection Agencies
The debt may be turned over to, or sold, to a collection agency. (The Fair Debt
Collection Practices Act applies to these, see below.) While some collection agencies
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may attempt to collect the debt through letters or phone calls, some collection agencies
‘sue first and ask questions later’. Most in the collection industry suggest that it is during
the first 60 days of collection effort that there are the best odds of successful debt
collection. For this reason, it is always a good idea to be aware of when a client was first
contacted by a collection agency, to increase possibility to negotiate a payment
arrangement.
The Fair Debt Collection Practices Act
The Act applies only to 3rd party debt collectors. Please note that every state also has its
own laws governing behavior of creditors, collection agencies, and rights of consumers.
Although Financial Counseling Professionals should be informed of consumers’ rights
and share this information with their clients, Financial Counseling Professionals are not
certified or licensed to practice law or give legal advice in any form. You will want to
make yourself aware of appropriate community services for when client referrals are
necessary.
o Protects consumers from the harassment of debt collectors
o Defines rights and responsibilities of debt collectors
o Consumer’s have the right to these protections:
o Consumers are not obligated to supply personal information
o Consumers are entitled to know the debt collector’s employer and reason
for the call
o Consumers may request termination of contact
o Consumers may dispute all billing errors, and even the debt itself
o Consumers may correspond in writing with the debt collectors and
should keep records of that correspondence
o Consumers should never succumb to scare tactics
Your clients should never ignore a bill or debt and should never negotiate an
unworkable payment arrangement. Collectors may ask, but clients are not obligated to
supply personal information. The consumer is always entitled to know the name of the
collector’s employer and the reason for contact. A letter requesting termination of
contact may include a description of the harassing behavior and the reason for nonpayment of the debt. The consumer has 60 days to dispute a bill; the creditor must
respond within 30 days. Your clients should always keep records of correspondence
when disputing debt, negotiating arrangements, or requesting termination of contact.
Any complaints or disputes should be sent by the consumer, in writing, by certified mail
to the creditor or collection agency. Once a collection agency makes contact with the
consumer to collect a debt, within 5 days a written statement should be sent to the
consumer indicating the nature of the debt and the right to dispute the debt.
Consumers should read all correspondence carefully (including ‘adjustments to your
contract’ flyers that may arrive with a billing statement from creditor).
Collection agency limitations
Collection agencies may not:
o Provide false or misleading information
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o
o
o
o
o
o
o
o
o
Call after 9pm or before 8am (consumer’s time zone)
Interrupt consumer’s work routine
Make excessive calls to home or work
Send letters with appears of government documents
Threaten physical harm
Threaten consumer’s property
Deposit post dated checks prior to indicated date
Impersonate government agency or lawyer
Harass consumer after request of contact termination received
Legal Actions
If collection attempts go unanswered or fail to result in some sort of payment
arrangement, then it is quite possible that the creditor or their collection agency will
proceed with some form of legal action against the client. Depending on the
circumstance, legal action comes in the form of liens, judgments, garnishments,
repossessions or foreclosure.
Lien -noun
1. Law. The legal claim of one person upon the property of another person to
secure the payment of a debt or the satisfaction of an obligation.
Basically a lien places a “hold” on property used to guarantee a loan. Liens are generally
used in second mortgages, car loans or in cases where remodeling or construction work
is done on a home. Liens have the power to keep a borrower from selling the property
or from transferring the title of the property to another party before the debt has been
paid in full. If a loan goes into default a lender can force the sale of the property or the
car in order to collect the balance due.
One of the most common liens is a construction lien also known as a mechanic’s lien.
This type of lien is implemented when a property owner does not pay for materials and
or labor which improved their property in some way. This can include maintenance,
repairs, remodel work, new construction and landscaping.
