The Seedy Underbelly of Debt Collection

Seems to me that anything that gives a lender an incentive to loan money without any regard to whether it gets paid back (because the debt will have been sold to someone else long before) is an assbackwards way to do lending.

 

Quite a big if.

And maybe it will get fixed when we go back to a time when interest is what drove a lender's profits. Now it's fees.

 

Oh, I never meant to suggest that he/she had been in default. It's just that he/she noted "regular" payments. And the difference, over the loan life, between "regular" payments and "always precisely on time" payments can be not so trivial.

Suppose you borrow $10,000 at 10% for 10 years (monthly payments). Your monthly payment will be $132.15. Now, further suppose that you make your very first payment on the last day before it's late (let's say that's 15 days into the month), and you do the same throughout the life of the loan. You only get hit with extra interest that one month (because the remaining 119 payments are made 30 days apart). Yet after that 120th payment, you'll still owe close to the equivalent of one month's payment.

The point is it doesn't take much (when interest rates are high) in the way of payment irregularity (just the normal stuff for those who aren't perfect, like me), for those end-of-loan amounts to be way out of whack as compared to what the coupon book says.

 

Y'all are forgetting collection fees.

Each time the debt was sold, the new buyer added in some percentage and then throw interest.

 

I was just suggesting that the party in error in that circumstance might have been the borrower, not the original lender or the subsequent holder(s) of the debt. If you're relying strictly on your coupon book, and if you haven't paid EVERY payment PRECISELY on time, that book is going to lead you astray. And if interest rates are relatively high, it can lead you VERY astray.

 

My mind keeps going back to the Tribune Company debacle.

There were red flags waving at hurricane force. And IF IF IF the only way the lenders were going to see a profit was on the 8 percent interest Zell agreed to, the deal never would have gone through. Never. Because, well, it SHOULDN'T have gone through.

Only the ancillary factors (fees, selling the debt) made just enough greedy people just blind enough to keep lurching it toward completion. "I'll get a fat bonus just as long as this horseshit deal closes, so . . . "

This e-mail by an JPMorgan Chase analyst written during the deal sums up the perverse lending climate:

"There is wide speculation that [Tribune] might have [taken on] so much debt that all of its assets aren't gonna cover the debt in case of (knock-knock) you know what. Well. that's what we [the bank's Tribune team] are saying, too. But we're doing this 'cause it's enough to cover our bank debt. So, lesson learned from this deal: our (here I mean JPM's) business strategy for TRB, but probably not only limited to TRB, is 'hit and run' --- we'll s_uck the sponsor's a$$ as long as we can s_uck out of the (dying or dead?) client's pocket, and we really don't care as long as our a$$ is well-covered. Fxxk 2nd/private guys --- they'll be swallowed by big a$$ banks like us, anyways."

They knew the debt would not be repaid. They didn't care. It's a fucked up way to do banking.

And people like me care because, SEVEN YEARS AFTER THE DEAL WENT THROUGH, we still are subject to a lawsuit filed by Aurelius Capital Management, claiming that the deal was fraudulent conveyance and thus any proceeds paid to shareholders --- i.e. BTExpress --- are subject to be clawed back FROM THOSE FORMER SHAREHOLDERS. So far the courts have given them the green light to proceed.

 

True.

But the lender can also (I would possibly even say "just as easily") be in error, particularly if the debt has been sold at least once. Record-keeping isn't so pristine on their side either.

 

Was this a private student loan? If the loan was a federal loan, it would be in default within a year of not making payments, and tax refunds and wages would be garnished within a few years.