Your Bank Will Drive You Longer in Debt Than the Return Trip

One of the options you can use to get out of debt is a Debt Management Plan (DMP) from a non-profit credit counseling agency. These groups can organize many of your unsecured debts into one monthly payment that consumers make to the agency. It is then divided up and sent along it’s merry way to the creditors in the repayment plan.

When people reach out to a credit counseling agency, often times the repayment interest rate is lowered or eliminated. But the maximum repayment term is, as far as I’m aware, 60 months, or five years.

So enjoy the irony from the latest statistics from TransUnion on auto loans. “The study found that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.”

TransUnion’s study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in Q3 2015 were between 73 and 84 month terms, compared to just 10% in Q3 2010.

So your bank will help you to go longer in debt but not longer to get out of debt. And according to decades of banking logic, that makes total sense, to someone.

Under the same heading of one department has no clue what the other department is doing, how about the fact the credit counseling departments of a bank will have a hissy fit if a credit counseling group tries to settle a debt for a consumer but the department next door will settle them all day long.

These same departments are calling the shots at credit counseling agencies and even telling them what their inbound call scripts should contain.

I don’t know about you but it sure is looking like the credit counselor policy makers and departments at banks has far too much power and control over credit counseling agencies who are trying to help consumers.

To make this issue even more absurd, when it comes to private student loans some of these banks will allow repayments for decades but when it comes to a credit card, they limit the time to repay.

But the banks alone are not to blame for the clusterf**k. Part of the blame has to rest with the Office of the Comptroller of the Currency (OCC) who puts out regulations that control what the banks can do.

When it comes to debt repayment, here is what the OCC shackles banks and consumers with.

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“Another practice often used in the collection arena is the fixed payment program. Such programs are targeted to borrowers with prolonged or severe credit problems in an attempt to both work with the borrower and to encourage continued repayment. These programs can be either “temporary” (up to 12 months, after which the account returns to its original terms) or “permanent” (whereby the account is closed and the balance fully amortized over a term that generally should not exceed 60 months). Guidance on the terms of temporary programs and programs lasting longer than 12 months are addressed by OCC Bulletin 2003-1, “Credit Card Lending: Account Management and Loss Allowance Guidance.” – Source

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But the OCC also says, “In general, cardholders should be placed in the workout program with payment terms appropriate to their hardship. The total length of time a borrower is in a workout program, on a combined basis, generally should not exceed 60 months.”

The OCC even specifically addresses credit counseling programs, “After acceptance into a CCC program, consumers generally then make their payments directly to the CCC organization, which pays the creditors. CCC programs can run for up to 60 months and are considered “permanent” workout programs under OCC Bulletin 2003-1.”

I remember once right after the 2003 guidance came out that I was the speaker at a conference of bank examiners. I brought up this 60 month repayment limit as a problem for credit counseling agencies and the room was silent. It might have been that I had said, “This silly 60 month limit is hinderance to some who want to repay.”

So let me summarize the ridiculousness of these arbitrary time limits. The banks will give loans longer than 60 months: think mortgages, car loans, student loans, but the banks can’t allow repayment plans longer than 60 months because a regulation holds them to that limit or they are penalized.

The irony is a consumer can’t take longer than 60 months to repay their unsecured debt but can legally take less than 90 days to eliminate it completely in bankruptcy.

The very same OCC regulation that allows for a 60 month workout repayment program, also allows for the same bank to enter into settlement arrangements. The document says, ” Institutions sometimes negotiate settlement agreements with borrowers who are unable to service their unsecured open-end credit. In a settlement arrangement, the institution forgives a portion of the amount owed. In exchange, the borrower agrees to pay the remaining balance either in a lump-sum payment or by amortizing the balance over a several month period. Institutions’ charge-off practices vary widely with regard to settlements.”

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But it seems the credit counseling departments of banks is penalizing credit counseling agencies for doing settlements for consumers in impossible situations. Yet if they would allow consumers to settle their outstanding debt, repay a percentage, and take payments over time, they’d wind up recovering more money and not driving people to a less expensive option like bankruptcy where about 70% of the time the bank recovers nothing.

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So it would seem that a logical alternative would be to allow credit counseling programs to deliver a modified DMP that permitted a consumer to repay what they could afford over the arbitrary 60 month limit and then forgive the rest. It’s a similar approach as in a Chapter 13 bankruptcy. Why hasn’t anyone suggested that? But they have, many years ago.

The OCC said, no way to that in 2008. – Source

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It’s a mess when credit counseling agencies just really want to help people with logical solutions and are faced with these silly hurdles.

And it gets even sillier when you understand that the OCC actually says longer repayments plans are available if the banks would just report the debts in those plans as losses and charge-offs. Instead, the banks say no to the longer plans, bundles those non-performing debts and sells them to debt buyers for pennies on the dollar.

It is all an unnaturally occurring mess that leaves the consumer tossed aside and good credit counseling agencies shoved into a corner.

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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