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221 Main Street, Suite 480 • San Francisco, California 94105 • www.consumer-action.org • Winter 08-09

About 8,000 homeowners call the HOPE hotline Foreclosure prevention (888-995-HOPE or 4673) About this issue What’s working, what’s not and why everyday. "e Alliance says that it ince mid 2007, the U.S. has been reeling has succeeded in rework- Sfrom an economic crisis that has hit Wall By Ruth Susswein foreclosure crisis through voluntary ing 2.7 million home Street and Main Street with bad news and measures, with little success to date. loans since 2007. But more bad news. couple of hundred people Treasury Secretary Henry Paulson critics charge that more Predatory mortgages and ill-advised lending gathered at a Methodist church and Federal Reserve Chairman Ben than half of these loan have led to a foreclosure crisis, real estate has in Stockton, CA, in December Bernanke handed banks $350 bil- modifications are in fact lost substantial value, lay-offs are crippling Afor a town hall meeting on foreclo- lion in Troubled Asset Relief Program repayment plans that communities, and the stock market, where sure. One homeowner could not hold (TARP) funds with no strings at- simply extend the life of many people invest their retirement savings, back tears as she told of her struggle tached and no commitment for relief the mortgage to 40 years. shed 40% of its value in 2008. to save her home. from the burden of predatory loans According to MSNBC, "is issue focuses on our current state of She is not alone in her emotion. that some homeowners are stuck over one million of these indebtedness and how consumers can take More than eight million homeowners with. Instead Secretary Paulson has repayment plans actu- charge and avoid long-term financial damage. are expected to lose their homes to supported industry efforts to rework ally increase the monthly "e issue was created by our Managing Money foreclosure in the next four years. Mil- millions of mortgages on a voluntary mortgage bill to make up Project, funded with a cy pres award from the ! lions more are already in foreclosure. basis through the Hope Now Alliance. for missed payments. Griego v. Rent-A-Center settlement. Non-profit counseling groups, some "ese not-so-modified Hope Now lenders and loan servicers, many states mortgages may explain Hope Now is an alliance of lenders, and a few federal government agen- why the latest default rates show that pleted, and it anticipates being able to loan servicers and housing counselors cies have stepped in to help save these more than half of those with loan help modify two million home loans that provides free foreclosure preven- families from financial ruin. Some of modifications have re-defaulted on this year. tion counseling and arranges for loan the programs are working, but unfor- their loans. While hundreds of thousands of ho- modifications. A loan modification is tunately, more are not. Hope Now admits that not all meowners are being helped, estimates a change in the terms of your mort- Here’s a status report on efforts be- reworked loans have been successful are that millions more will lose their gage. It can include a rate cut, rate ing made to save families from fore- but it says publicly it is very proud of homes. Georgetown University Law freeze, extended repayment period, or closure. its achievements. In early in 2009, it professor Adam Levitan attributes "e federal government has repeat- forgiveness of part of the loan bal- plans to produce a breakdown of the See “Foreclosure,” page 6 edly opted to let banks solve the ance (temporarily or permanently). type of modifications it has com-

Get rid of debt by yourself Why are we so indebted?

By Linda Sherry debt. Consumers need to be careful in By Michelle De Mooy and the perception of immediate need taking on credit card debt, especially more important to you than accumu- eing in debt means that finance if they cannot pay the balance in full ompiling debt has replaced lating debt or remaining financially charges are eating up income over a short period of time. If you apple pie and baseball as secure. that could provide a buffer in can’t pay your credit card bills in full America’s pastime. Accord- Take the “exotic” interest-only, ad- Bthese uncertain times. With disci- within a few months or so, stop using Cing to the Federal Reserve, the total justable rate mortgages—they tempt- pline, many people can tackle debt your credit cards. Use your debit card amount of credit card debt in the U.S. ed many home buyers, but left many reduction by themselves. instead. is a staggering $973 billion dollars or See “Indebted,” page 5 In deciding how to reduce your Here are some suggestions for re- about $10,678 per household. Even as indebtedness, it may help to think gaining control of your debts: credit card companies charge higher about “good debt” and “bad debt.” Assess what you owe. Gather all and higher interest rates and fees, this Not all debt is bad. Mortgage debt, your most current credit billing state- number has continued to climb. What’s inside for instance, is usually considered to ments. Include your credit cards, Are we just hamsters on the wheel be good debt. After all, how many overdraft loans, car loans, mortgage, of consumption? Or is something else 2 Credit counseling people can pull out their checkbooks home equity lines of credit, etc. In- going on? and pay hundreds of thousands of clude personal debts, too. Make a list "e answer includes both concepts. 3 When you can’t pay dollars for a house? In the case of by hand or create a computer docu- Each time you purchase a product, your credit card bill mortgage debt, homebuyers can use ment. you are at the mercy of an extremely credit to buy an asset (a home) that Get your credit report. Request cop- well researched and targeted market- 4 Debt management provides several benefits: a place to ies of your credit files for free from the ing machine. Many of today’s busi- plan or a scam? live, a tax deduction and an asset that three major credit reporting bureaus nesses have become experts in how may appreciate in value by the time at www.annualcreditreport.com. If consumers make purchasing decisions, 7 Student loan debt you sell it. you recently ordered your reports, you convening focus groups and consult- Long term and high-interest credit can use them or purchase new copies ing psychologists to understand the 8 Lenders reach out card debt and large credit card balanc- forces behind how we buy. es often are considered forms of bad See “Pay down debt,” page 5 "e goal is to make convenience Be aware that if you think you’re eli- Consumer Action Credit counseling can help gible for Medicaid benefits, based on www.consumer-action.org your medical debt, do not put these Consumer Action is a non-profit debts on a credit card. Medicaid does By Michelle De Mooy Opt for an in-person appointment 501(c)(3) advocacy and education not consider debt on a credit card to when possible. "e counselor will organization founded in 1971. We be medical debt. "is could disqualify publish surveys and distribute n a volatile and downward spiral- review your monthly income, your you from receiving Medicaid benefits. multilingual educational materials in ing economy, many Americans are bills and how current you are on your printed form and on the Internet. struggling just to make ends meet. payments. Based on this information Credit scores Consumer Action provides nonlegal IIf you are among the millions of and your input, your counselor will advice and referrals on consumer Creating and implementing a DMP problems. Chinese, English and households buried under a mountain create a repayment plan that locks you may or may not affect your credit Spanish are spoken. Call or write: of credit card balances and other debt, into fixed, monthly payments for a record. It depends on the lender and (415) 777-9635 • (213) 624-8327 it’s even harder to stay afloat. period of two to five years. Generally, how they report your account to [email protected] "ere are some ways to make a dent if it will take longer than five years to credit bureaus. Some lenders may in the mountain. For people consis- pay off your debts, most counselors report you as delinquent until a series San Francisco tently late paying their credit card will tell you that bankruptcy may be a of consecutive payments is made by 221 Main St., Suite 480 bills, who