All Funny Money loans are subject to attack: Credit Cards, Auto Loans, Student Loans, ANything with no money down, a teaser rate or no payments until 2-3 later

The New York Times Story Below shows the coming wave of defaults and additional credit problems to hit. Think about it — where did the money come from for those teaser rates at 0% on credit cards for one year or more. It came from investors who thought they were buying a performing asset at 29% or who thought that the pool they bought share in all contained performing assets averaging 9%. If the investor doesn’t know the asset is performing only because no payment is expected, he’ll put up $100,000 for that 9% return, even though the real return is close to zero.

That $100,000 then is used to “fund” balance transfer and other tricks of the credit industry. They take the “asset” (debt) they acquired and buy more of the non-performing or almost non performing debt. The stated rate is 29% but the rate offered is 9%. That means they sold the same $100,000 debt three times over. That is called fraud. It’s also called the great mortgage meltdown of 2001-2008. And it is now called the great credit crisis of 2008.

Do the math. Only $13 trillion dollars in mortgage backed assets were out there in a market of $600 trillion. Declining housing values didn’t cause the crunch. It couldn’t. Even a 50% loss amounts to only 1% of the total credit market. They could have papered that over as a rounding error. No, the problem is that outright fraud, lying and deceit, intentional and deliberate occurred as a matter of policy of our most esteemed financial institutions and our government. TRUST was broken. Bankers have known for hundreds of years that TRUST can never be broken. You can’t break the buck. But apparently non-bankers got into the banking business.

So expect more of this stuff. And expect more opporuntities to challenge debt in and out of bankruptcy court using the same principles and laws and practices discussed on this blog.

October 29, 2008

Consumers Feel the Next Crisis: It’s Credit Cards

First came the mortgage crisis. Now comes the credit card crisis.

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said.

Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the “Bad Credit Hotel,” an online game that teaches the basics of maintaining good credit.

At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.

“We are not going to say, ‘Yahoo, this is over,’ and extend credit like we did without fear,” Jamie Dimon, JPMorgan Chase’s chief executive, said in a recent conference call. “If you’re not fearful, you’re crazy.”

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders — a move that could, for example, push a 15 percent rate up to 18 percent.

“We think it’s prudent given the nature of those products and the economic environment we face,” Daniel Henry, its chief financial officer, said in a recent conference call.

Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for a Sony big-screen television as a way of lowering the cost of their redemption prizes.

For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress.

The regulations, while beneficial to consumers, will curb profits on card issuers’ riskiest customers. JPMorgan said that it was withdrawing some teaser-rate loans that were only marginally profitable. Discover Financial shortened the duration of its zero-balance offers.

And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005. Mail offers to new and existing customers are on pace to drop below 8.4 billion pieces, the lowest level since 2004, according to Mintel Comperemedia, a direct marketing research firm.

Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web, according to data from comScore, an Internet marketing research firm.

“We used to get a couple of offers a week, but I haven’t seen a credit card offer in over a year,” said Brett Barry, who owns a real estate agency outside Phoenix and described his credit record as strong. “What blows me away is these companies are in the business of extending credit, but they don’t want to do it for me.”

Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. The moves have also made it difficult for him to manage his payroll and budget, he said.

“Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back,” said Lisa Hronek, a research analyst at Mintel. “People are completely maxed out with mortgages, home equity lines and credit card debt.”

At the same time, credit card profit margins have been narrowing, largely because lenders’ own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.

Meanwhile, bank executives say consumers are starting to curb their spending, to an extent that may become clearer Wednesday when Visa reports its third-quarter results.

In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.

“The last time credit costs spiked, the late fees were much lower, so card issuers could turn to that and reprice more nimbly,” a Morgan Stanley analyst, Betsy Graseck, said. “There is just more scrutiny now, and coming after the subprime mortgage crisis, the world is more sensitive to the way lenders behave.”

3 Responses

  1. […] 7.All Funny Money loans are subject to attack: Credit Cards, Auto No, the problem is that outright fraud, … Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings. … TITLE AGENT LIABILITY FOR ERRORS AND OMISSIONS AND TITLE INSURANCE… […]

  2. […] 12.All Funny Money loans are subject to attack: Credit Cards, Auto Think about it — where did the money come from for those teaser rates at 0% on credit cards for one year or more. … No, the problem is that outright fraud, … Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying… […]

  3. Date: 05-22-2009

    Case Style: Robin L. Avery v. First Resolution Management Corporation, et al.

