BBB President's Blog

Bad debt, especially mortgages that involved monthly payments that are even less than the accrued interest, continue to but a burden on the American economy.

Read the full post.

How did the credit crisis come about? Many errors by many people. But what is likely to have been the biggest error was covered by 60 Minutes in a story that aired last night, named "Financial WMDs"

Read the full post.

A gang of Eastern Europeans that stole money from numerous business owners last year by impersonating organizations that ranged from the Better Business Bureau, the IRS, the Federal Trade Commission and even the FBI, appears to be back in operation.

The Washington Post has an article that deserves the attention of every business owner or manager, at http://voices.washingtonpost.com/securityfix/2009/06/spear-phishing_gang_resurfaces.html?wprss=securityfix.

These scammers use "Trojan" software, meaning they trick the recipient of an e-mail into opening an attachment or link that installs key-tracking software on their computer and then enables the scammers to steal bank login information the next time a customer goes to their online account.

The best protections:  1) be very cautious about opening links in e-mails, even ones that appear to come from a trusted organization like the Better Business Bureau or a government agency; and, 2) always be sure that your anti-virus, firewall and anti-spyware software is up to date and running. 

Today's New York Times has an article entitled "Finding Financial Advice in an Age of Bad Behavior." The article talks about financial planners "gone bad," including some that are members of the National Association of Personal Financial Advisors (NAPFA). Even a former president of this organization has turned up among those accused of wrongdoing.

As the reporter notes in the article, NAPFA is a membership organization.  The article says (although many in the organization would disagree) that being an NAPFA member is "not a credential."  However, NAPFA has strong "Standards of Membership and Affiliation" displayed on the organization's website, much as BBB does. 

I have no reason to doubt that NAPFA works diligently, as BBB does, to promote its mission and hold members to standards. Despite the problems that the reporter knows (and has personally experienced) with NAPFA member planners, he writes, "I still believe that a Napfa planner should be among the first people you see when shopping for financial assistance."

What implications does this article have for the Better Business Bureau? 

The “bottom line” is that any self-regulatory organization can only reduce the risk – and can never remove the risk – that a customer will end up dealing with a business that doesn’t do things correctly.

“Start With Trust” by picking a BBB Accredited business is good advice, and always a good ides.  But a potential customer should never put caution aside.  Rather, each customer should do as much research as possible and take all reasonable and appropriate steps to protect him/herself from being “ripped off.”  No matter how well BBB does our job, the BBB can never assure that every BBB Accredited business is completely trustworthy. 

We have to be realistic.  Despite the fact that some “bad apples” (or apples that go bad) will get into the barrel, a NAPFA member or a BBB Accredited business is a good place to start when looking for a financial planner.  But that can never mean that there are not some financial planners and other businesses in the NAPFA ranks and in BBB ranks that will not be highly trustworthy or will not engage in inappropriate behavior.  

Most of us know someone we thought we knew well, and thought was a good person, but who has done bad things.  Failure is part of the human condition.  Even those who fail severely can, at their core, be “good people.” 

BBB helps businesses be better.  We help connect consumers to businesses that, more likely than not, will be trustworthy and customer oriented.  But we’ll never eliminate risk or the need for consumers to “trust but verify” when shopping for any service or product.  BBB is the place to start your search.  But that never means a person should stop searching for more information and better information and doing other things to protect themselves and their money.

The Better Business Bureau is receiving dozens of calls each day from consumers and business people who are receiving "robo calls" to their cell phone numbers, primarily from companies trying to sell extended service contracts for automobiles.  These companies appear to be playing on consumer concerns about manufacturer warranties due to financial difficulties facing some automobile manufacturers.

The "good news" is that these telemarketing appear to have called the wrong people -- Senator Chuck Schumer of New York and Senator Mark Warner of Virginia both report calls to their cell phones, and both Senators have called on the Federal Trade Commission to crack down on these calls.  Earlier this week, the Federal Trade Commission announced that lawsuits will be filed shortly against several companies.