have trouble making the better option. the credit counseling service. "is San Francisco, CA 94105 minimum payment, who are hounded In fact, if it’s determined that you scenario would probably damage (415) 777-9648 Email: [email protected] by creditors and collection agencies, are too deeply in debt, you may not your credit score. Others note that or even considering bankruptcy, con- be able to create a DMP because the Ken McEldowney the consumer is enrolled in a credit Executive Director sumer credit counseling may be the credit counselor may not be able to counseling service, which is not likely next best step. Michael Heffer cut your payments enough to dig to affect your score. Business Manager Over nine million people in the U.S. you out. "is doesn’t mean they can’t Many lenders view credit counseling Kathy Li sought help from a credit counseling help you. Reputable credit counseling as a sign that the customer plans to Director, San Francisco (S.F.) Office agency in 2003, mostly as an alter- services offer a host of services along- pay off his debt. Yet others may refuse Mikael Wagner native to bankruptcy, according to side DMPs, including free educational to lend to you even after you’ve paid Director of Training/Outreach Consumer Federation of America and information and classes on the basics the debt. Ask your counselor upfront Nani Susanti Hansen the National Consumer Law Center. of budgeting and money manage- about their experiences in working Associate Director, S.F. Office Credit counseling is a professional ment. Some organizations require you with your particular creditors to find Yamin Chai service that offers personalized finan- to participate in these classes as a part out how your credit score might be Assistant Director, S.F. Office cial education and debt management. of creating a DMP. affected. FICO, probably the most Audrey Perrott While there are some agencies that are If a DMP can be created, you must important credit score, ignores any Associate Director, Training/Outreach “for profit,” most credit counseling then approve it. Next the plan is sent reference to credit counseling. Jamie Woo organizations are nonprofit and are to your creditors for approval. "is Community Outreach Manager legally obliged to provide education is where a credit counseling service Do it yourself? Joseph Ridout and counseling services to consumers. can be of most value to a consumer. Most of what a credit counselor Consumer Services Manager However, just because an organization "ey will negotiate with your credi- can do, you can do yourself. You can Angela Kwan says it’s “nonprofit,” doesn’t guarantee tors to reduce your monthly payments assess your total debt, figure out a Web Manager that its services are legitimate. (usually by waiving fees and greatly realistic payment plan, call your credi- Hazel Kong To find out if an agency is the real reducing finance charges). tors and negotiate lower or reduced Office Manager deal, check to see if it’s affiliated with At this point, you will be asked to payments, even implement a DMP. Cui Yan Xie However, some counselors have Project Associate the National Foundation for Credit cut up all of your credit cards. Virtu- Counseling (NFCC), the agency that ally all DMPs are voided if you take relationships with creditors that help Kinny Li, Tasneem Pitalwala them negotiate better terms. (For more Administrative Assistants first developed credit counseling, or on more debt or miss any payments. accredited by the Council on Accredi- When all parties have agreed to the information, see “Get rid of debt by Ricardo Perez yourself,” page 1.) Mail Room Operations tation or the Association of Inde- new repayment plan, you’ll pay the Ruth Gilbert, Schelly Gartner pendent Credit Counseling Agencies credit counseling service each month, Other services Consumer Advice Counselors (AICCA). It’s always helpful to check and they will divide up the payment Most reputable counseling agen- Loven Ko, Wilson Ku, Robert La, with the Better Business Bureau in among your creditors, in accordance cies offer a host of services related to Dennis Wong your town to see if there are com- with the plan. consumer debt, including help with Support plaints about an agency and how they It’s critical to continue monitor- foreclosure prevention. For this type Los Angeles were resolved. ing your monthly bills to ensure that of assistance, look for an agency certi- Most counseling services are offered the counseling service is honoring fied by the U.S. Department of Hous- 523 West Sixth St., Suite 1105 in-person, online, and by phone. Uni- Los Angeles, CA 90014 your plan, paying the agreed-upon ing and Urban Development (HUD) (213) 624-4631 versities, military bases, credit unions, amount on time every month. You are to provide housing counseling. "is Cher McIntyre housing authorities, and branches of ultimately responsible for any late or service can include anything from California Legislative Director the U.S. Cooperative Extension Ser- missed payments, so keep checking! the basics on buying a house to more Nelson Santiago, Linda Williams vice operate nonprofit credit counsel- If you discover that the credit complex mortgage loan modifications Community Outreach Managers ing programs. Visit the Department counseling agency has underpaid or and negotiations with banks to help (Training/Outreach Department) of Justice website (http://www.usdoj. missed any payments, contact each of people keep their homes. Counseling Guo Guang Zhuo gov/ust/eo/bapcpa/ccde/cc_approved. your creditors immediately to explain Support agencies generally offer information htm) for a list of approved credit the situation and pay what you owe. and classes on rebuilding credit, creat- Washington, DC counseling agencies in your state. "en sever your relationship with the ing and maintaining a budget, and "ough there is almost always a P.O. Box 70037 agency. long-range financial planning. Washington, DC 20037 fee for these services, it should not Debts arising from illness and "e Federal Trade Commission (202) 544-3088 be included in the monthly amount serious injury are a major cause of advises consumers to look for a non- Linda Sherry you pay to creditors. According to personal bankruptcy in the U.S. profit organization that offers coun- Director, National Priorities the NFCC, any set-up fees should with those who are uninsured or (Editor, Consumer Action News) selors who are trained and certified be “reasonable” (defined as $50 or low-income suffering the brunt of in consumer credit, money and debt Ruth Susswein less) and any monthly fees should not rising health care costs. Families are Deputy Director, National Priorities management, and budgeting. Check exceed $25. You should have the abil- frequently unprepared for the steep to see if the agency is accredited by Michelle de Mooy ity to waive all fees in case of hardship financial burden that comes from Associate, National Priorities the Council on Accreditation (www. and the agency is required to disclose an unexpected medical crisis. Often coanet.org). ! Sol Carbonell any fees to you before you even start a Associate, National Priorities insurance does not cover all costs and counseling session. there simply may not be enough sav- Healthy Children ings to cover the difference. Debt Management Plans Organizing Project Medical bills are considered “unse- "e goal of credit counseling is to cured” debt and can be included in 221 Main St., Suite 480 come up with an affordable long- Support San Francisco, CA 94105 a DMP. "e counseling agency will (415) 777-9648, Ext. 307 term plan—called a debt manage- reach out to the doctor or hospital, Consumer Action Web site: www.healthychildrensf.org ment plan or DMP—to pay off your to work out a reasonable repayment Neil Gendel debt. When you begin the process of plan. "e Internal Revenue Service Director credit counseling, you’ll work with a Give Now Online! (IRS) allows you to deduct your www.consumer-action.org/ Consumer Action News is printed by counselor who will take a thorough medical expenses if they exceed 7.5% the Alonzo Printing Company, using look at all of your debts. A typical of your adjusted gross income. Be sure join/donate recycled paper and soy-based ink. counseling session should last about © Consumer Action 2009 to ask your counselor about whether Fast, safe, secure 60 to 90 minutes, and can take place you qualify. in person, on the phone, or online.

