The Consumer Financial Protection Bureau (CFPB) made its database of complaints against mortgage issuers, student loan firms, credit bureaus and other kinds of lenders available to the public for the first time on Thursday. 

The database covers 90,000 complaints with more than 1 million data points covering 450 companies.

The CFPB spreadsheet allows consumers to find the most complained-about banks in highly specific categories. For example, Capital One received the most complaints about credit cards, and Bank of America received the most complaints about traditional adjustable-rate mortgages.

It's important to note that the data isn't normalized and that banks with more customers receive more complaints.

Data can be sorted at the bureau's website by state or company. It can also be downloaded for free and used in privately developed applications. 

The agency's complaint database was released on a limited scale last year, and included only 19,000 credit card-related complaints. Thursday's announcement represents a large expansion of publicly available data. 

The bureau hopes consumers can use the information to make more informed choices about banks they do business with. "By sharing these complaints with the public, we are creating greater transparency in consumer financial products and services,” said CFPB Director Richard Cordray. “The database is good for consumers and it is also good for honest businesses."

Complaints are listed in the CFPB database only after the company responds to the complaint or after they have had the complaint for 15 days. Records include the type of complaint, the consumer's ZIP code, the company, and the resolution. Consumers' names and other personal information are not shared.

Among student loans and mortgages, about two-thirds of the complaints involve consumers who are having trouble repaying their loans, according to an analysis provided by the CFPB of complaints filed through February. Many of the mortgage complaints reflect consumers' paperwork-related frustrations when attempting loan modifications. 

Nearly three-quarters of the 6,700 complaints filed against credit bureaus involve inaccurate information. Credit card complaints are more scattered, with billing disputes making up 15 percent. A common gripe, the bureau says: Consumers don't realize they have to dispute a suspicious item on their credit card bills within 60 days.

In a blog post that accompanied the release of the data, CFPB official Scott Pluta said he hoped consumers would be creative and find new ways to examine and use the data.

"From infographics to iPhone apps, we’ve seen people do amazing things with the credit card complaint data that was available before today," Pluta said. "We encourage the public, including consumers, analysts, data scientists, civic hackers and companies that serve consumers, to analyze, augment, and build on the information in the database to develop ways for consumers to use the complaint data or mash it up with other public data sets to reveal potential trends."

The bureau plans to expand the data to other complaint categories in the future, he added.

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More from Red Tape Chronicles:

• Celebrity hackers stole data from AnnualCreditReport.com, Equifax says
• Google pays $7 million to settle 'Wi-Spy' case filed by states
• Why consumer agency must go, and why it should be saved

The Econ4u Web site includes a blog with helpful tips and other personal finance tools.

Econ4u.org seems like a happy place to learn simple lessons about money.  The Web site is full of smiling faces and quick, fun questions like: How long will it take to double your money if you are earning 5 percent interest? (14 years, by the way).

So what's a fun Web site like that doing in the middle of a bitter battle over the payday loan industry, or for that matter, the smoking industry?

Research commissioned by the Econ4u.org's operator, The Center for Economic and Entrepreneurial Literacy, has made its way into newspapers around the country – fewer than 1 in 5 members of Congress have any formal economics training, the organization said after a recent study.  The Wall Street Journal, The New York Times, Bloomberg, Reuters and dozens of papers have all cited the center's research.

Econ4u's owners say the site has a straightforward, noble mission: to "teach important economic concepts."  But while the site offers plenty of useful money basics, there is one oddity: information on controversial payday loans is unusually positive.

And more curious: The man behind the site is Rick Berman, a notorious Washington, D.C., publicist famous for taking up the cause for unpopular industries like alcohol and tobacco. In fact, many believe Berman –- who's known by opponents as Dr. Evil -- was the model for the lobbyist viewers loved to hate in the 2005 movie "Thank You for Smoking."

The Econ4u.org Web site has appeared as Congress is on the verge of passing legislation that could severely restrict the $25 billion short-term loan industry, which has been under attack for many years. A law proposed by Sen. Dick Durbin (D.-Ill.) – the "Protecting Consumers from Unreasonable Credit Rates Act" – would cap payday loan rates at 36 percent annually, far lower than the current rate of 400 to 800 percent.