The use of automatic dialers and recorded messages to cell phones is illegal under existing Federal Communication Commission regulations, so the BBB recommends that consumers receiving such calls file a complaint with the Federal Trade Commission at www.ftc.gov whether or not their cell phone number is registered on the federal Do Not Call Registry.

To further deter future calls of this nature, the BBB is also recommending that consumers register their cell telephone numbers on the Do Not Call Registry.  This can be done online at www.donotcall.gov or by calling toll-free 1-888-382-1222.  Complaints about violations of the Do Not Call Registry law can also be filed through this website or toll-free telephone number.

John Bogle, the founder of Vanguard, has a reputation for integrity that seems well-earned.  His column in Monday's Wall Street Journal, aptly entitled "A Crisis of Ethic Proportions," offers important thoughts on what he considers "a broad deterioration of traditional ethical standards" and the need for what he calls "a fiduciary society." 

Frankly, I am not sure that I agree about "a broad deterioration" in ethical standards.  There have always been less ethical and more ethical people, and there have always been "pendulum swings" in the value that society attaches to adherence to high ethical standards.

There can be little question, however, but that recent years saw a rise in the tendency to measure success "in monetary terms." Too frequently, managers have been willing to separate "success" from principled behavior and adherence to traditional standards of professional conduct.  This has been especially the case with those charged with responsibility for managing other people's money and, I fear, in the legal and accounting professions, where adherence to standards and principles has an especially important role in upholding societal values.

The result has been what Mr. Bogle recognizes as "a failure of capitalism," which is no small statement.  Or, as Alan Greenspan said in his testimony before Congress last October, "a flaw in the model that I perceived as the critical functioning structure that defines how the world works."  Mr. Bogle quotes an unnamed journalist as noting, "that's a hell of a big thing to find a flaw in." It's also a "hell of a big...flaw" stated in the convoluted way that is uniquely Alan Greenspan.

As Mr. Bogle wrote, "The managers of our public corporations came to place their interests ahead of the interests of their company's owners."  Too often, short term profits (and this year's "bonus') seem to have ranked ahead of what should have been foreseeable longer-term interests of the corporation.

Mr. Bogle says that we need to create "a 'fiduciary society,' where manager/agents entrusted with managing other people's money are required -- by federal statute -- to place front and center the interests of the owners they are duty-bound to serve."  In other words, tomorrow's managers must do what most "old school" managers would have seen as their duty, their professional responsibility. 

What Mr. Bogle recognizes, and what Alan Greenspan came to recognize to a point I think, is that markets are not always "self-correcting." Laissez faire economics, where greed is "too unchecked" by either social norms or government regulations, doesn't lead to long-term economic success.  Instead, it led to a bubble economy and a credit crisis of epic (and ethic) proportions.

The Better Business Bureau, in our promotion of martketplace trust, knows that trust and ethics are the foundation of free enterprise and capitalism.  We have a special role in helping maintain the right balance between regulation, self-regulation and free markets.  I'd call the 'free markets' part of this equation 'greed' in the good sense, that capitalism and free enterprise depend on people operating in their own interest.  But this self-interest must be constrained or 'checked' by recognition of the public welfare, the 'common good,' and especially, as Mr. Bogle notes, by recognition of duty to others, especially to those whose money it is that managers are entrusted to manage.

A well-functioning economy, as with a well-functioning society, must have a high regard for ethics.  Sometimes people forget this.  In this case, it appears to have taken a major economic event to bring us back to reality...and to a recognition of important principles.

I attended a high school basketball game with my sons on Tuesday night.  While at the game, my younger son talked to a friend who was concerned that his brother may be losing money to a "shady business."  He asked my son whether the Better Business Bureau had information about the business, which is based in Elizabethtown.  After checking the BBB's information, it appears that "shady" is a fair description of the business practices encountered by the brother.

The "shady business" offers credit repair.  Problems in this industry are so widespread that the credit repair industry in one of a handful of industries which the BBB has identified as having "inherent problems."  This determination results in a BBB rating of D or lower for any firm having the "type of business" designation of "credit repair" in the BBB database used to generate BBB ratings and BBB Reliability Reports®.

This friend's "credit repair" case provided the information which was discussed in my "Taking Care of Business" segment on WHAS radio this morning.  CLICK HERE for more information about this credit repair situation.