Page 2 • Winter 08-09 • Consumer Action News Credit cards Personal bankruptcy: 7 vs. 13

What to do when you can’t any people are confused by the difference between Chapter 7 and MChapter 13 personal bankruptcies. Here are the basic differences: afford the minimum payment • Chapter 7. "rough Chapter 7—also called liquidation—filers are able to wipe out (discharge) all debts (except student loans, child support and By Ruth Susswein work and fell behind on a couple of alimony, and most taxes) and get a fresh start. Valuable assets (like cars, payments, but you’ve found a new homes, etc.) usually are sold and their cash value is divided among credi- mericans owe close to one job, you might want to ask the lender tors. Under some state homestead laws it may be possible to keep your trillion dollars in credit card to wipe out the missed payments and home if you do not have a mortgage. You must complete a “means test” to debt. If you’re having trouble bring the account current. qualify for Chapter 7. If your means (funds and other assets) are too great Amaking the minimum payment on Some lenders are willing to reduce you will have to file under Chapter 13. your credit cards each month you’re your interest rate, waive late and • Chapter 13. In Chapter 13—also called reorganization—the court not alone. over-limit fees, and even eliminate helps debtors set up a repayment plan to pay off most debts in three to five Credit card delinquencies spiked in part of the principal balance owed. years at a reduced rate. Chapter 13 bankruptcy may allow you to keep cer- the last quarter of 2008, according to For a possible reduction in principal, tain valuables that you cannot retain under Chapter 7. Chapter 13 allows the Fitch Retail Credit Card Index, investigate a debt management plan you to stop a foreclosure and catch up on overdue mortgage payments over and a wave of credit card defaults is (DMP). the 3-5 year life of the repayment plan. However, under current law your expected in 2009. While some issu- A non-profit credit counseling agen- principal residence mortgage debt cannot be reduced. You must pay your ers are more willing to negotiate these cy can help you set up a DMP to in- agreed-upon mortgage payments as part of the Chapter 13 bankruptcy days, a growing number of cardhold- clude all your credit accounts. For one repayment plan, otherwise the bankruptcy court can lift the stay and the ers find themselves with few alterna- account, you can deal directly with mortgage company can resume foreclosure proceedings. tives for a workable way out. the issuer. A DMP can be a lump sum Debtors must complete a credit counseling class before filing for bank- settlement that reduces your debt by ruptcy and a debtor education course before receiving a discharge. To find Contact the issuer up to 60% and usually must be paid approved organizations that offer these classes, visit the U.S. Trustee web If you contact your card issuer to in three to six months. Or it can be site (http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm). request help in dealing with your a multi-year repayment plan without debt, would you know what to say, any reduction in principal. (For more Learn more whom to ask for or what is realistic on DMPs see “Debt management plan • Consumer Action offers a free booklet on personal bankruptcy. Visit to expect? Issuers vary as to how far or a scam?” on page 4.) our web site (www.consumer-action.org) and pull down the tab on the they’re prepared to go in reducing a Credit counselors are dealing with upper right-hand side of the home page called “Select a Training Module.” cardholder’s debt, but most say they an increasing number of consumers "en choose “Personal Bankruptcy.” "e free guide, available online and as are interested in talking to you. who are not eligible for a short-term a PDF download, is titled “Personal Bankruptcy: Your right to a financial Issuers tell Consumer Action that debt management plan. "ese card- fresh start.” there’s more flexibility than you might holders can’t afford a reduced pay- • !e National Consumer Law Center (NCLC) offers a valuable “Guide think. Without access to home equity ment either. "e remaining options to Surviving Debt.” "e book can be purchased at book stores or from the loans and other lines of credit, lenders are ignoring the debt while it grows NCLC web site (www.consumerlaw.org) for about $20. realize that consumers have run out even bigger or filing for bankruptcy. • Nolo Press (www.nolo.com) offers excellent, clearly written books for of options to pay down their credit Card issuers must adhere to regula- consumers on filing Chapter 7 or Chapter 13 bankruptcy. Check your card balances. As these debts become tory guidelines that limit what they library or order from the web site. tougher to collect, some card compa- can offer people who fall behind. To find a bankruptcy attorney near you, contact the National Association nies are more willing to forgive part of Last year, Consumer Federation of of Consumer Bankruptcy Attorneys (www.nacba.org) or search Nolo’s Law- ! a balance in order to get paid. America (CFA) and the Financial yer Directory (www.nolo.com). — Ruth Susswein Typically lenders make these deci- Services Roundtable, representing the sions on a case-by-case basis, de- country’s biggest banks and insurers, pending on how long you’ve been a recommended to the Office of the cardholder, how often you’ve run into Comptroller of the Currency (OCC) laying around they wouldn’t be in "e National Foundation for problems paying, how late your pay- that lenders should be allowed to trouble,” said Travis Plunkett, CFA’s Credit Counseling (NFCC) recom- ments are and how likely it is that you forgive larger amounts of credit card Legislative Director. “"e goal is to mends steps creditors can take to help will pay the company back. debt than current guidelines permit. allow for serious debt reduction over people, even when the outstanding Is the reason you can’t pay because For people so deeply in debt that time.” balance cannot be reduced: you’re out of work or have a medical they don’t qualify for a DMP, a repay- CFA and the Roundtable believe • Reduce minimum payments to less problem? Is the problem temporary? ment plan was recommended that the proposal would help people who than 2% of the outstanding balance. If so, issuers may give you a tempo- would reduce the principal owed would otherwise file for bankruptcy. • Cut interest rates as low as neces- rary payment plan that reduces your by up to 40%, charge no interest, Bankers would also benefit by re- sary to pay off the debt within five minimum monthly payment. and extend the repayment period to couping a portion of what was owed, years. Start with a call to your card compa- five years. Regulators have not al- instead of having to take a total loss. • Require consumers to set aside a ny’s customer service line, and ask to lowed lenders to combine such a long However, the OCC rejected the pro- cushion of at least $25 a month for be transferred to the collections or risk repayment window with substantial posal because lenders asked to delay emergencies. department. Explain your problem reductions in principal. Under current writing off the forgiven debt until the "e NFCC says this plan is a way and say that you are willing to work rules, a repayment plan with deep cuts repayment plan was completed. "e for people who are willing but unable with the lender to come up with an in principal would typically require OCC wants lenders to account for to pay to meet their obligations. ! affordable alternative payment plan. repayment within three to six months. any losses at the time the repayment For instance, if you were out of “If people had that kind of money plan begins.

anonymously solicit and provide fi- Get Rich Slowly (www.getrichslowly. Shake that ‘all alone’ feeling nancial advice, and offers professional org/blog) says it is devoted to tips on money management, such as “sensible personal finance” and was By Michelle De Mooy credit counseling or other professional “66 Ways to Save Money Every Day.” named “Most Inspiring Money Blog” services, these informal groups pro- "e site also features financial quizzes by Money Magazine in 2008. It offers rying to pay off debt can be a vide a forum for people to discuss the to test your credit card smarts, help useful tips on budgeting, saving, lonely and depressing place. emotional impact of being in debt. you determine your money style, and getting out of debt (the blogger Blowing off steam no longer Consumers are able to commiser- discover if you’re a smart shopper. even tells a story about how he paid Tincludes dinner and a movie, just ate and share advice on the everyday Debtors Anonymous is one of the off $35,000 worth of debt), book “Grey’s Anatomy” on TV and peanut aspects of financial and debt manage- most well-known support groups. reviews, and community forums. butter and jelly sandwiches. ment. "e program is based on the 12-step Wise Bread (www.wisebread.com) Because of the stigma attached to model used by Alcoholics Anony- is geared towards living well on a Support online being in debt, many people don’t talk mous. Search online for meetings near budget. It offers advice on how to save openly about their financial situa- iVillage Debt Support Group (www. you at www.debtorsanonymous.org. money on everything from batter- ivillage.com—under Household ies to hosting a good party without tions. Except when they are online. Blogs Like so many issues, the Internet Finances) hosts a range of forums, breaking the bank. It also features a from “debt discussions” for those new Blogs have also become a respite for forum on “Deals and Coupons” that has spotlighted debt. Online support debtors seeking support. A few of the groups for people dealing with debt to the site to “check-ins” for compul- highlights good retail deals on the sive spenders. "e site allows users to best free ones include: have become commonplace. Unlike See “Support,” page 7