Judgments – noun
1. Legal verdict: the decision arrived at and pronounced by a court of law
2. Obligation resulting from verdict: an obligation, e.g. a debt, which arises as a
result of a court's verdict, or a document setting out an obligation of this kind
Attorneys are also authorized to collect debts for creditors. Some law offices employ
staff simply for the purpose of debt collection. Others will file suit to collect debts with
possible garnishment of wages or assets if judgments are granted. If a client is sued,
and does not respond in a timely manner to the court, a default judgment is issued.
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Garnishments - noun
1. a warning, served on a third party to hold, subject to the court's direction,
money or property belonging to a debtor who is being sued by a creditor.
2. a summons to a third party to appear in litigation pending between a creditor
and debtor.
Wage garnishment, occurs when money is deducted from an employee's wages or
salary as a result of a court order. Wage garnishments are in full force until the entire
debt is paid off or until some sort of arrangements are made to pay off the debt. While
garnishments can be assessed for any debt, the most common types of debt that result
in garnishments include:




child support
defaulted student loans
taxes
unpaid court fines
Once the employer is served notice that an employee has been garnished, the employer
is required by law to take the funds out of the employee’s paychecks. It is very
important for employers to correctly calculate the amount to withhold. Deductions
must be made until the garnishment expires. If an employer does not abide by the
garnishment order, in some cases the employer may become liable to pay the
employees debt off in full.
If an employee is being garnished by multiple creditors there is an order in which the
garnishments should be paid. The order is as follows:




Federal taxes
Local taxes
Child support
All other garnishment orders
Currently, there are three states that do not allow wage garnishment except for debts
related to child support, court-ordered fines or restitution, federally guaranteed student
loans, and taxes. They are North Carolina, South Carolina and Texas. According to the
United States Department of Labor, Title III of the Consumer Credit Protection Act
protects employees,
“by limiting the amount of earnings that may be garnished in any workweek or
pay period to the lesser of 25 percent of disposable earnings or the amount by
which disposable earnings are greater than 30 times the federal minimum hourly
wage prescribed by Section 6(a) (1) of the Fair Labor Standards Act of 1938. This
limit applies regardless of how many garnishment orders an employer receives.
The federal minimum wage is $7.25 per hour effective July 24, 2009.
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Title III permits a greater amount of an employee’s wages to be garnished for
child support, bankruptcy, or federal or state tax payments. Title III allows up to
50 percent of an employee's disposable earnings to be garnished for child
support if the employee is supporting a current spouse or child, who is not the
subject of the support order, and up to 60 percent if the employee is not doing
so. An additional five percent may be garnished for support payments over 12
weeks in arrears. “
State law varies as to timing, percentages, and what assets may be attached for
garnishment. There are many states that have maximum thresholds that are lower than
the maximum amounts established by the federal law. Some states prohibit
garnishment in certain circumstances. Clients should always defer to legal counsel for
the most complete and accurate garnishment information in regards to their specific
case and state.
Repossession -verb (used with object)
1. to possess again; regain possession of, especially for nonpayment of money due.
2. to put again in possession of something: to repossess the Bourbons of their throne.
If a consumer becomes delinquent, creditors may repossess collateral securing a loan.
As an example, when a borrower buys a car, the car is used as collateral against the
loan. In the event the client is unable to make the car payment, then the creditor will
often “repossess” or take the car back. When several payments are missed it is not
common for the lender to find out where the car is and drive it away or have it towed
away. The lender will then sell the car. Often times the car will sell for much than the
borrower owes on it. This creates an additional problem for the borrower. Not only is
the borrower without a car, they will then also have to pay the remaining balance due
on the car known as the “deficiency balance”.
If a client is having a temporary difficulty but intends to try to keep their car, it is wise to
contact the lender as soon as possible to make arrangements. In the event, your client
becomes involved in repossession proceedings it is wise for your client to seek legal
advice.
Note - Some states may require a legal notification of intent or a legal filing to repossess
collateral called a “Replevin Action”.