A citizen of South Louisville called me today about a call which claimed, in a recorded message, to be from his credit card provider.  The recorded message said that, because of the ongoing credit crisis, the credit limit on his credit card was being lowered and his interest rate was increasing.  Then came "the punch line," with the recorded message saying, "If you wish to speak to representative about these changes, please press '2' now."  The caller (wisely) did not press "2."  Instead, he hung up and checked with the three banks from which he holds credit cards.  Each bank told him that they were not changing his credit limit or interest rate.  One of the bank representatives wisely suggested that he contact the Better Business Bureau about what the representative felt was a scam attempt.

A scam attempt, indeed.  Pressing "2" would almost certainly have brought on a "credit card representative" who would want to know the citizen's credit card number and other personal information in order to "help him" with his questions about the recorded message.  Without a doubt, this was one more clever effort by scammers to capitalize on today's headlines and rampant economic concerns.  Identity theft and fraudulent use of credit cards are epidemic in the marketplace.  Unfortunately, tough times too often spell "opportunity" for scammers.

After 12½ years at the Better Business Bureau, I thought I had heard every scam.  I was wrong.  Yesterday, I learned about the “White Van Speaker Scam.”  An Internet search turned up hundreds of victims of similar scams from across the country.

A Louisville man reported to the BBB that he fell for this scam earlier this week when approached by two young men in the parking lot of the Kroger Store on Breckinridge Lane.  The men were driving a white Ford van and peddling what appeared to be a high-end surround sound speaker system.

According to the young men, their boss sent them to pick up a speaker system from a warehouse in Erlanger, KY.  They said the warehouse made a mistake and gave them two systems. They offered the extra system, supposedly worth $5,000 (they had a receipt to prove it!), to the Louisville man for a hugely discounted price of $370.

For ethical and practical reasons, the victim should have walked away and called the police.  He didn’t.  Now he knows that was a mistake.

The victim says the men selling the speakers were “pros.”  They had an electronics magazine with the product in it, making the offer more believable. The men even agreed to follow their “potential customer” home so that he could check the product out online before he purchased it.
 
The victim says the packaging looked professional.  The speakers looked great, too, but they are not functional.

The “White Van Speaker Scam” has made its rounds across the nation.  Various “pitches” are used to lure in scam victims. The scammers often use a white van, to make it look like a company vehicle.  But the scam can involve any product being peddled in a parking lot from a truck or the trunk of a car. 

The scam artists want cash, and are usually willing to follow you home or to an ATM to get it. The victim, in the end, is out the cash and left with either a bad product, or, in some cases, boxes of rocks or junk.

Have you been solicited for a contribution by a charity that you don’t know a lot about?  If so, the Better Business Bureau recommends (in the words of President Reagan about an arms deal with the Soviet Union) that you “trust but verify.”  Perhaps we should put the emphasis on “verify.”

For example:  A Southern Indiana businessman contacted the BBB earlier this week about a request that his business make a $500 contribution to the National Coalition of Disabled Firefighters.  This contribution, according to the solicitor, would sponsor one child’s attendance at a “Burn Camp,” which (the solicitor said) serves children who are burn victims and have suffered “EXTREME disfigurement due to the HORRIFYING trauma they experienced.”   Who wouldn’t want to help?

According to information faxed to the businessman, the National Coalition of Disabled Firefighters has a local mailing address at P. O. Box 395, Georgetown, IN 47122, with Tax Exempt ID 33-0768089.

A little BBB “verification work” shows that a potential donor may want to think twice before sending $500 (or $10,000, which the solicitation says is the suggested corporate level for a “PLATINUM SPONSORSHIP, 20 KIDS”).

Here’s what BBB found:  The tax ID 33-0768089 is assigned to Emmanuel Outreach Temple, Inc., 963 Glencliff Street, Laharba, CA 90631.  This recently-formed church reported to the IRS on its 2006 IRS Form 990 (which is public information) that it operates four programs:  1) United States of America Police Disabled Officer; 2) Children Dream Foundation Network; 3) American Assisting Veterans Program; and, yes, 4) National Coalition of Disabled Firefighters. 