    Case Number: 07-35726

    Judge: Milan D. Smith, Jr.

    Court: United States Court of Appeals for the Ninth Circuit on appeal from the District of Oregon, Multnomah County

    Plaintiff’s Attorney: Danny Gerlt, Portland, Oregon, for the plaintiff-appellant.

    Defendant’s Attorney: David A. Jacobs, Luvaas Cobb, Eugene, Oregon; Daniel Gordon, Daniel N. Gordon P.C., Eugene, Oregon, for the defendants-appellees.

    Description: Plaintiff-Appellant Robin L. Avery appeals the district court’s grant of summary judgment in favor of Defendants- Appellees Derrick E. McGavic and Kristin K. Finney (collectively, the Attorneys) and the district court’s denial of Avery’s request for attorney’s fees from Defendants-Appellees First Resolution Management Corporation and First Resolution Investment Corporation (collectively, First Resolution). Avery claims that the Attorneys attempted to collect a timebarred debt against her in violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692-1692p. She also claims that the district court’s refusal to accept supplemental jurisdiction over First Resolution’s counterclaim against her entitles her to attorney’s fees as a prevailing party. We have jurisdiction under 28 U.S.C. § 1291, and we affirm the district court.


    Avery, an Oregon resident at all relevant times, received an offer for a credit card from Providian National Bank (Providian) in July 2001. Avery applied for and received the card and used it to make several purchases. She received the billing statements at her Oregon residence and made payments on her card balance, the last of which was credited to her account on November 5, 2001. At that time, Avery’s balance stood at $2,971.82. Under the terms of the credit card agreement, Avery was charged interest at 23.99% per annum on any unpaid balance. The agreement also provided that the laws of New Hampshire would apply in case of a dispute, regardless of Avery’s actual residence, and contained an attorney’s fee clause. Avery defaulted on her account and made no further payments after November 2001.

    Providian assigned the account for collection, and First Resolution purchased the debt. On November 15, 2004, First Resolution sent Avery a notice identifying itself as the owner of the debt and indicating that the account information would be forwarded for collection to a lawyer in Avery’s area if the debt was not resolved by December 6, 2004. Avery received a letter dated December 29, 2004, from McGavic, one of the Attorneys, informing her, as required by 15 U.S.C. § 1692(g) and (e)(11), that she could dispute her debt in writing and that First Resolution was considering filing suit. McGavic filed suit against Avery on behalf of First Resolution on February 9, 2006, in the Washington County Circuit Court of Oregon.

    On the day the suit was filed, Avery disputed the debt and requested verification. Finney, the other of the Attorneys, responded to Avery’s request for verification in May and provided Avery updates on the amount of the balance in June and August. On September 13, 2006, McGavic served Avery with a notice of intent to apply for an Order of Default Judgment.

    On September 20, Finney received notice that Avery was represented. The next day, Finney filed a motion to dismiss the underlying lawsuit without prejudice, allegedly because the Attorneys had concluded it would be best to avoid protracted litigation over such a small amount. The Attorneys denied that the reason they decided to dismiss the lawsuit was because Avery indicated her intention to pursue a statute of limitations defense.

    Avery filed suit against First Resolution and the Attorneys on December 19, 2006, in the United States District Court for the District of Oregon. On January 31, 2007, First Resolution filed a counterclaim seeking to collect the debt due on Avery’s account. Avery moved to dismiss the claim for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The Attorneys moved for summary judgment on Avery’s FDCPA claim that they had illegally attempted to collect a time-barred debt, and Avery made a cross-motion for summary judgment, arguing that the underlying debt at issue was time-barred as a matter of law.

    The district court found that the underlying debt was not time-barred and granted the Attorneys’ motion for summary judgment, denying Avery’s cross-motion for summary judgment on the same issue. The district court also declined to exercise supplemental jurisdiction over First Resolution’s counterclaim and dismissed it accordingly, but did not award Avery attorney’s fees. Avery appealed to this court.


    We review a district court’s decision on cross-motions for summary judgment de novo. Arakaki v. Hawaii, 314 F.3d 1091, 1094 (9th Cir. 2002). Summary judgment is appropriately awarded when, viewing the evidence in the light most favorable to the nonmoving party, there are no genuine issues of material fact and the district court has correctly applied the underlying substantive law. Olsen v. Idaho State Bd. of Med., 363 F.3d 916, 922 (9th Cir. 2004).