Foreclosure- verb (used with an object)
1. to deprive (a mortgagor or pledge) of the right to redeem his or her property,
especially on failure to make payment on a mortgage when due, ownership of
property then passing to the mortgagee.
2. to take away the right to redeem (a mortgage or pledge).
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Foreclosure occurs when the borrower defaults on a mortgage loan. The mortgage
lender files suit against the borrower in order to force the sale of the property in order
to pay off the debt. Foreclosures take up to seven years from the time the property is
sold to come off the client’s credit report.
While it is certainly possible for a client to re-build their credit from one of these
devastating consequences, it requires a consistent and sensible plan to do so.
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Loan Modification
 Forbearance
 Refinance
 Reinstatement

Workout Programs
Loan servicers have several options they may utilize in order to provide assistance to a
struggling homeowner. Generally, these options are referred to as “Workout Programs”.
Workout programs are basically loss mitigation for lenders and home retention for
borrowers which can be a win for both parties. Below are a few of the most common
kinds of workout programs.
Loan Modification: Loan Modification is the most common and seemingly most
effective way of implementing a workout program. Loan modification occurs when a
mortgage's terms change without doing a full refinance. Some of the changes include:
the interest rate, the maturity date, the principle balance and ultimately the payment
amount. These agreements “modify” the original loan documents.
Forbearance: Forbearance is an option where the lender offers a short term agreement
to defer a portion of the monthly payment. Generally, forbearances have a three to six
month time frame. This process works best for those clients who are having a temporary
hardship and will be able to get back to their regularly scheduled payments within three
to six months.
Re-finance: Re-financing the existing loan to a new loan with a lower interest rate is
another possibility. However, this option may be a bit harder for a client with an
already low credit score or one who has had some difficulties making timely and
consistent payments in the past. Additionally, this option may not be available in the
event the client’s home is valued at less than the amount owed on the loan. It is still
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wise to discuss this option with the lender to determine whether or not this might be a
viable option for the client.
Reinstatement: Reinstatement occurs when the client pays the lender the lump sum
due by a specific date. Often times, reinstatement is coupled with a forbearance. This
process remedies the default so the lender will treat the borrower as if they were never
behind.
Mortgage Delinquency
Since mortgage delinquency can have many serious ramifications, it is imperative to
make this a priority debt. According to credit report experts, a foreclosure is one of the
most damaging items a consumer can have on his or her credit report. In the event your
client is behind on their mortgage consider taking the following steps:
1. Stop paying lower priority debts in an effort to bring the mortgage current.
2. Contact the lender to negotiate payment arrangements. Some creditors will agree to
a “forbearance” on the loan. Some of the terms they are likely to accept are as follows:



Accepting reduced payment amounts for a short period of time.
Skipping a payment.
Extending the grace period on late payments.
3. Re-structure the loan. Lenders are discovering the foreclosure process and the
bankruptcy process are often more detrimental to their bottom line than working with
clients who need a little help getting back on target. It is not uncommon for lenders to
be willing to re-structure a client’s mortgage.
4. Re-finance the loan to a lower interest rate. This option may be a bit harder for a
client with an already low credit score or one who has had some difficulties making
timely and consistent payments in the past. However, it is still wise to discuss this
option with the lender to determine whether or not this might be a viable option for the
client.
5. Sell the house.
6. Rent the house.
Home Affordable Modification Program (HAMP)
One of the most common programs a borrower will be reviewed for is the Home
Affordable Modification Program (HAMP). The HAMP program is fairly simple. Lenders
calculate 31% of the borrower’s gross income. From there they back into a payment
amount to see if they can provide a revised mortgage payment including interest,
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principle, taxes, insurance, homeowners association or condo fees. Lenders are able to
reduce the interest rate charged to borrowers and in some cases even reduce the
principal balance owed. Borrowers are then put on a trial modification plan with the
new interest rate and payment amount for three months. If all their payments are made
on time, the modification will be implemented at the new rate and will be fixed for the
next five years.