So, one wonders, how is Emmanuel Outreach Temple, Inc. using the money raised for these programs?  This is where things get murky.  According to IRS Form 990, the organization had total revenue of $788,272 in 2006.  On Line 13 of the Form 990, called “Program Services,” the charity reports spending $0.00 (that's right, $0.00!)  On Line 30, called “Professional fundraising fees,” the charity reports spending $702,245.  Under a category labeled “Management and general” expenses, the charity reports spending $12,292 (but there is apparently a math error, because the reported expenditures in the “Management and general” column total $16,192.)

For 2007, Emmanuel Outreach Temple, Inc. reported to the California Attorney General that the organization had revenue of $749,465, of which $74,947 (10%) went to charity, with the balance of $674,518 being paid to commercial fundraisers.

To meet BBB’s Standards for Charity Accountability, a charity must:  1) Spend at least 65% of its total expenses on program activities; and, 2) Spend no more than 35% of related contributions on fund raising. (These are voluntary standards adopted by the BBB Wise Giving Alliance in consultation with charities and donors, and there is no legal requirement that charities meet this BBB standard.)

Better Business Bureau reports on charities that voluntarily submit to evaluation through the BBB Charity Review Service (another free public service of the BBB) are available online at www.bbb.org/charity.  Donors may give with high confidence to charities that have been evaluated by BBB and meet BBB's twenty Standards for Charity Accountability.

A group of state Attorneys General, including the Attorney General of Kentucky, have announced a settlement with Countrywide Financial Corporation.  The settlement announcement refers to mortgages with "initial 'fixed' teaser rates" and to "pay-option adjustable rate mortgages."  This raises a question: "Why did such exotic mortgage products even exist?"

If I ever heard an oxymoron, the so-called "fixed teaser rate" is it.  I am convinced that some consumers signed up for ridiculously low mortgage rates, let's say an advertised "fixed rate" of 1.9% or 2.9% ('fixed" for maybe six or twelve months, that is!), without realizing that this was a "teaser rate" that failed to cover even the interest due on the mortgage.  In these cases, the difference between the "teaser rate" payment amount and the real interest that was accruing on the mortgage was being added to the principal, and would result in a much larger payment at some future date.  The future payment would have to cover both the higher rate of interest for the mortgage and a larger principal balance that was being built up by adding unpaid interest to the principal. 

Why were such loans issued?  Why were mortgage brokers paid even more to originate exotic products such as "fixed 'teaser rate' mortgages" and "pay-option adjustable rate mortgages" than they were paid to initiate traditional, straight-forward mortgages?  Simply stated, I think it was because mortgage originators like Countrywide were able to put other people's money at risk (not their own money, that's for sure) while taking the loan origination fees off the top.  These crazy mortgages were packaged and sold as part of the "securitized mortgage pools" that Wall Street peddled to investors who had not-a-clue about the quality of the debt they were buying.

"Teaser rates" might be fine on credit cards, where debt amounts are lower and people are not putting their homes at risk.  But the "teaser rates" used to induce people to buy certain mortgages were too often sold deceptively and, in my judgment, should be prohibited entirely.  "Interest-only" mortgages are bad enough.  But these "teaser rate" mortgages, and the so-called "pay-option adjustable rate" mortgages, frequently pushed monthly payment amounts that didn't cover even the interest on the loan.  The unpaid interest was then bundled into a higher principal balance, and a much higher monthly payment, when the loan "reset" at some future date.  If people were even aware that this much higher payment would be coming somewhere down the road, they too often bought into the idea that they didn't need to worry about the future higher payment because they would be able to re-finance again before the higher payment took effect.

Needless to say, the wheel has fallen off of this wagon.  It was doomed to happen from the start.  "Fixed 'teaser rate' mortgages" and "pay-option adjustable rate mortgages" were all too similar to the world's largest Ponzi scheme that has fallen apart on Bernie Madoff and his investors.  We're all now paying a price for wild and crazy stuff that went on while regulators, responsible journalists, credit rating companies, and many others appear to have been asleep at the switch.