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Warning Signs Ahead, Says Credit Counselor

August 2007, F&I and Showroom - Feature

by Greg Arroyo

Ask Leslie Linfield about today’s consumer and you might not like what she has to say. However, her doom-and-gloom take isn’t based on some government report. Rather, it stems from her work as executive director of the Institute for Financial Literacy, a Portland, Maine-based non-profit organization whose role in credit counseling was expanded when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Linfield’s organization, however, saw the change as an opportunity to establish a research program aimed at better understanding why people file for bankruptcy. In May, the institute released results from its second such study, which surveyed 24,038 clients. Linfield sits down with the magazine this month to review the Institute’s findings.

Q: Can you give our readers a little background on your organization?

A: We formed in 2002 as an adult financial literacy organization. Our mission is to make effective financial literacy education available to adults. We publish the National Standard for Adult Financial Literacy Education, we host an annual conference on financial education, and we maintain the Library of Personal Finance. It’s the only library of its kind in the country.

Q: I bet you’ve been pretty busy since the changes to the bankruptcy rules were enacted.

A: The changes did cause us to grow. In fact, we’re growing pretty quickly. Now, there are really two components to the Institute. We do the required one-on-one credit counseling to find out why the individual is financially distressed. We also offer the financial education required under the new bankruptcy rules, which also includes a survey course in personal finance with debtors who are in bankruptcy.

The bankruptcy law in 2005 was the first law to mandate adult financial education, and it’s really one of those shining spots. I think we’ll look back 20 years from now and recognize that was a smart thing to do.

Q: We have a columnist whose tag line this year has been: ‘We’ve gone from a credit-driven economy to a credit-dependent economy.’ How true is that?

A: I think it is true when you consider that two-thirds of our gross domestic product is currently consumer spending. That wasn’t the case 30 years ago. So, when you look at that piece of data and then you look at income numbers and wage numbers, as well as consumer credit over the last two decades, you can really start connecting the dots. We’ve gone from manufacturing to service.

You can also look at the wages people are receiving today. Wages are lower, yet we’re still consuming. Unfortunately, consumption is being fed by credit. And the actual outstanding balances and the Fed reports for consumer credit have consistently gone up and up.

Q: The big talk earlier this year was about how the subprime mortgage market would affect the automotive finance industry. Most experts didn’t see a link between the two, but some noted the repercussions in regards to consumer spending. What’s your take?

A: Well, to give you some numbers, we will see 1.6 million foreclosures this year, and we will see an excess of 800,000 bankruptcies this year. That’s a problem. And in 2008, that bankruptcy number will most likely breach the one-million mark. As for foreclosures, it wouldn’t surprise me if we see it hit 1.6 million again, if not greater.

And again, what’s driving this is all that junk paper that was being written. People who couldn’t afford to be buying were buying. When you talk about finance numbers, we used to underwrite loans where 28/36 was the ratio. The industry has abandoned that model. Now, they’ll put you in any kind of paper if you simply have a pulse. Unfortunately, this situation has laid the groundwork for what we’re seeing now. What’s frustrating is everybody kind of shrugs and says, ‘Well, it’s not really my problem. I don’t touch the paper.’ However, it really is your problem because you can’t get repeat business if the customer goes belly up.

Q: So what do you see happening in 2008? Will things get better?

A: I think 2008 is not going to be a pretty year. I don’t think the real estate market is really going to improve much. I don’t think delinquencies are going to improve much either. I think things might actually get a little worse. Clearly, the real-estate market and interest rates on mortgages will drive that bus. What’s interesting is you hear a lot about subprime prices, but what you’re not hearing about is that ‘A’ and ‘B’ paper is becoming just as problematic. It hasn’t hit yet, but those rates are about ready to start adjusting, too.

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