Consumer Action News • Winter 08-09 • Page 3 ments for a few months, the scammer Debt management plan or a scam? disappears with your money and you still owe the lender. How to tell the difference • You think you’re signing docu- ments for a new loan to make your By Linda Sherry you ask a lot of questions before Many companies advertise that they existing mortgage current—but really enrolling in a DMP. Avoid any com- can reduce your debt, negotiate with you have given unscrupulous indi- t can be very stressful if you have pany or organization that pushes debt creditors, and stop harassment from viduals ownership (the deed) to your large debts looming and you management plans as the only option. debt collectors. "e ads usually don’t home. doubt your ability to repay them. Look for an organization that offers a mention the hefty fees for the service. • You surrender the title to your IIn this situation, people may be vul- "ere is no guarantee that a creditor range of services, including budgeting, home as part of a deal that allows you nerable to offers to consolidate debts savings and debt management classes will accept partial payment of a legiti- to remain in your home as a renter, or enroll in for-profit debt manage- and that charges for its services on a mate debt. and buy it back later. But you lose all ment plans (DMPs). Beware: Many sliding scale adjusted for income. "ese companies can rarely work the rights, and the scam artist takes any of these offers may be scams that Don’t commit to participate in a kind of magic they promise. "e Fed- available equity in your home. will make your debt problems much DMP over the telephone. Get all the eral Trade Commission has brought • A scam artist offers to find a buyer worse. terms in writing. Read documents actions against many of these compa- for your home, but only if you sign If you are in serious debt, it prob- and contracts carefully before you nies for pocketing the fees and failing over the deed and move out. Once ably took you a long time to get there, sign. If you are told you need to act to provide the services. you transfer the deed, the scam artist so a “quick fix” is not realistic. Your immediately, look for another organi- Debt negotiation rents out the home and pockets the choices probably boil down to legiti- zation. High-pressure sales tactics are "ese are some “red flags” for sus- proceeds while foreclosure continues. mate debt consolidation (a difficult one sign of a scam. You lose your home—and you’re still thing to achieve), a debt management Also avoid any pect debt negotiation deals: • You are asked to responsible for the unpaid mortgage. plan administered by a non-profit agency that: (Transferring a deed to property does stop making pay- credit counseling agency or filing for • Requires a large It will take time, effort not transfer responsibility for the bankruptcy. upfront fee as a and discipline to repay ments to your cred- itors and instead mortgage.) Debt management plans condition of work- your debts in a way that • "e scam artist promises to negoti- ing with you. send the money to When you enter a DMP, the credit will improve your credit. the debt negotiation ate with your lender or to get refi- • Does not dis- counseling agency may negotiate with !ere are no quick fixes. nancing on your behalf for a fee, but close all fees and company. Be sure your creditors to accept a smaller instead he pockets the fee and files a details upfront. that your creditors monthly payment. "e DMP will bankruptcy case in your name—even • Charges for the have a working re- take up to 60 months to complete, without your knowledge. You could initial counseling session (in person or lationship with this company. Other- depending on your overall debt. lose the money you paid to the scam by telephone). wise, find a negotiator that does. Entering a plan can bring your ac- • Claims are made that using the artist as well as your home—and end • Asks you to delay payments to counts current, stop late fees and end up with a bankruptcy filing that ruins your creditors for any length of time. service will have little or no negative collection calls. Make sure you in- your credit history. • Charges more than $50 per month effect on your ability to get credit in clude all your debts. When you have for participation in a DMP. the future. Tips to avoid fraud completed a debt management pro- • Does not perform a full budget • Credit card debt can be paid off • Beware of offers or promises that gram, check your credit reports (www. for 10%-50% of the existing balance. analysis before making a recommen- seem too good to be true. annualcreditreport.com) to make sure dation. A full analysis should take at • Companies that will not send free • Debt management plans (DMPs) the debts in the DMP are reported as least an hour. information about debt negotiation are not for everyone, and may be “satisfied in full.” services unless you provide personal harmful to your credit history if you Legitimate debt management plans Debt consolidation financial information, such as credit do not include all outstanding debt, are offered by accredited non-profit Sometimes debt management plans card account numbers and outstand- employ a trustworthy organization, or consumer credit counseling organiza- can be confused with debt consolida- ing balances. fail to complete the plan. tions. "e best way to find an orga- tion. DMPs do not require you to Many states have laws regulating • It is against the law to charge in nization is through an association open a new line of credit, while debt debt negotiation companies and advance for credit repair services. of credit counselors. "e National consolidation usually does. services. Contact your state Attorney • If your English-speaking skills are Foundation for Credit Counseling Legitimate debt consolidation may General (AG) for more information. limited, bring your own trusted trans- (800-388-2227; www.nfcc.org) and be achieved by taking out a home You can find contact information for lator to any financial or homeowner- the Association of Independent Con- equity loan, a personal loan or a new your state AG at www.naag.org or in ship negotiations. sumer Credit Counseling Agencies credit card in order to pay off and the government section of your phone • Bankruptcy will remain on your (866-703-8787; www.aiccca.org) offer “consolidate” all your other debts. If directory. credit report for ten years or more referrals. the finance charge on the consolidated Lawyers legitimately may be able to and, as a legal document, is recorded Take the time to learn your state’s debt is lower overall, you achieve a assist you with debt negotiation and with your state and is a matter of licensing requirements for credit cost savings. Otherwise the only ben- settlement, but take their fees into public record. counselors. To check on non-profit efit is convenience. account. To find an attorney who • It will take time, effort and disci- status, call the state agency that Taking out additional “secured debt” focuses on debt negotiation, seek a pline to repay your debts in a way that regulates charitable organizations. with a home equity loan guaranteed referral from your state bar associa- will improve your credit. !ere are no To locate your state agency, visit the by your house can be risky—you tion. If your debt is related to income quick fixes. National Organization of State Char- could lose your home if you can’t taxes, consult with a professional tax • Don't be pressured to sign any ity Officials (www.nasconet.org/agen- make the payments. You must have attorney. contract. Take your time to review all cies). Also check with your local enough equity in your home to bor- Remember that you may owe taxes documents thoroughly. Better Business Bureau (www.bbb. row against to pay off your other on forgiven debts. • Don't sign away ownership of your org) to make sure the organization has debts. Foreclosure rescue scams house (transfer the deed) to anyone a record of good customer service. Some offers to consolidate debt may without advice from a housing coun- To protect yourself, deal only with not mention that you will be asked to Foreclosure rescue scammers find homeowners in distress through pub- selor or a reputable lawyer. nonprofit agencies that are members pledge your home as collateral until • Filing for bankruptcy will not save of the Association of Independent you are deep into the process. lic foreclosure notices in newspapers and in public files at local government your primary home from foreclosure. Consumer Credit Counseling Agen- Personal loans in limited amounts • If you stop making payments on a cies (AICCCA) or the National are available from banks, credit offices. Fraudsters may advertise on the Internet, on television, or in the credit card, the balance can continue Foundation for Credit Counseling unions and online lenders, such as to grow because of late fees and per- (NFCC). Credit.com. However, approval and newspaper; place posters on telephone poles, roadways and bus stops, or haps a higher interest rate. "e debt Also check to see if the agency is ac- the interest rate you will pay for such can be resold to a third party collector credited by the Council on Accredita- loans are tied to your credit history. leave flyers or business cards at your door. who may hound you to pay. tion (www.coanet.org). COA is a non- If you have mismanaged credit in • Federal and some state laws pro- profit accrediting organization for the past, you may have a low “credit "ese are some foreclosure related scams to beware of: hibit companies from charging for social service programs. On the COA score.” "is is a number derived from credit repair services until the services web site, choose “Individual Seeking the information in your credit report. • "e scam artist tells you that he can negotiate a deal with your lender have been fully performed. Ask your Information” at top, then “Who is Lenders use it to decide whether or AG’s office for the details. Accredited?” on the left. Click on the not to grant you credit, and what to save your home if you pay a fee. Once you pay, the scam artist takes • Before doing business with any U.S. flag and choose your state from interest rate they will charge. firm, check the company with your the list. You will see all accredited Your credit history also figures off with your money. • You are asked to make all your state AG, local consumer protection agencies in your state. greatly in your ability to find a new agency, and the Better Business Bu- mortgage payments directly to the Be aware that DMPs are not right credit card with a lower rate and a reau. Ask if the company is required for everyone. "e Federal Trade Com- credit limit large enough to cover your scam artists while they negotiate with the lender. After collecting your pay- to be licensed and, if so, check the mission (www.ftc.gov) recommends existing debts. license. !