HAMP Eligibility Requirements
If a client’s current mortgage payment is under the 31%, unfortunately they will be
ineligible for this program. To qualify for HAMP, the following conditions must apply:





Client must be the homeowner and must be occupying the residence.
Mortgage must have originated prior to January 1, 2009.
The loan balance must be less than or equal to $729,750.00.
Mortgage payment must be greater than 31% of gross income.
Client must be having some form of financial hardship.
Some examples of financial hardships include loss of income, reduced income, or
increased medical expenses.
Clients who are not able to qualify for HAMP may be able to qualify for another type of
modification. This modification is known as an “in-house”, a “traditional” or an
“investor” modification. This type of modification is based on:
1. affordability to the client, and
2. investor specified guidelines.
Basically, the lender reviews the account to determine if it is possible for them to reduce
the interest rate in order to provide the client with a payment that leaves a budget
surplus. It is important to be aware that investor specified guidelines are the criteria
defined by the investors on the loans. This is the rule book per se of what the investor
will or will not allow.
FHA, VA and USDA loans are different
Please note that FHA, VA and USDA loans are handled differently. They have long and
tedious guidelines and processes. For VA and USDA loans, it is best to contact the
individual agencies directly and early.
The Process
Prior to contacting the bank, it is important for the client to have thorough knowledge
of their situation. This means the client should have a solid idea of what their income
and expenses are. Preparing a budget before contacting the lender will be very useful
since these numbers will be utilized throughout the “workout” process.
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Know the amount of income
For the purpose of loan workouts it is not uncommon for lenders to request the client’s
gross income (pre-tax) as well as their net (take home pay) income. Often lenders will
ask the client to provide their Federal Tax Returns so income can be verified.
Know the amount of expenses
While it is not imperative to define every single cent the client spends. It is important to
be as accurate as possible without going overboard. The most important items to
consider include:
 Utilities
 Credit debt/other debt
 Cable/TV/Phones/Internet
 Out-of-pocket insurance and medical costs
 Groceries/home supplies
 Transportation costs
 Child care
Know if there a deficit or a surplus?
Subtract the expenses from the income. Is there a large deficit or a large surplus? It is
imperative to avoid any extremes. Showing an enormous deficit or showing a large
surplus will not help matters. An enormous deficit may indicate the borrower can’t
really afford the home and a large surplus may lead the lender to believe the borrower
doesn’t really need any sort of assistance. Keep the budget as “real” and relevant as
possible.
Now is time to contact the lender to get instructions on how to apply for a “workout”
program or a loan modification with their organization. Each lender works a little
differently. Most lenders will send out a packet of paperwork that needs to be
completed. Be sure to keep detailed logs on any communications you have with a
lender. Always capture the name of the person you are speaking with, the date you
spoke with them, the time you spoke with them and any relevant notes from the
communication. Remember verbal agreements from lenders will not be very helpful in
the event they don’t hold up their end of the arrangement. Always request written
correspondence outlining the details of any arrangements or agreements made with
lenders.
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◦ Allocating payments
◦ Double cycle billing
◦ Due dates and times
◦ Interest rate increases
◦ Overlimit fees
◦ Pay to pay
◦ Subprime cards
◦ Timely payments
Rates, terms and fees:
The sections of the Credit CARD Act likely to affect the most consumers are those
limiting when interest rates on consumer credit card accounts can be increased on
existing balances (called retroactive interest rate hikes). The law also requires that fees
for paying late or going over the credit limit are reasonable and related to the infraction.
All noted sections of the CARD Act became effective 2/22/10 unless otherwise noted.
Allocating payments
Any monthly payment amounts that exceed the minimum payment due must be applied
to balances with the highest interest rate first, then to balances with the next highest
rate, and so on. For deferred interest programs, the card issuer must allocate the entire
amount in excess of minimum during the last two months before the deferred-interest
period ends.