Econ4u.org is marketed most heavily in the Washington D.C. area, where it is hawked by bold advertisements in subway cars.  There, its puzzlers are printed on bright orange posters. But one of the fun quiz questions seems to be posed far more often than others:

If faced with an unexpected cash need, which of these options will typically cost the most?

• Bounce a check
• Get a short-term payday loan
• Initiate a wire transfer
• Pay credit card late fee

Bob Sullivan

Econ4u.org on the DC subway

The *right* answer, the poster indicates, is bounce a check, which can cost twice as much as the other alternatives. A $100 payday loan costs $15, the poster says, far less than the average late fee or wire charge.

By itself, that might not cause the raising of any eyebrows.  But following the poster's instructions to learn more on the Econ4u.org Web site adds a bit more to the mystery.  Listed on the site's "About" page are merely a form for entering an e-mail list and a phone number. The name of an executive, or even a public relations contact person, isn't listed.

A Google search for the phone number unmasks the anonymity quite a bit. The number also appears on press releases issued by the Center for Economic and Entrepreneurial Literacy, belonging to a spokesman named Tim Miller.

Information about Miller is easy to find online. He has also worked for another Berman organization called the Center for Consumer Freedom. It supports industry efforts to oppose laws aimed at limiting access to tobacco, fattening food and alcohol.

Miller, meanwhile, wrote an op-ed piece last year titled "Payday Loans Help Many of the Poor," that appeared in The Wall Street Journal and was reprinted in several newspapers around the country. The letter, in which Miller identifies himself as a spokesman for the Center for Consumer Freedom, makes a case against limitations on the payday loan industry.

"Short-term payday loans are actually cheaper than similar financial products like overdraft fees, credit-card cash advances, or paying bills late," he wrote.

'Ambush education'

In an interview, Miller said that Econ4u.org is published by a nonprofit group headed by Berman that is concerned about the lack of financial education among consumers.  The Center for Economic and Entrepreneurial Literacy is a spin-off of the Center for Consumer Freedom, he said.

"As an organization, we'd like to advocate the need for increased economic education in schools," he said.  "Only three states have mandates for personal finance classes."

Miller said that Berman created the site "as a vehicle for (him) to talk about something that he is passionate about."

The quiz questions are part of an "ambush education" campaign that he said is more effective than traditional methods for teaching money lessons.  Television ads for the site have appeared around the country, he said, but poster ads are primarily appearing in Washington D.C.

"We have a lot of twentysomethings working in town, working in The Hill, that don't have a lot of economic literacy and they are making big decisions," he said.

He rejected the suggestion that the site is a subtle marketing tool for the payday loan industry.

"We have a lot of information on our site. I wouldn't know how we could favor one industry," he said.  Instead, questions involving payday loans simply indicate how bad some consumer other options are. "We're trying to drive home the silly mistakes people make.  Bank overdrafts are as raw a deal as you can get."

Miller said he didn't know where the funding for Econ4u came from, and he directed additional questions to Berman.

'Information isn't unbiased'

Berman's day job is running the Washington D.C.-based public affairs firm Berman & Company. He is best known as the paid defender of unpopular industries. He runs numerous nonprofit groups and media campaigns that target consumer advocacy groups, and has waged campaigns ridiculing efforts of groups that call attention to the dangers of smoking, drunk driving and obesity, among others. He has a celebrated rift with the organization Mothers against Drunk Driving.  Miller described him as a libertarian.

In an e-mail exchange, Berman said he had a policy of not disclosing supporters, but asserted that Econ4u doesn't receive money from the payday industry, and that his PR firm currently does "not have any payday lenders as clients."

He reiterated that Econ4u was merely a labor of love.  He did say that the Center for Consumer Freedom has a "long history of planting its flag in defense of consumer choices and attacking those who want to take them away."

Berman said his PR firm represents businesses against "activist attacks" by making "controversial, but factual, arguments to dispel many of the myths that are out there."

Econ4u.org,  however, is different, he said.  He pays for the site by himself, he said.

He called the lack of economics and finance knowledge among the American population "astounding."

"However, the information I put out isn't unbiased," he wrote. "It reflects the issues that I personally believe need to be addressed. The bank overdraft fees are one of the biggest scams running, and the reason we use that ad in the metro is because it's one of the questions that people seem most surprised by."