    We review the district court’s denial of attorney’s fees and costs for abuse of discretion. P.N. v. Seattle Sch. Dist., No. 1, 474 F.3d 1165, 1168 (9th Cir. 2007). Elements of legal analysis and statutory interpretation underlying the district court’s decision are reviewed de novo, and factual findings are reviewed for clear error. Id.


    A. Summary Judgment to the Attorneys

    [1] Both parties agree that under the terms of the original agreement between Avery and Providian National Bank, New Hampshire law applies to this dispute. Under Oregon law, applied by the district court sitting in diversity, if a claim is based upon the law of another state, the limitations period of that state applies, as do the laws of that state governing tolling and accrual. OR. REV. STAT. §§ 12.430(1)(a), 12.440. Accordingly, because New Hampshire law covers First Resolution’s claim against Avery, New Hampshire law also controls the applicable statute of limitations, as well as tolling and accrual provisions.

    [2] The New Hampshire statute of limitations for an action on a credit card is three years. N.H. REV. STAT. ANN. § 508:4. However, this statutory period is tolled if a defendant is absent from and residing out of the state at the time the cause of action accrued. Id. § 508:9 (“If the defendant in a personal action was absent from and residing out of the state at the time the cause of action accrued, or afterward, the time of such absence shall be excluded in computing the time limited for bringing the action.”). Avery contends that “the state” referred to in the New Hampshire statute should be interpreted to mean “the forum state,” in this case, Oregon, and not New Hampshire.

    [3] All available case law interpreting this statute suggests that its intent and purpose is to toll New Hampshire’s statute of limitations when the defendant is not available to be served by a plaintiff suing in the state of New Hampshire. Bolduc v. Richards, 142 A.2d 156, 158 (N.H. 1958) (holding that the statute of limitations is only tolled when a defendant could not otherwise be served in New Hampshire due to lack of personal jurisdiction); Quarles v. Bickford, 13 A. 642, 643 (N.H. 1887) (same); see also Atwood v. Bursch, 219 A.2d 285, 287 (N.H. 1966) (holding that the statute of limitations runs only in favor of those who are within the state).

    [4] Although the analysis in this case is otherwise simple enough to be addressed in an unpublished opinion, we address this issue to hold that, under OR. REV. STAT. §§ 12.430 and 12.440, when parties lawfully adopt a state’s law for the purposes of resolving disputes arising from an agreement, they adopt that state’s statute of limitations provision and tolling provision in toto. Avery agreed to abide by New Hampshire’s statute of limitations as well as its tolling provisions, which have consistently been interpreted by New Hampshire courts to apply when defendants are absent from New Hampshire, not from any other state.1

    Avery’s theory rests on the premise that Oregon’s choice of law regime converts the foreign jurisdiction’s substantive law into Oregon’s for the purposes of that lawsuit. That premise 1Several advocacy groups filed a brief as amici curiae in support of Avery’s petition for rehearing en banc, suggesting that our opinion overlooks the ramifications of allowing perpetual tolling against out-of-state debtors under New Hampshire’s tolling provision. We do not purport to construe definitively the scope of New Hampshire’s tolling provision or to determine conclusively its effect when lawsuits are filed outside New Hampshire courts. Rather, we address only the narrow statutory argument Avery has made: that under Oregon’s choice of law regime, “the state” referred to in N.H. REV. STAT. ANN. § 508:9 is Oregon when a lawsuit is filed in Oregon but New Hampshire law otherwise governs.

    We express no opinion on arguments Avery did not raise, including, without limitation: (1) whether New Hampshire courts would construe N.H. REV. STAT. ANN. § 508:9 to allow perpetual tolling against an out-ofstate defendant on a cause of action that could not, as a matter of law, be brought in New Hampshire courts, see 15 U.S.C. § 1692i (requiring debt collectors to bring action on debt against a consumer in the judicial district where the consumer signed a contract or where the consumer resides); or (2) whether a credit card agreement would be unconscionable under New Hampshire law if it led to perpetual tolling when the debt collector was free to sue the card holder at any time in the card holder’s home jurisdiction. is not borne out by the plain language of the Oregon statutes. See OR. REV. STAT. § 12.440 (providing “the other state’s statutes and other rules of law governing tolling and accrual apply”); OR. REV. STAT. § 81.120 (providing “the contractual rights and duties of the parties are governed by the law or laws that the parties have chosen”). Taken together, these provisions simply require Oregon courts to apply the substantive law of another jurisdiction as a court of the foreign jurisdiction would, not to transform that foreign substantive law into domestic law for a particular case. Avery’s suggested gloss of New Hampshire’s tolling statute in light of Oregon’s conflict of law regime is wholly unwarranted; it seeks to take advantage of the portions of New Hampshire law that are favorable to Avery and ignore the balance.