Double-cycle billing
No finance charges for previous billing cycles unless there was an adjustment due to a
disputed purchase or because a payment was returned for insufficient funds.
Due dates and times
Due dates for monthly payments must be the same day each month. If due dates fall on
weekends or holidays, payments must be credited to the account on the next business
day without late penalties.
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If the card issue changes its mailing address or payment processing procedures and the
changes cause delays in crediting cardholders’ accounts, the issuer cannot charge late
fees during the 60 days following those changes.
Interest rate increases
Retroactive interest rate hikes on existing balances are banned, except when:
 An introductory or "teaser" period ends.
 The interest rate is tied to an index and is variable.
 The card user completes the terms of a workout plan for debt repayment or fails
to comply with terms of a workout plan.
 The card user is more than 60 days late making a monthly payment. The card
issuer must give the reason for the increase and must restore the interest rate to
the previous, lower level after six months if the cardholder has made on-time
payments during that six-month period.
 Military service members end active duty. Federal law caps credit card APRs for
service members at 6 percent as long as they are on active duty. The Federal
Reserve Board added a provision that allows credit card issuers to increase
interest rates on cards owned by service members to restore APRs to previous
levels.
Interest rates cannot increase during the first year on new accounts except under the
five exceptions listed above. Promotional or "teaser" rates must last for at least six
months. Every six months, the card issuer must conduct reviews of accounts in which
interest rates have been increased based on market conditions, the creditworthiness of
the card user or other factors. If those factors have changed, card issuers must, if
warranted, reduce the interest rate.
Universal default
The practice of increasing card users' interest rates based on their payment records with
unrelated accounts, such as utilities or other credit cards -- is banned for existing credit
card balances.
Effective: Reducing interest rates: 8/22/10
Over limit fees
Consumers must be given the option to opt in to over-limit fees. If the consumer opts
out, when they attempt to make purchases that exceed their credit limits, the
transactions will be rejected. Consumers who choose to have over-limit fees must be
informed of the amount of the fees and have the right to revoke their option at any
time.
Over-limit fees can be assessed to an account only once during each billing cycle.
Consumers can opt in orally, electronically, or in writing. The Federal Reserve Board
must set up guidelines for selecting or rejecting the fee option and for the required
notice to consumers.
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Pay to Pay
Credit card issuers may not charge customers additional fees to pay their bills by mail,
electronic transfer, telephone or other methods, unless customers request expedited
payment (such as last-minute payment to avoid late fees).
Timely payments
Monthly statements must be mailed or delivered to credit card users at least 21 days
before the due dates. If the account has a grace period, the finance charges for the
month cannot be assessed unless the user receives the monthly statement at least 21
days before finance charges are to begin.
Effective 8/20/09
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◦ 45 days’ notice
◦ Free credit reports
◦ Late payments
◦ Online agreements
◦ Payoff time
◦ Penalty interest rates
◦ Right to opt out
Disclosures:
Credit card issuers must clearly disclose terms of consumer credit card accounts,
including fees, penalties and terms. The most significant disclosure requirement is that
credit card issuers must give 45 days’ advance notice of significant changes in terms of
credit card agreements. Consumers must be informed of their right to opt out of
changes in terms and close or cancel their accounts. There are also requirements for
disclosing payment due dates and how long it would take consumers to pay off their
credit card debt fi they make only minimum payments each month.
45 days’ notice
Advance notice of changes to card agreements: Credit card issuers must give account
holders at least 45 days’ advance notice of significant changes in terms of the account,
including interest rates and fees. Issuers must include a notice informing the card user
of the right to cancel the account.
Closing or canceling the account won’t require the card user to immediately pay off the
entire balance.
Effective: 8/20/09
Free credit reports
Companies that advertise offers of “free” credit reports must include statements in
those ads that consumers are entitled by law to receive a free credit report each year
from each credit bureau. The ads must also state that the only official Web site for
obtaining those free reports is AnnualCreditReport.com
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Radio and television ads must include the following statement in audio and video: “This
is not the free credit report provided by federal law.”
Late payments
Monthly credit card bills must disclose the dates by which payments must be received
to avoid late penalties and the dates that the late fees will be charged to the accounts.
Online agreements
Creditors must post credit card agreements on the internet and submit electronic copies
to the Federal Reserve Board. The Fed will act as a central repository for consumer
credit card agreements.
Payoff time
Card issuers must include a warning in monthly statements that indicates consumers
who make only minimum payments increase the amount of time it will take to pay off
their debts in full and the amount of interest they will pay.
Issuers must also disclose the amount of time it will take card users to pay their
balances off in full if they make only minimum monthly payments, the total amount
they will pay, including interest, if they make minimum payments and how much they
would have to pay each month if they wish to pay off the balance in 36 months.
Card issuers must set up toll-free telephone numbers for consumers to get information
about nonprofit credit counseling and debt management assistance.
The Federal Reserve must issue guidelines for setting up the toll-free numbers to card
issuers within six months of enactment (or by Nov. 22, 2009).
Penalty interest rates
Card issuers must disclose whether interest rates will increase if one or more payments
are not received on time and what the penalty interest rate will be. This notice must
appear on the monthly statement near the payment due date.
Right to opt out
Consumers will have a right to opt out of significant changes in terms to their accounts,
including interest rate hikes and increases in fees and other charges. Until the law’s
passage, opting out of interest rate increases was only granted at the card issuers’
discretion and was not a consumer right.
Opting out means the consumer can no longer make purchases with the card. Instead,
the old, lower interest rate will be applied while the consumer repays the balance.
There are three methods for repaying the balances on accounts that have been closed
by consumers choosing to reject changes. Issuers can do one of the following:
 Collect the balance over at least five years.
 Charge a minimum payment amount that is up to twice the percentage charged
before the change in terms.
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 Use the same repayment plan used on the account at the time consumer rejects
the change in terms.
Credit card issuers must inform card users of the right to cancel when they mail the 45day advance notice of the change in terms. The notice must explain the steps
cardholders can take to exercise their rights to cancel, including a toll-free number to
call and the deadline for opting out.
Consumers who decide to opt out of the changes must not be penalized by card issuers.
Opting out is not considered defaulting on the account. Issuers cannot demand payment
in full of the outstanding balance or charge monthly maintenance fees on closed
accounts if consumers reject the changes in terms.
Card issuers can begin charging the new, higher interest rates on accounts beginning 14
days after notice of changes in terms is mailed. But that new, higher interest rate can
only be charged to transactions processed after the 14th day. According to the Fed, this
is to prevent card users from abusing the system by going on shopping sprees before
the higher APRs take effect.
There are exceptions to the opt-out rule. Consumers cannot opt out of increases in
minimum payment amounts. The Federal Reserve Board has ruled that when card
issuers increase minimum payments -- for example, by requiring card users to pay 5
percent instead of 2 percent of the outstanding balance each month -- account holders
do not have the right to cancel their accounts based on this change. Why? Fed
regulators reason this act, while often painful, is actually good for consumers. Higher
minimum payments mean consumers will pay off their balances faster and pay less in
finance charges.
Card issuers who increase minimum payments are not required to give 45 days’ advance
notice of this change in terms. Instead, the Fed gives issuers the option of providing 45
days notice or informing consumers at times when they are likely to notice the
disclosure.
In addition, consumers who are more than 60 days late making payments do not have
the right to reject APR increases.
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◦ The process of making a loan
to a consumer who does not
have the ability to repay the
loan.
Predatory Lending
Predatory lending can best be described as the process of making loans to customers
who do not have the ability to repay the loan. Generally, it includes the use of high-cost
or deceptive consumer loans as well as mortgages that strip a home owners’ equity.