'A sock puppet'

The Center for Responsible Lending, a consumer group that has long advocated restrictions on payday loans, isn't buying that explanation.

"It's a PR firm's attempt to put a nice face on payday lending by couching it in terms of broader advice, said Ellen Schloemer, executive vice president of the agency. "They don't disclose who they are. There is no way an average consumer would know this is a sock puppet for a PR firm."

In Washington D.C., interest groups disguised as unbiased research organizations are sometimes called "astroturf" groups.  Schloemer dismissed Econ4u as the work of such an astroturf firm, and for evidence pointed to the keywords purchased by the site from Google's ad service – because keywords are purchased via auction, information about them can be gleaned by market research companies like KeywordSpy.com.  Schloemer pointed to that site's research on Econ4u.org, which shows about nearly 80 of the 97 keywords purchased by Econ4u.org's operators involve some variation of the words payday loan – terms like "instant payday loan", "military payday loan", or "payday loan Oregon" --indicating its owners are principally interested in getting their site in front of people looking for information on payday loans.

Schloemer said she had no problem with the firm taking out advertisements – and conceded that much information on Econ4u.org is useful – but said Berman's group should disclose its identity in the advertisements and on the Web site.

"I have no problem with them trying to advance their views, we do that too.  But it's not fair to consumers who are thinking this is objective advice," she said.  

Berman, however, insists the site is his own personal project, and he plans to work even harder in the future to improve the state of financial education in America.

"Our last round of advertising...was a round of national (public service announcement) focusing on mortgages and basic business economics. And I am exploring getting our information into public schools in D.C." he said.

Like anyone with a radio or TV, Lorena Altamirano heard the ads promising quick and painless debt relief. If there was a way to settle her debt for 50 cents on the dollar, she sure needed it.  A recent divorce had led to a nasty financial surprise: Her ex-husband's unpaid bills had pushed her almost overnight from having virtually no debt to being $17,000 in the hole.

"I was paying everything perfectly, no problem, until the divorce," she said. "Then the skies fell on me. These were bills he never told me about.  We were married and I was responsible, but that put me totally out of balance."

Altamirano still had a decent job as a benefits claims processor, but she was now living paycheck to paycheck.  With a son in college, and $1,600 a month rent for her San Mateo, Calif., apartment, she had nothing left at the end of the month to pay down the debt. The interest rates on her credit cards climbed, and the late fees started to pile up.

A friend had enjoyed great success with a debt consolidation loan, so Altamirano started researching debt workout plans on the Internet.  She quickly found Debt Remedy Solutions in Boca Raton, Fla., and sent an inquiry.  The response seemed like an answer to her prayers.

"We are generally able to settle debts for about 40 cents on the dollar and have our clients debt free in a very short period of time on a low monthly payment plan," said the letter, which Altamirano provided to msnbc.com. "We charge the lowest fees in the industry."

Like most Americans with debt trouble, Altamirano knew nothing about the fast-growing debt negotiation industry, and did not understand the important distinctions between debt consolidation, credit counseling and debt settlement. She believed she was simply entering a payment program that would lower her interest rates and help her climb out of the hole she was in.

She missed the reference in the pitch letter she received – "We are generally able to settle debts" – that indicated she was about to trust her finances to a debt settlement company. She signed up, and began sending $200 a month to Debt Remedy solutions. A year later, the answer to her prayers had become a nightmare.

Rogue industry

 In May, New York Attorney General Andrew Cuomo announced an investigation into the debt settlement business, calling it a "rogue industry." Among the 10 firms that received subpoenas from Cuomo's office was Debt Remedy Solutions. Unfortunately, that came too late for Altamirano.

There are perhaps 1,000 firms that offer debt settlement services, according to the industry's lobbying group, The Association of Settlement Companies (TASC). About $20 billion in consumer debt is currently enrolled in debt settlement programs, according to the association.

 Ads for debt settlement companies are ubiquitous, and nearly always use the same pitch: Consumers have the "right" to have their debts reduced by 50, 60 even 70 percent, the ads say, promising information that "credit card companies don't want you to know."

But as Altamirano discovered too late, there also are things the debt settlement companies don't want you to know.