    Plaintiff contests the constitutionality of the New Hampshire tolling statute’s application to her, citing Abramson v. Brownstein, 897 F.2d 389 (9th Cir. 1990), which in turn relied on Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1988). We need not decide whether the New Hampshire tolling statute’s application to Avery is unconstitutional because, even if it were, Oregon law provides that Oregon’s limitation period applies if the limitation period of another state that otherwise would apply imposes an unfair burden in defending against the claim. OR. REV. STAT. § 12.450. The applicable Oregon statute of limitations for contractual claims is six years, id. § 12.080, and the action against Avery was filed within six years.

    [5] Because Avery was absent from New Hampshire at all relevant times, the statute of limitations on the claim against her was tolled under New Hampshire law and had not run by the time the Attorneys brought suit against her in Oregon. Even if the New Hampshire tolling statute were unconstitutional, OR. REV. STAT. § 12.450 would replace New Hampshire’s statute of limitations with Oregon’s six-year limitations period, under which the suit was timely. Accordingly, the district court did not err in granting summary judgment to the Attorneys on the claim that they had violated the FDCPA by attempting to collect on a time-barred debt. The district court was also correct in denying Avery’s claim for summary judgment on this issue.2

    B. Attorney’s Fees

    In an action where a federal district court exercises subject matter jurisdiction over a state law claim, so long as state law does not contradict a valid federal statute, “ ‘state law denying the right to attorney’s fees or giving a right thereto, which reflects a substantial policy of the state, should be followed.’ ” MRO Commc’ns, Inc. v. AT&T Co., 197 F.3d 1276, 1281 (9th Cir. 1999) (quoting Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 259 n.31 (1975)); see also Mangold v. Cal. Pub. Utils. Comm’n, 67 F.3d 1470, 1478 (9th Cir. 1995).

    Under Oregon choice-of-law provisions, the state law chosen by the parties to control the substantive issue under dispute also controls the issue of attorney’s fees, unless doing so would circumvent a fundamental public policy of Oregon law.

    Fiedler v. Bowler, 843 P.2d 961, 963 (Or. Ct. App. 1992). In this case, however, the district court explicitly declined to exercise subject matter jurisdiction over the state law claim, so it is unclear whether New Hampshire law or federal law controls Avery’s entitlement to attorney’s fees on the state law counterclaim. See MRO Commc’ns, 197 F.3d at 1281 (holding state law controls entitlement to attorney’s fees if the district court exercises subject matter jurisdiction over a state law claim).

    [6] We need not resolve this question, because Avery has not established her entitlement to attorney’s fees under either standard. Although the New Hampshire Supreme Court has held a party is entitled to attorney’s fees under New Hamp- shire law when the opposing party recovers nothing on a claim after a jury trial, see Van Der Stok v. Van Voorhees, 866 A.2d 972, 978 (N.H. 2005), we have not found any case in which a New Hampshire court held a party is entitled to attorney’s fees when a claim against it is dismissed without prejudice. Under federal law, a prevailing party must have experienced an alteration in the legal relationship of the parties in order to be entitled to attorney’s fees. Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of Health & Human Res., 532 U.S. 598, 605 (2001). Avery’s legal relationship with First Resolution was not altered by the district court’s dismissal without prejudice of the permissive state law counterclaims because First Resolution was free to refile those claims. See Oscar v. Alaska Dep’t of Educ. & Early Dev., 541 F.3d 978, 982 (9th Cir. 2008) (holding defendant was not a prevailing party, because defendant “remains at risk that Oscar will re-file his IDEA claim in federal court”); cf. Dattner v. Conagra Foods, Inc., 458 F.3d 98, 103 (2d Cir. 2006) (per curiam) (denying the defendant’s claim for attorney’s fees because “[a] dismissal on the ground of forum non conveniens does not, after all, immunize a defendant from the risk of further litigation on the merits of a plaintiff’s claims”).

    Accordingly, the district court did not abuse its discretion in denying Avery’s motion for attorney’s fees and costs.

    * * *


    Outcome: AFFIRMED.


    The moral of this poorly decided opinion is that NH credit card issuers can enroll out of state (in this case Oregon) holders whose debt will NEVER sunset or be subject to statutes of limitation.

    Brattle Research Associates

Contribute to the discussion!

%d bloggers like this: