Tess Vigeland: So complete debt forgiveness isn't likely unless you go through bankruptcy or maybe a short sale. Both have other consequences to bear in mind, as we've discussed before. But this week, the American Banker magazine reported that JPMorgan Chase appears to be backing off efforts to collect unpaid credit card debt from its customers. They're not forgiving the debt, but they've quietly stopped going after it.
We're talking about this with Christopher Whalen, a banking industry analyst with Tangent Capital Partners in New York. Thanks for helping us out today.
Christopher Whalen: Thank you.
Vigeland: Describe for us what you know of what exactly is going on here. It sounds like basically we may be looking at a robo-signing problem with credit card collections.
Whalen: Yeah, it seems, based on the news reports I've read, that there may be some process issues here, similar to what you had with the mortgages. In other words, you go into court and you say, "You owe me money." And the judge says, "OK, are you the person entitled to collect on the loan?" And the bank says, "Yes," and they file affidavits and everything else, which was the problem we had with robo-signing. In many courts, in New York for example, the person with primary knowledge of the loan has to actually sign off on the affidavit. And you may not have that person available, if you're the bank, right?
Whalen: And what that means is you may not be able to pursue the claim, and you may not be able to assign it to a third-party like a collections agency and have them pursue the claim.
Vigeland: So we're not seeing forgiveness of this credit card debt. What we're seeing is that they're backing off collection efforts.
Whalen: Precisely. It's much like the same issue you have with a mortgage. If you can't prove that you are the person or the institution that's legally entitled to enforce the claim, you can't do it. Here in New York, the head of the court system made it clear to all lawyers: Don't file anymore foreclosure papers unless they're perfect. So the same thing applies to credit cards.
Vigeland: So what does that mean of customers of JPMorgan Chase, who have credit cards? It does not mean that you can stop paying your debt, right?
Whalen: Oh no. I think what it means is that those individuals who are in the unfortunate position of being behind on their debts may in fact have a much more complex situation facing them than they may think. And it may or may not allow them to get out from under those debts.
Vigeland: You know, I wonder -- not to be too cynical about it -- but I wonder if the consumer looks at this and says, "Hey look, I stopped paying my mortgage and then the bank couldn't prove that it was able to come collect from me.
Vigeland: And now, I have credit card debt that the bank wants, but it can't prove that it can come collect from me. What are you supposed to think about this?
Whalen: I think what it tells us is as a society, is that there is no free lunch. And if the banks are gonna be out making loans and doing so in a very sloppy and haphazard fashion, then they can expect to take losses.
Vigeland: Well, maybe the free lunch is for the consumer?
Whalen: I think that's right. And there is a libertine thread in American society in history, where getting out from under debt is always been seen as good. Something for nothing, as the song says, right?
Vigeland: Right. Is there any room here for sympathy with the banks and its investors?
Whalen: Oh of course not.
Vigeland and Whalen laugh
Whalen: I think there should be sympathy for the investors because they may have been the subjects of fraud. And many of them are already in the courts suing their advisers and suing banks for fraud in the mortgage sector. You could see similar actions in credit cards if as some of the news reports have suggested the banks can't collect on them. So this isn't done yet. We're gonna probably be talking about this for a couple years.
Vigeland: I wonder what would happen as we just heard our commentator proposing in a very humorous way, what would happy if all of a sudden we just all started with a clean slate?
Whalen: Well, we'd declare the Jubilee and return all property.
Vigeland: Yes! Or perhaps the Apocalypse, I don't know.
Whalen: Well, the thing you have to remember is that someone does bear the loss. And so if you start imposing those losses on banks, they're going to stop making loans and it's gonna hurt the economy. If the Fed monetizes a lot of debt as they are already doing, that shows up in terms of inflation at the grocery counter.
Vigeland: Christopher Whalen, thank you so much joining us.
Whalen: My pleasure.