For help understanding how these firms work, msnbc.com interviewed Ray Hardy, who said he recently quit working for a debt settlement company after becoming frustrated with its business tactics. He did not wish to identify the company, but provided intimate details about the industry's tactics during several conversations with msnbc.com.

The dark side

The basic strategy these firms employ is to instruct consumers to stop paying creditors. Instead, they are told to save money in a separate account.  After receiving nothing for many months, the settlement companies say, lenders will be happy to take a lump sum payment for far less than the total debt.  Sometimes, it works. 

The problem for consumers is that high up-front fees -- and additional monthly fees -- often mean they have very little to offer creditors after six months or a year in the program.

"The program takes time, we have to get the credit card companies to think they will never see a dime, then approach them with the 50 percent offer," Hardy said. "The dark side of debt settlement is that most clients could not pay their monthly credit card bills and now we are asking them to send money to our company on a monthly basis.  Most of the money paid during the first year goes toward the fees and most clients who agree to debt settlement give up after less than a year.  So the company will collect some monthly amount from them for one to 12 months, offer no service whatsoever and not a penny paid goes toward getting them out of debt."

That's precisely what Altamirano said happened to her.  She agreed to pay more than $200 as month to Debt Remedy Solutions in early 2008. She says she was told that in 120 days, the firm would begin settling debts with her creditors. She was also told that collection calls and threatening letters would stop.

But as months rolled by, and she continued making payments, the threatening calls didn't stop. In fact, they increased.  Then, phone calls and letters to Debt Remedy went unanswered.  After 300 days, and $1,850 in payments, she stopped paying the firm.

"Nothing had happened," she said. "And now things were much worse."  Her debt had spiraled upward to nearly $25,000. After numerous complaints to the company, she was offered a refund -- of $100.

Altamirano has filed complaints with the California state attorney general's office and state banking regulators, but so far, she has gotten no relief.

"They did not do anything for me and stole $1,857 from my checking account," she said. "It's tricks everywhere.  The problem is there are so many people in this situation. They are having a feast with us."

Debt Remedy Solutions disputes Altamirano's account. 

"We made every effort to work with this customer," spokeswoman Erika Papp said in an e-mail. She declined to answer specific questions about Altamirano's account, but said that her story was investigated by the Better Business Bureau and Florida state officials, who rejected "rejected this customer's complaint as unfounded and without merit."

But a spokeswoman for the Florida Department of Agriculture and Consumer Services, which sent a letter dated June 11 to Debt Remedy Solutions that Papp provided to msnbc.com, disputed her characterization of the agency's finding

 "We have not sided with either party," said Sophie Campfield, a program administrator at the agency. "We have merely acknowledged  that the company responded to the complaint. It does not mean we agreed with what they said."

Papp also said Debt Remedy Solutions was complying with the New York attorney general's subpoena, "and we are working hard with his office to explain the work we do and assist his efforts in trying to understand our industry."

Big fees, small benefits

Hardy, the former debt settlement worker, said debt settlement companies rack up charges against consumers in numerous ways. For example, he said, while the money saved for eventual debt repayment is held in an outside bank account, there are often fees associated with that.  After all the fees are added up, there's often very little benefit to the consumer -- even if the credit card company agrees to a 50-cents-on-the-dollar offer, he explained. A consumer with $10,000 in debt would eventually pay nearly $4,200 in fees by the time commissions, up-front charges and bank account charges are added in.  After paying $5,000 to the creditor, the consumer's savings amount to only about $800, he said.

 "The concept is nuts"

Consumers Union recently advised debtors not to use settlement companies. In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers -- those who cannot pay their bills but can pay something toward their debts each month.  The vast majority of those consumers could work out their own arrangements with lenders, it said.

"Basically you are saving your money instead of paying your bills, and paying someone to do that. The concept is nuts," said Gail Hillebrand, legislative director for Consumers Union. "Those who can't pay their bills should be in bankruptcy."

 Settlement companies have no legitimate product, but are thriving because so many consumers are deeply in debt, she said.

"They are selling hope. They are selling optimism," Hillebrand said. "Scams always come back in a recession, and now they are just roaring back."