Predatory lenders often take advantage of borrowers by charging them extremely high
interest and fees. A common practice of all predatory loans is using a consumer’s
inability to repay to the advantage of the lender in the form of:


High-cost loans
Fraudulent and or deceptive sales practices
The most common examples of predatory lending practices often occur with:







Payday loans
Car title loans
Tax refund anticipation loans
Check-cashing stores
Pawnshop loans
Subprime lending institutions
Home improvement scams
Predatory Lending Target Market
Predatory lenders most frequently market themselves to distressed consumers who are
in desperate need of money. Generally, this group of people are in a distressed
situation and do not have the time wait for traditional loan approvals. The most
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common types of people who are at risk of becoming targets of predatory lenders
include:









Delinquent homeowners
Minorities
Elderly
Young consumers
Young military members
Those with limited education
Those who are living beyond their means.
Those who have a need for immediate cash.
Those with poor credit ratings.
Predatory Lending Practices
Some of the most common predatory lending practices include the following:







Balloon mortgage refinancing – This occurs as a result of a borrower needing to
pay off a large payment at the end of the loan term. Predatory lenders benefit
by providing the borrower with a new high-interest, additional fee loan to cover
the balloon payment.
Higher fees – The fees of predatory lenders are usually much higher than those
charged by banks and credit unions.
Home improvement scams. The most common two deceptive sales practices
that occur in the realm of home improvement include forging of signatures on
loan documents or filling in blank spaces with inflated numbers in a contract
after it has been signed by the borrower.
Loan flipping - In this case, a predatory lender would encourage a borrower to
refinance their existing loan into a larger, longer-term loan. Often times, the
new loan will have a higher interest rate. In addition to the higher interest rates,
the lender will also charge additional fees for processing each loan.
Loan packing – When high fees for credit insurance and other so called
“benefits” are added into the payment for a loan.
Negative amortization of a loan - When the scheduled loan payment is not large
enough to cover the cost of the interest that accrues each month, negative
amortization results. Unpaid interest is then added to the unpaid balance. Over a
period of time, the balance of the loan increases. In this case it is quite possible
that the borrower will end up owing more on the loan than the amount originally
borrowed.
Not reporting a borrower’s payment history. – It is not uncommon for predatory
lenders to never report a borrower’s payment history to the credit reporting
agencies (i.e.: Experian, Equifax or Trans Union). This is unfortunate for
borrowers who are actually able to make the payments on these loans timely
and consistently. Without the lender reporting the timely and consistent
payments on the loan, the borrower is unable to build their credit history or
improve their credit score from this loan.
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Over lending - Over lending occurs when borrowers are allowed, or even
encouraged, to borrow more than they can afford to repay. When the borrowers
are unable to pay, the lender then persuades them to refinance the loan. In
many cases, the new loan will substantially reduce any if not all of the equity the
borrower may have had in the home. Even worse, the lender may foreclose on
the home. Either way the borrower usually loses.
Reverse redlining. This practice occurs when lenders segregate a limitedresource neighborhood on a map. Anyone who lives with in the identified
“redlined neighborhood” is then charged excessive rates to borrow money,
regardless of their credit history or income level.
Words of Wisdom
Unfortunately, it is not possible for a client to borrow their way out of debt. Getting
involved with a predatory lender can lead to a never ending cycle of outrageous fees
and charges. Borrowers generally end up in a worse situation than when they started.
Fees can add up quickly, sometimes even exceeding the amount borrowed. Excessive
interest rates and unrealistic re-payment can easily set a client on the road to financial
disaster.
In order for a client to protect them-self against predatory lending, a client should know
their lender and their lender’s reputation. It is crucial to read any and all loan
documents before signing them. Lastly, it is important to always research the market to
ensure that there is not a lower cost alternative available.
Knowledge is Power. Empower your Clients. Arbor Education
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