Page 4 • Winter 08-09 • Consumer Action News cally request a printed receipt for the vacation or should be able to buy a contributing to debt. Here are a few Indebted transaction or account balance. "is large screen TV, despite your debts, suggestions to begin your own market Continued from page 1 can leave you so disconnected from you might decide to ignore what’s in research: your transactions that you may not your bank account and buy it anyway. • Knowledge is power: Be real with in dire financial straits. "ese loans realize the financial impact until the We have positive associations with yourself. Keep a budget. Know ev- allowed people to suspend disbelief damage is done. having money, such as being in erything there is to know about your and buy way more house than they Yet at the end of the shopping day, control of our destiny. Conversely, money. Know where it goes and how could afford. we are responsible for our own actions being in debt carries the stigma of much you really have left after bills "e exotic loans removed the deter- and spending habits. No amount of shame. Rather than reaching out for and taxes. rent of having to pay both principal savvy marketing can physically force help, many people may continue try- • Avoid trigger points: If you can’t and interest (P&I) on a fixed 30-year you to buy, nor can it stop you from ing to keep up with the Joneses and resist buying $200 worth of stuff at loan. Initial low “teaser” rates and putting your card back in your wallet maintain the illusion of wealth, even Wal-Mart, don’t go there. interest-only payments were tantaliz- and walking away. while their homes are being foreclosed • See a bigger picture: Create long- ingly low by comparison. upon. (See the article on debt support term financial goals, like buying a Buyers were qualified for the loans Eye of the beholder groups on page 2.) house or saving for a child’s college based on whether they could pay the Along with savvy marketing, our Circumstances can play a major role tuition. Use your goals as a reminder artificially lower initial payments— money decisions are swayed by our in debt accumulation. Situational when you’re tempted to live beyond not on the eventual day of reckoning, emotions. Having money is inextri- changes can intervene unexpect- your means. when the loans would reset to unaf- cably linked with a sense of security edly. "e slippery slope of debt often • You are not your money: Find a fordable levels and no inroads had and well-being, and it makes us feel in begins with a traumatic, life-changing purpose outside of material things, been made on the principal. control even when event such as the such as spending time with your fam- It’s little wonder that so many we, ironically, are Rather than reaching out loss of a job, the ily or volunteering at a local non-prof- people were seduced. not. for help, many people may end of a marriage, it. "ere’s more to life than spending. Credit card companies also bank on Parents might buy or a debilitating • Trick yourself: Automate, auto- this philosophy. Whether or not you their children gifts continue trying to keep up illness. mate, automate. Most banks make it have paid off your debt, they have they can’t afford, as with the Joneses. Many of us live easy to pay your bills automatically. (until recently) increased credit lines, evidenced by the on the edge of • Pay yourself first: When pay- dangling the ability to buy more in re-emergence of debt, making minimum payments ing your bills, include a set amount front of you, as you become more lay-away programs at discount stores on credit cards and living paycheck each month for savings. Set up an indebted to them. like Kmart. We buy to make the kids to paycheck, with little to no savings. automatic transfer to your savings ac- happy and provide for them, even Distancing effect Unexpected expenses can plunge us count. Out of sight, out of mind. when the reality is that we are chip- into financial disaster. • Use cash: Making your spending Creditors capitalize on a “distancing ping away at family stability. effect” that occurs with credit—the more real increases the chance that Studies show that people with low Wake up call? you’ll use your money carefully. “buy now, pay later” seduction. For self-esteem tend to do more impulse "e rude reality of being far behind some, credit isn’t “real” money and buying, suggesting that our inner lives on bills and unable to purchase neces- Keep learning racking up purchases feels more like have a direct impact on our relation- sities can be a wake-up call for some, To learn more about how we view adding random numbers to a sheet of ships with money. but it can also tap into a kind of de- money as a nation of consumers and paper than spending hard-earned dol- nial. Sometimes people continue rack- ways to tackle our (mis)perceptions, lars on wants instead of needs. Economic reality? ing up debt even after this happens. here are a few books on the subject: "is effect can also happen when we Perception is another critical piece According to a Bankrate.com Finan- Your Money or Your Life, by Joseph purchase items online. Retailers make in the psychology behind debt. Ac- cial Literacy Survey, many Americans R. Dominguez and Vicki Robin. it easy to enter the numbers of your cording to Tahira Hira, founder of the live in a constant state of financial Money Harmony, by Olivia Mellan. credit or debit card before you think Family Financial Counseling Clinic at ignorance or denial. "e non-profit Consuming Passions: Help for Com- twice—and with the click of a mouse Iowa State University, many consum- financial health organization Myvesta pulsive Shoppers, by Ellen Mohr Cata- any item is yours. ers have a perception of their econom- found that nearly one-quarter of lano and Nina Sonenberg. Even ATMs seem to produce money ic class that is not based on economic Americans don’t look at their credit Get these books and others like from an anonymous place, rather than reality. "ey spend at that perceived card statements every month. them from your local library! It won’t from your bank account. At most level whether they can afford to or "ere are ways to beat both the cost a cent. ! ATM machines you have to specifi- not. If you feel you “deserve” a nice marketing and emotional factors

Plan your grocery needs weekly, replace if they fail. Make a schedule to your savings account. Each time Pay down debt pack your lunch and cook at home. of big bills like insurance or property you cut an expense or pay off a debt, Continued from page 1 Seek out free entertainment such as taxes that come only once or twice a add the money you were paying to magazines, books and DVDs at your year. Keep this list in mind in trans- the transfer amount. Or contribute local library. At the library, check out ferring funds to your saving account. the “found” money to your retirement for $10-$15 each. Compare the active books on becoming debt free. Con- If a big car repair bill comes up un- account. credit accounts listed on your credit sider giving up your gym membership expectedly you’ll be more prepared to Plan ahead for splurges. You need reports to your own list to make sure and start walking, biking or running handle it. some fun in life. But try to plan your all outstanding debts are accounted outside. Or exercise at home with TV Pay more than the minimum. treats in advance and in small doses for. fitness programs. Always pay more than the “minimum so you will stay in control of your Rewrite the list. Copy your debt list Create a budget. "ere is lots of free payment” asked for by your credi- money. again, this time listing the debts in the help out there. Software you already tors. Even a small extra amount can Fall off the wagon, but get right order you plan to repay them. For in- own may provide free templates. Does shorten the amount of time it takes to back on. Borrow a trick from success- stance, at the top of the list, you could your bank offer free tools? (Bank of pay off your debts. Paying one ad- ful dieters—accept lapses, don’t beat place your highest balance, highest America’s My Portfolio or PNC Vir- ditional mortgage payment each year yourself up, and start up where you interest rate credit card. Your 30-year, tual Wallet are will retire your left off. fixed rate mortgage would be the last two—ask your mortgage ear- Seek professional help. If you just debt to be fully repaid. Even a small extra payment can own bank what lier. If you have can’t do it on your own, seek help. Set realistic goals for repayment. it has available.) shorten the amount of time it an adjustable Join or create a support group of Provide “mile markers” that you "ere are takes to pay off your debts. rate mortgage, like-minded people. Investigate credit hope to meet in six months, or a many free bud- paying part of card “work out” plans offered by your year. When you reach a mile marker, geting services the principal card issuer. Look into consumer credit reward yourself in a way that does on the internet including: will mean that at your next adjust- counseling programs, which offer low- not require you to spend a lot or take • CNNMoney.com—Instant Budget ment, your payment will be figured cost budgeting sessions and classes. out more debt. "e reward gives you Maker (http://cgi.money.cnn.com/ on a lower balance. "e National Foundation for Credit something to look forward to and tools/instantbudget/instantbudget_ Increase your income. Get creative! Counseling (800-388-2227, www. keeps you motivated. 101.jsp) Sell household goods or seek addi- nfcc.org) can help you find a program Reduce expenses. Shop only when • Crown Financial Ministries— tional employment (sewing, cooking, near you. necessary. Avoid recreational shop- Spending Plan Online (www.crown. yard work, bookkeeping, etc.) on Share your secrets. In this economy, ping. Consider thrift shops, garage org/Tools/Calculators/Budgeting_ Craig’s List. Run errands for house- we need all the help and support we sales and consignment shops for SpendingPlan.asp) bound seniors. (But avoid “work at can get! If you have great tips for tack- clothing and necessary household • Mint.com (www.mint.com) home” offers, as they are almost sure ling debt, write to Consumer Action goods. Check out Craig’s List (www. Anticipate major purchases or bills. to be scams!) so that others can try your techniques. craigslist.org) and Free Cycle (www. Take note of the age and condition of Save, save, save. Set up an automatic Email the Consumer Action editor: freecycle.org) for things you need. things you own that will be costly to transfer from your checking account [email protected]. !