The debt settlement industry has attracted the attention of regulators and legislators around the country. In addition to Cuomo's investigation, numerous other state attorneys general have taken action against individual firms. And several states have pending legislation that would limit fee structures or force licensing on agents.

Industry defends practice, blames "bad players"

Andrew Housser, who runs the Freedom Financial Network debt settlement company and sits on the board of The Association of Settlement Companies, said that settlement firms offer an important service to customers in certain circumstances. But he said an influx of new settlement firms -- many of them run by former mortgage industry workers -- are giving the industry a bad name.

"Hundreds of companies are flooding into this and frankly some of them don't know what they are doing," he said. "There's been explosive growth and unfortunately you get some good players and some bad players."

TASC is actively supporting regulation in 24 states, he said, in an attempt to reign in abusive companies. It's also self-policing its 200 members and investigating complaints against other settlement firms lodged via the association's Web site, TASCsite.org, he said.

"It's frustrating when we hear ads that say 'guaranteed 30 percent (debt reduction) in 12 months," he said. Still, he argued that complaints against settlement firms represent an "extraordinary small minority" of customers.

Housser defended the industry's business model, and disputed claims by consumers and consumer organizations that legitimate settlement firms tell customers to stop paying their bills. By the time consumers arrive at settlement companies, they've already stopped paying bills and often can't afford even minimum payments, he said.

Sending small sums to credit card firms or other creditors won't do any good, he said. "It will just be a never-ending game," he said. Those debtors are better off receiving help negotiating settlements with creditors, he said.

He also said that credit counseling isn't a viable alternative for many indebted consumers.

For example, consumers who enroll in credit counseling generally still face highly monthly payments, because counselors can only negotiate lower interest rates and friendlier loan terms – not principal reductions.  Many debtors can't afford those payments.

"Some (consumers) fit in sweet spot of debt settlement, where they can't afford credit counseling programs but still have some income," he said. "We give them a program to work out their debt for less than face value." Typical monthly payments for debt settlement are 1 to 1.5 percent of total debt, vs. 2 to 3 percent for debt counseling, he said.

Total settlement fees typically average about 15 percent of debt, he said -- meaning a consumer with $10,000 in debt would pay $1,500 to a debt settlement company for help. Housser justified the fees, saying that debt negotiation is a very "labor intensive" business. Legitimate companies clearly list their fees up front, and don't pile on extraneous charges, he said.

Ray, however, said his experience with debt settlement left him with great cynicism for the industry.

"Debt settlement as an idea is good, but the companies are so greedy they charge high fees, most of which are upfront," He said.  "I got into debt settlement because I thought it was saving people from the evil credit card companies, but it turns out the debt settlement companies are profiting mostly from the people that never complete the program.  I walked away after just six months. I had too many questions, and the companies that do debt settlement prefer salespeople who are ignorant and just sell without asking."

Altimirano said her experience with debt settlement left her even more desperate than when she started.

"I don't think I have any future until I get rid of this debt," she said.  "I cannot sleep. I cannot get peace. I'm always in a bad mood. It's horrible. I don't how I still smile."

RED TAPE WRESTLING TIPS

Consumers with debt troubles have several options, though none of them are easy.

Debt consolidation: Using a single loan – such as a home equity loan -- to pay off multiple debts at full price. The benefit is usually lower interest rates, though debt consolidation loans are now much harder to get. This option is generally credit score neutral.

Credit Counseling: Involves paying a small fee – usually under $100 – to a service that offers budgeting advice and will negotiate lower fees and interest rates with debtors. Debtors pay the counseling service, which in turn pays the lenders. These nonprofits sometimes receive financial support from credit card companies. Still, C onsumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt.  Debt counseling will impact a consumer's credit scores, but not as severely as other options. To find a debt counselor, visit the National Foundation for Credit Counseling.

Debt settlement: Specialized firms that instruct consumers to stop paying bills with the hope of negotiating discounts at a later date. This has a dramatic negative impact on your credit score.

Bankruptcy: A federal judge will consider your debts and assets, and decide which debts get paid and which get erased. While bankruptcy is the only option for some consumers, it has the longest negative impact on credit scores.

In general, those in debt should never sign up for a service that requires a large up-front fee.

TIPS FOR DEALING WITH DEBT SETTLEMENT COMPANIES

Some advice from N.Y. Attorney General Andrew Cuomo's office:

• Be wary of debt settlement companies that falsely promise to obtain substantial lump sum debt reduction settlements. Many advertise "reduce debt now," and claim to be able to erase as much as 75 percent of credit card debt, but they rarely obtain advertised reductions.
• Never sign a contract with a debt settlement company that requires payment prior to obtaining the promised debt reduction.
• Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits or prevent enrolled accounts from growing larger through the addition of late fees, interest and penalties. Also, credit reports will be adversely affected.
• Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance.
• Only a small number of consumers who enroll in debt settlement plans have the financial means to complete them. Usually, they drop out after having paid service fees to the companies without reaching settlements.
• Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts, often resulting in judgments, wage garnishments and freezing of bank accounts.
• Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
• A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer. Alternatively, it may be helpful to speak to an attorney or an accredited credit counselor who can help develop a plan of action that best works for each consumer's unique situation.

There's been a lot of talk lately about loan modifications for homeowners facing foreclosure, a discussion that reached a crescendo on Wednesday when the White House announced details of its "Making Home Affordable" plans.

A woman I'll call Mags (we're preserving her anonymity) had heard the talk too. The suburban Virginia woman in her 60s is homebound, recovering from ankle surgery. Her husband has recently declared bankruptcy. Three months ago, she started contacting her lender to ask for help. She ran into a wall of busy signals and vague answers. So when she heard about a private company that said it could help work with her bank to modify her loan and save her home, she began to investigate. That's how she landed in my inbox.

"How can we tell that this company is legitimate, will do what they say they will?" she asked. "We desperately want to modify our mortgage, but we don't want to be stupid!"

There was a red flag right away. Mags said the company wanted a $3,000 up-front payment.

I e-mailed Mags that day to ask her what this firm would do that she couldn't do for herself. She didn't write back. A few days later, I called. That morning, she'd sent the company a check for $2,881. And she was very sure she'd done the right thing. She'd checked the company out at the Better Business Bureau and there were no complaints. The employees sounded very competent, she said, and the company was advertising on television. I asked her if she'd seen advice on various Web sites telling consumers not to pay up-front fees for loan modifications. She said she had, and she'd asked the company about this.

"They said, 'Has anything else you've done so far worked?"

I talked to Mags about how to get free loan modification help, through the list of approved housing counselors on the U.S. Department of Housing and Urban Development's Web site. I sent her a link to HUD's "find a counselor" Web page. She said she'd already been to the site, but didn't find what she was looking for there.

"There are so many different agencies listed, how do you choose?" she asked, noting that about three dozen are listed in Virginia. "Are they all free? How can you tell?"

In the end she said she relied on the personal recommendation of a co-worker who had also signed up with the for-profit company.

Within minutes, Mags politely thanked me, rushed me off the phone and then didn't respond to my additional e-mails. I had the sick feeling she wouldn't get anything for her $2,881, but for some reason the modification company was more persuasive than I was. She was willing to pay for something that should be free.

No answer
So I went back to the HUD site and looked up the counselor that was geographically closest to Mags. When I called, the phone went unanswered. There wasn't even an answering machine to leave a message, and an e-mail got no response.

Government efforts so far to help out troubled homeowners have been equally ineffectual. The Hope for Homeowners alliance program announced last year with great fanfare has so far only helped a few hundred mortgage holders.

It's no wonder Mags would turn to a company that promised immediate assistance. In fact, swarms of for-profit companies are advertising loan modification help right now. They are succeeding because consumers still don't really know where to turn, said Seattle-based mortgage fraud expert Richard Hagar.

"They are filling in where our government is failing," he said. "The government says go get a housing counselor, but when you make a call there is not always somebody there."

Many consumers have hit similar brick walls when dealing with lenders, Hagar said, creating an ideal opportunity for loan modification con artists.

At the unveiling of the White House loan modification program on Wednesday, officials reiterated that consumers don't have to pay for mortgage help. Still, the pitches by for-profit firms can be very powerful, Hagar said.

"They say they have special phone numbers and can get you help right away," he said.