Consumer Action News • Winter 08-09 • Page 5 government. Fewer than 100 people Foreclosure are currently participating in the Fight foreclosure with all you’ve got Continued from page 1 plan. "e Federal Housing Authority (FHA) has since revised the program ou can’t pay your mortgage bill. Denial won’t help anything. It’s time to the failure to solve the problem on to encourage participation, but so far make a call and see if you can get some help. Here are some things you lenders’ focus on repayment plans vs. it has produced dismal results. Y can do to give your SOS its best shot. actual loan modifications that would Many mortgages that are modi- Be prepared. Whether you plan to speak with your mortgage lender or permanently change a loan’s interest fied offer a reduced interest rate for servicer, or meet with a HUD-approved housing counselor, be organized rate or reduce the principal balance. only three to five years. "en the rate and be prepared. rises—sometimes to its original rate, FDIC to the rescue Have the right documents at hand, including your: other times to a current market rate. Sheila Bair, head of the Federal De- • Latest loan statement and loan number. A five-year modification is typically posit Insurance Corporation (FDIC), • Pay stub or proof of income. used by Hope Now, Fannie Mae, is the only bank regulator who has • Homeowner’s insurance . Freddie Mac and many other play- taken action to prevent foreclosures • Property tax information. ers in the loan modification business. in a more systematic way. Since the • Information on other debts (monthly bills). "is solution will work for some FDIC took over failed lender Indy- • Bank account statements (past two months). homeowners, while many more bor- Mac last summer, it has reworked Be clear. You’ll need to explain why you can no longer afford your mort- rowers may find themselves back in mortgages for eligible IndyMac gage payment, and whether the problem is temporary or permanent. Write trouble five years from now. customers by reducing interest rates down your thoughts before the call. as low as three percent for up to five Roadblocks Be patient. Housing counselors will spend at least 20 to 30 hours (often years and offering loan extensions. A Servicers. "e servicer is the com- more) working to prevent your home from going into foreclosure. "at loan extension increases the length of pany that sends you a bill and collects includes meeting with you, examining your documents, negotiating with time allowed to repay the loan, while your mortgage payment, but usually lenders/servicers, advocating for you and working out a modified mortgage leaving the rate the same. does not own the loan. Servicers are plan, etc. "e FDIC’s big breakthrough in its blamed for many delays in loan modi- Be cautious. If you are able to modify your loan, be sure you understand IndyMac refinancing plan was to base fications. the agreement that you’ve reached with your lender/servicer. Be able to loan modifications on homeowner af- Days after you close on your home, answer these questions before agreeing to anything: fordability. "e FDIC was calculating your loan probably will be bundled • Is the reduced interest rate temporary? If so, for how long and what mortgage payments at no more than with hundreds of other mortgages does the rate change to? 38% of a homeowner’s income. and sold to investors. Servicers collect • Does this payment include principal and interest (P&I)? Mortgage buyers Fannie Mae and payments and manage the loans for • Am I being asked to add missed payments to the original loan amount? Freddie Mac took Bair’s lead in investors, but servicers may not have • Can I afford the modified monthly mortgage payment? Is it less than I November and streamlined its loan the authority to change the terms of was paying? modifications to qualify homeowners the loan. Since about 80% of loans • Are there any fees for modifying the loan and can they be waived? based on 38% of income. end up owned by investors, this Be realistic. Not every home can be saved from foreclosure. Some home In November 2008, Bair called on makes modifying mortgages extremely loans were never affordable in the first place and no modification will make the U.S. government to increase its ef- difficult. them so. If a borrower has been unemployed for several months with no forts and modify more than two mil- Second mortgages. Even if your job prospects in sight, modification may not be attainable. If it is not a lion troubled mortgages using TARP lender agrees to modify your loan, the realistic goal for you, ask what you can do to avoid foreclosure and limit money (bailout funds). Bair’s new and owner of your home equity loan, or damage to your credit record and your chance of owning a home again in improved plan would: second mortgage, must approve the the future. Inquire about alternatives such as a short sale or deed in lieu of • Limit a borrower’s mortgage pay- deal or it won’t happen. foreclosure. ment to 31% of monthly income. Upside down houses. If your house Be heard. Counselors, lenders and servicers are overwhelmed by the num- • Guarantee that the federal govern- is worth far less than what you owe, ber of people who need help. If you’ve had no success reaching a counselor ment would pay the mortgage holder as is the case for many homeowners, or lender/servicer and you’re at risk of losing your home, contact your half of the loss. who should take the loss? "e lender, Congressional representatives for help. Some legislators have devoted staff • Lower interest rates to 3%. the investor, the homeowner, or the to help people prevent foreclosure and save their homes. ! • Defer some principal. taxpayer? Some rescue programs try to — Ruth Susswein • Extend some loans. make all parties share the loss. • Pay the servicer $1,000 for modi- No standardization. Unfortu- fying the loan. nately, there is no standard for loan tions.” contacting homeowners to offer this However the Bush administration modifications. Loan modifications or Who qualifies. While a recent Los assistance. (For details, see “Lenders has not embraced the FDIC’s foreclo- repayment plans can mean rate cuts, Angeles Times poll found that a major- reach out to customers,” page 8.) sure prevention plan. Instead the Ad- principal balance reductions, rate ity of Americans would support using Many states have set up their own ministration has worked to reduce in- freezes, rate reset freezes, extended tax dollars to help bail out homeown- foreclosure prevention programs. terest rates to spur investment, restart payment periods or all of the above. A ers, there is great debate about who Check with your state AG’s office to the housing market and raise home unified approach might solve some of should be eligible for mortgage modi- learn if there is such a program in values. "e Federal Reserve plan to the problems, fications. Most agree that only those your area. (Find your AG using the buy up part of the debt behind Fan- Delinquency. Many programs, such who genuinely can’t pay through no online directory at www.naag.org.) nie Mae and Freddie Mac mortgages as Fannie Mae and Freddie Mac, fault of their own should qualify. Consumer groups have called on spurred interest rates to drop to their require homeowners to be 90 days Some loan modification programs Congress to require lenders to enter lowest levels in five years, but it is very delinquent on their mortgage before have strict requirements that disqual- into mortgage modification plans for tough to qualify for such loans. the loan can be modified. Homeown- ify many candidates for not meeting the sake of individual families, neigh- "e government also created ers with adjustable rate mortgages arbitrary standards, such as the length borhoods and for the well being of the FHASecure, a plan intended to help who know that their interest rates will of time you’ve been paying the loan. entire economy. With the exception of subprime borrowers refinance when increase (reset) shortly to unaffordable Modifications that won’t work. So the AGs’ lawsuits, none of the current their adjustable interest rates reset levels, often must wait until they’re far even the most effective housing plans require lenders to participate. and become unaffordable. Subprime behind before they can find help. counselors are only keeping about borrowers generally are people who Happily, some large lenders like 25% of their clients out of foreclo- Judicial modifications are charged higher interest rates due Citi, Chase and Bank of America/ sure. Reasons ranging from job loss to One approach to stemming the to poor credit histories, but some Countrywide are now willing to work huge medical bills make modification flood of foreclosures would be to borrowers have been put in this high with borrowers who are not yet delin- unrealistic for many. Some consumers allow bankruptcy court judges to cost category for no reason at all. quent. were sold a mortgage with a reset rate modify the mortgages on primary FHASecure has only helped a limited Other debts. Whatever formula is they could not afford. Many people homes when people file Chapter 13. number of homeowners refinance and used to calculate affordability must took out adjustable rate mortgages "is option is now available to people is no longer accepting applicants. include other monthly debts such as with a plan to refinance a home that who want to save vacation homes, Congress passed the Hope for Ho- a car loan, student loan, and second was expected to rise in value. Many of boats or farms. Currently judges are meowners (H4H) plan, which offers mortgage. Otherwise it is not a realis- them learned the hard way that home not allowed to apply the same protec- relief by refinancing borrowers into tic repayment plan. values don’t always go up. tion to a person’s primary residence. 30-year fixed rate mortgages backed “Even the smallest problems become "e Helping Families Save "eir by the government. "is program big when all of a homeowner’s regular Workable prevention plans Home in Bankruptcy Act (S.61) requires sacrifices from all par- debts are not captured on the front "is past fall, attorneys general would change that. It would require ties. Lenders would refinance loans end,” says Bruce Dorpalen, director (AGs) in 14 states reached agreement lenders to modify loans—and at no based on 90% of a home’s current of loss mitigation and housing coun- with Bank of America/Countrywide cost to taxpayers. Consumer Action value. Homeowners would have to seling for Acorn Housing. “We need to freeze foreclosures and modify as supports S.61 introduced by Senator share future housing profits with the sustainable, long-term loan modifica- many as 400,000 mortgages. BofA is See “Foreclosure,” page 7

Page 6 • Winter 08-09 • Consumer Action News for Undergraduate Students (PLUS) Renter’s rights in Student loan debt that requires the borrower not have an foreclosure cases “adverse credit history,” which might Mortgaging the future include things like defaulted loans, enters are often caught in the bankruptcy, or foreclosure. Rmiddle when a property owner By Michelle De Mooy combining several student loans from Private lenders generally use the faces foreclosure. Tenants typically different lenders into one bigger loan FICO score to determine eligibil- are evicted from foreclosed properties xpecting a car or a trip to from a single lender. Consolidating ity and the interest rate for loans. To even if they are up-to-date on rent. Europe as a college graduation should allow the loan holder to reduce determine your interest rate, lenders Mortgage funder Fannie Mae made gift? How about tens of thou- the interest rate and pay a single use a tiered rating system that pits Esands of dollars in debt instead? monthly payment. "e downside is your score against other loan appli- news lately when it agreed to let renters remain in their homes despite As the costs of education rise, more there is usually an increase in the total cants. Students with poorer scores foreclosure. On properties acquired and more students and families are interest paid over the life of the loan. sometimes receive rates that are up to by Fannie Mae in foreclosures, tenants being forced to take on huge sums of "e interest rate on a consolidation six percentage points higher than bor- who stay current with the rent will personal debt. A 2007 study from "e loan is determined by averaging the rowers with good scores, according to not be evicted. Project on Student Debt reports that interest rates on all of the loans being FinAid.org. "ey also may be offered Responding to a threat of legal the average college student graduates consolidated, and has been capped at smaller loans with more restrictions action by the New Haven Legal As- with $21,900 in student loan debt, a 8.25%. on how the money is spent. sistance Association in Connecticut, six percent increase from 2006. Unfortunately, private student loans A small crop of private education Fannie Mae agreed to sign new leases Making sense of complex student cannot, in general, be consolidated loans has begun to use criteria other with current tenants or help them loans can in itself be an education, with federal student loans, nor would than credit scores. MyRichUncle of- find new housing. and because it could be the largest it be necessarily a smart thing to do. fers a “PrePrime” loan that uses a host While Fannie Mae deals with only loan you’ll take out—next to your Federal loans offer more flexibility of alternative criteria, including your a small portion of renters, it is hoped mortgage—it’s critical to understand and protections to borrowers than college’s reputation and your GPA that the mortgage funder’s actions will your options. private loans, which could disappear and major. "e interest rate for this serve as a model for other lenders. ! "ere are two basic types of loans, if you combine them. It is possible to loan is based on the prime rate. — R.S. federally-backed and private. consolidate private student loans with Some lenders have begun offer- "e U.S. government issues or backs other private student loans. ing schools a small pool of money federal loans, with (normally low) in- within their normal funding that they terest rates set by Congress each year, Bankruptcy may use to make loans to students Support through two programs. U.S. bankruptcy law is not on the on criteria outside of credit scores. Continued from page 3 "e Federal Direct Student Loan side of student loan borrowers. Private "e schools determine how they will Program (FDSLP) provides loans and federal student loans are not dis- judge applicants—for example, some web and off-line. to students directly from the gov- chargeable, which means you would schools may weigh major and course Money Smart Life was started by ernment, while the Federal Family still owe them even after filing bank- load more heavily—and provide loans a 20-something chronicling his own Education Program (FFEL) uses an ruptcy. "ough federal loans offer accordingly. bad money decisions. "e site (www. intermediary, such as Sallie Mae, to some protection to students outside moneysmartlife.com) features advice Tips loan money to students but then of bankruptcy, such as repayment on topics from finding a job to reduc- Closely examining all the disclosures guarantees the loans against default. flexibility in cases of unemployment, ing your restaurant bill. for your student loans will not only Students qualify for federal loans death, and disability, private loans help protect your credit, it will ensure Online counseling based on demonstrated financial need. provide no protection at all to bor- that you aren’t paying unnecessary Many credit counseling services have "e government sets the interest rowers and are essentially owed for life and expensive loan fees now and in also begun to go virtual and offer on- rate for its loans every July. Lenders (or until they are paid off). "is may the future. Always read the fine print line classes and counseling for people who offer federal student loans are mean that banks have a lot of incen- of your loan contract. Take note of in debt. ! not allowed to increase this set inter- tive to give you a risky, large loan, the length of the loan term (normally est rate but they may offer reductions even if you can’t afford it because 10 years), the monthly payments, and depending on factors such as whether there is no avoiding paying it off. the interest rate, as well as how inter- you pay electronically and on time. "ere is one small provision in Foreclosure est rates might fluctuate over time. Federally backed loans cap how much bankruptcy law that allows the bor- Among the few benefits of paying off Continued from page 6 money you can borrow in one year, so rower to file for “undue hardship,” student loans is that any interest you many students turn to private loans to which is ultimately approved or Richard Durbin (D-IL). pay, for private or public loans, is tax fill in the financial gaps. denied by a bankruptcy judge. People "is approach is expected to who aren’t able to both pay a modest deductible within income limits. encourage lenders and investors who Interest rent and their student loan bills even Find out when repayment begins on have been unwilling to refinance Interest on both private and fed- after filing for bankruptcy can file a your loans, which is generally after home loans, to take action even before eral loans starts accruing as soon petition for this. Check with an at- you graduate but varies by loan and a homeowner files for Chapter 13 as you take out the loan. However, torney for details on this. lender. For many lenders, you may bankruptcy. (See an explanation of many federal loans (but not all) are be expected to begin paying back the Chapter 13 on page 3.) “subsidized” by the government. "e Wages garnished loan immediately if you drop out of Major lenders, like Citigroup, have subsidy covers the cost of interest that Defaulting on your student loan can school or fall below a certain number recently thrown support behind accrues on the loan while in school, be financially devastating. Not only of enrollment hours. Alert your lender judicial modification, but only if the during deferments, and for a short will the default greatly damage your if you change your address or tele- legislation is limited to existing loans time after you graduate. Once out credit score, but up to 15% of your phone number, so that you don’t miss and limits penalties to lenders for of school, you will be responsible for salary can be garnished, or forcibly any payments or important commu- violating consumer protection laws. full repayment of the loan, including taken, by the lender. Lenders are also nications. Industry support is likely to help the interest charges. legally allowed to seize your IRS tax Avoid default if at all possible. If you bill’s passage. Private student loans are issued and refund, if necessary, to pay off your default on the loan, which generally backed by a variety of non-govern- debt. occurs after you miss multiple pay- Homeowner help However, it’s possible to avoid these Homeowners can negotiate directly mental organizations. "e interest ments in a row, you will owe the total rates on private loans are variable and drastic scenarios. If you are struggling loan balance immediately, plus any with lenders or they can have a repu- to make your monthly payments, table non-profit housing counseling set by the organizations themselves, collection fees. You will also damage and can be as high as those on credit call your lender to discuss a solu- your credit record. A student loan in agency represent them at no cost. tion, which could be an interest rate If you are having no luck reaching cards. Private loans are generally “un- default stays on your credit record for subsidized” which means, once you reduction, a temporary period of no seven years after it’s paid in full. the right people at your mortgage payments, or a consolidation loan. It’s company or you are not comfortable begin repaying the loan, you will owe Again, if you are having trouble any interest that accrued while you in both your interests to work out a making payments, there are options. negotiating, try contacting a housing repayment plan. counseling agency. were in school, and any that accrues Call or write your lender to let them If you are seeking a loan modifica- during the grace period or deferment. Credit score know your situation and request tion, gather all the documents needed Some private lenders may even require Your credit score plays an integral forbearance (a delay in payment for a to make the case that you can no repayment of the interest while you role in determining the kind of pri- set period of time, although interest longer afford your mortgage payment. are in school, so check the fine print vate student loan you will get. (If you continues to accumulate) or ask to Have pay stubs, tax returns, copies on your loan contract. have a co-signer, his or her score also renegotiate a payment plan. of monthly bills and your mortgage Banks and credit unions usually of- has impact.) For assistance, start with the Depart- account number handy to begin the fer a variety of student loan options, However, your score is not a fac- ment of Education’s Federal Student ! including federally-backed and private tor for federal education loans. An Aid Ombudsman at www.fsahelp. conversation. ! subsidized and unsubsidized loans. exception is the federal Parent Loan ed.gov or 877- 557-2575. Consolidation is the process of

Consumer Action News • Winter 08-09 • Page 7 Lenders are reaching out to Debt collectors must follow the law nder the Fair Debt Collection Practices Act, third party collectors (but customers at risk of trouble Unot the original owners of the debt) are prevented from: • Contacting you before 8 a.m. or after 9 p.m. By Ruth Susswein "rough its Homeownership Re- • Calling you at work if you tell them your employer disapproves of per- tention Program, the company has sonal calls. fter luring people into debt been contacting customers who need • Using threats of violence or harm, or obscene or profane language. with unlimited credit card of- or may soon need (after adjustable • Repeatedly harassing you by phone. fers, unrequested credit limit rate resets) to modify their mortgages • Implying that you’ve committed a crime or will be arrested if you do Aincreases and home loans that were by reducing interest rates, extending not pay your debt. too good to be true, lenders are reel- loan terms, and, as a last resort, even • Telling anyone other than you and your attorney (if you have one) that ing from record levels of delinquen- reducing principal balances. "is ap- you owe the debt. cies and foreclosures. proach is expected to help as many as For more information about your right to dispute a debt under the law, Some banks are coping with this 400,000 homeowners. visit Consumer Action’s web site (www.consumer-action.org) and click on new reality and cutting their losses Frequently Asked Questions under the Help Desk. See the Debt category. by lowering credit limits, closing ac- Agreement with AGs You can also call or email our hotline (see page 3) for advice. ! counts, and raising interest rates. In an agreement with 14 state Attor- "ese practices are hitting even good neys General, Bank of America is: • Freezing foreclosures for anyone customers. In this rocky economy, tion. 915-9417 if you are already delin- banks are defensive because even good who is working on a modification. • Working to offer the same modi- BofA/Countrywide loan modifica- quent, or at 800-MORTGAGE if customers might become a credit risk. tions also vary depending on whether you are not behind. On the web, visit To address the risk of default on fications for the loans they service as well as the ones they own. the bank owns or services the loan. www.mortgagehelp.citi.com. a system-wide basis, companies are When the bank owns the loans, it increasing credit card rates across the • Waiving delinquency fees. Chase mortgages For high priced subprime and op- can control mortgage modifications.If board because of “market conditions.” it only services the loan, it may have JP Morgan Chase (new owner of In December, Chase hiked mini- tion ARM (flexible payment mort- Washington Mutual) has frozen gages), the bank is: less flexibility in making modifica- mum payments for some cardholders tions. "is has been a stumbling block foreclosures and is working to lower from two to five percent of the bal- • Offering three to five year exten- interest rates or temporarily reduce sions on introductory rates (or drop- for many troubled homeowners seek- ance. When customers complained, ing loan modifications. loan balances, particularly for sub- Chase let cardholders avoid a higher ping rates as low as 3.5%) and con- prime borrowers. (Subprime borrow- verting to a fixed rate in five years. Some servicers and lenders are of- minimum payment if they accepted a fering temporary modifications. For ers typically pay higher interest rates higher interest rate instead. • For some homeowners, the prin- for loans.) cipal is reduced to approach or equal instance, some modifications last only three years, after which the loan Chase’s Mortgage Modification Hot- A helping hand the home’s current value. line is 866-550-5705. However, some lenders have adopted • Mortgage payments are targeted to reverts to its original rate. a proactive approach to reach out to 34% of monthly income. “In three years, the homeowner Hope Now customers to help them stay afloat. Relocation funds are also available may have other options. "eir credit To reach the lending industry’s “It’s in the best interest of banks for homeowners who have completed score may be improved or the house Hope Now hotline for free referrals, and their shareholders to help their foreclosure. may have much greater value and the counseling and efforts at preventing cardholders,” points out Linda Sherry, BofA /Countrywide may consider homeowner may be able to afford the foreclosure, contact 888-995-HOPE director of national priorities for other types of modifications such as a [original] loan, or we may do another (4673) or www.hopenow.com. mod in three years. "e goal is a sus- Consumer Action. “If huge numbers repayment plan with temporary sus- Credit card issuers of cardholders default, the companies pensions (forbearance) or reductions tainable, affordable loan,” says Jerry themselves may face bankruptcy and in mortgage payments. In some cases, Durham, Countrywide’s vice presi- Some card companies, such as there will be a lot of very unhappy these missed payments are added to dent of homeownership preservation. American Express, are offering tempo- investors.” the end of the loan, extending repay- BofA/Countrywide’s Homeowner- rary customized payment plans, flex- Some mortgage lenders have agreed ment and increasing the overall cost. ship Preservation Hotline is 800-661- ibility with rates, fees and the length to modify some mortgages to avoid If one of these arrangements still is 9917. of repayment time. Discover says it is devoting more foreclosure. Both banks and mortgage not affordable, homeowners may be Citi mortgage loans holders benefit when loan modifica- offered the chance to avoid foreclosure of its staff to borrowers who need Citigroup is contacting up to half help. Bank of America is waiving tions prevent foreclosures. by selling the house through a short a million homeowners in high de- Housing values plunged in 2008, sale in which the lender approves a fees, reducing interest rates for some fault parts of the country (such as customers and adding collection staff. leaving many homeowners “upside sale for less than what is owed on the California, Arizona, Florida and the down”—owing more than their loan and writes off the balance. Citi offers a settlement program for Midwest) to prevent defaults before cardholders who are very behind on homes are worth. With unemploy- Other options may be “deed in lieu homeowners fall behind. ment figures continuing to grow, there of foreclosure” in which the borrower their payments. Capital One offers "e bank is offering a moratorium APR reductions and is reaching out are record numbers of people who can gives the deed to the lender. "is ap- on foreclosures for homeowners who no longer afford their monthly mort- proach results in losing the home, but to cardholders who miss a payment to live in their homes and who have work out an early solution. Each is- gage payments. it is less damaging to the homeowner’s sufficient income to meet a modi- Bank of America, which now owns credit record. suer says debt reduction decisions are fied repayment plan. Citi may offer made on a case-by-case basis. the nation’s largest home loan lender, Another arrangement, cash for keys, rate reductions or loan extensions to Countrywide, is offering eligible means you lose the home but are For more information on how to homeowners. handle credit card debt, see “What to borrowers a variety of loan workout given some cash to move out quickly Citi’s Office of Homeownership programs. and leave the property in good condi- do when you can’t make the mini- Preservation can be reached at 866- mum payment” on page 3. Lenders state that the best way to arrange for a loan workout plan is " to communicate with them. While Join Consumer Action many consumers say they get the cold Consumer Action depends on the financial support of individuals. All members receive a subscription to CA News. New members shoulder when they contact lenders, also receive our popular How to Complain booklet. In addition, members have the satisfaction of supporting our advocacy efforts in the companies say it works the other California and nationally, a free hotline and the distribution of more than one million free educational brochures a year. way too. Attempts to contact troubled $25, Regular Membership. borrowers often are ignored, making $35, Regular Membership (first class mailing). it impossible to devise an affordable $15, Senior or Student Membership. solution. $10, Low Income Membership. Some lenders are giving cardholders $50, Corporate Subscription (first class mailing, and all CA press releases). $_____ Additional donation to CA’s Publication’s Fund, supporting the free distribution of CA materials to consumers. incentives to get in touch. Entice- ments include free phone cards being Name Address mailed to delinquent customers. When the customer calls to activate the card the collection department City State ZIP tries to negotiate a settlement for what is owed. Mail to: Consumer Action, 221 Main St., Suite 480, San Francisco, CA 94105. 02/09 Always get the terms of any debt Donations to Consumer Action are tax-deductible. workout program in writing. !

Page 8 • Winter 08-09 • Consumer Action News