The problem for people like Mags is that criminals and government-backed counselors can look identical to consumers who need help. The organizations listed on HUDs Web site – with names like Consumer Credit Counseling Services – seem indistinguishable from for-profit firms at first glance.

"Whether it's a scam or it's legitimate, it all starts off the same way," he said.

Mortgage brokers piling in
To some struggling homeowners, the salesman behind the mortgage modification sales pitch might sound familiar, says Curtis Novy, a California-based mortgage broker who is also an expert on mortgage fraud. He said many of his former colleagues are trying to make a quick buck in the loan modification market.

"A lot of former subprime loan officers have discovered all this is a money maker," he said. "They made money selling mortgages people couldn't afford and are now making money modifying those mortgages."

One online advertisement targeting real estate professionals recently viewed by msnbc.com promises mortgage brokers a healthy new revenue stream if they attend a class and learn loan modification skills.

"It just makes sense that you learn how to do loan modifications. A certain percent of the sellers you are coming across will qualify for a loan modification and you should be the one providing this service (and earning a fee for doing it)," it said.

Tanisha Warner, a spokeswoman for the Consumer Counseling Credit Services, she said she hears about consumers paying for modification help all the time.

"When people find their backs are against the wall, they are willing to believe that someone is going to help them," she said, while stressing that her firm's mortgage assistance services are free.

Not all for-pay loan help services are scams, though, so it's hard to give blanket advice, Hagar said. Many consumers find it necessary to pay a lawyer to work out a complicated loan restructuring, for example, and there's nothing wrong with paying a lawyer an up-front fee. Hagar said he's also seen some legitimate services that charge a small up-front fee, and ask for larger payment upon the completion of a successful modification. As a rough guideline, he said, consumers should not pay more than a few hundred dollars up front, unless they are dealing with a lawyer.

Some government regulators have begun to take notice of potentially misleading modification services. In February, Connecticut Attorney General Richard Blumenthal announced his office was investigating a company named H.O.P.E. Alliance after it allegedly asked for $1,500 in up-front payments from consumers. In order to afford the fee payment, the firm told customers to stop paying their mortgage, he said. The firm's name also deceptively mimics the name of the government-backed, nonprofit modification effort, Blumenthal alleges.

On the Web site announcing the new White House loan aid plan – FinancialStability.Gov – federal officials also make clear that up-front payments are not necessary to get help.

"Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!" it reads.

Still, that message hasn't gotten through to consumers like Mags. And when HUD's Web site lists phone numbers that go unanswered and banks give consumers the runaround, it's no wonder troubled homeowners are tempted to pay when they finally find someone who will answer the phone.

As federal officials continue to create programs to help troubled homeowners, they should be sure their marketing plans are at least as extensive as those designed by con artists. HUDs counselors should be the first link that lands in a Google search, for example. Public service announcements from the president telling consumers where to get free help wouldn't hurt either.

RED TAPE WRESTLING TIPS
There is no reason to pay for mortgage help. When trying to get a HUD-approved counselor, persistence will pay off. Visit the HUD Web site and try several phone numbers until you reach someone who sounds genuinely interested in helping. Msnbc.com reached a counselor on our second try.

Beginning this week, you can test your eligibility for a government-backed loan modification at the Financial Stability Web site.

If you are tempted to pay someone, don't do so until you get results. You wouldn't pay for auto repairs or a home remodel until the work is done, so why pay a mortgage modification company? As a rough guideline, Hagar said, consumers should not pay more than a few hundred dollars up front unless they are dealing with a lawyer.

People facing mortgage problems often are embarrassed and try to deal with them privately. If anyone in your family might be in trouble, don't be shy. Recommend they visit the HUD Web site – take them to a computer and show them the site if need be. HUD counselors can offer a variety of solutions to consumers. Warner said a surprising number of consumers are able to refinance and avoid foreclosure, thanks to new government-backed programs.

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It happens every year: As soon as consumers begin gathering their tax information, tax preparation companies begin trying to talk them into taking out costly loans against any refunds they might have coming. The so-called refund anticipation loans are controversial in the best of times, but critics are turning up the heat on the practice this year, saying that taxpayers' money – courtesy of the $700 billion banking bailout by Congress -- is helping to fund the business.

A consortium of consumer groups recently complained that nearly $200 million in federal bailout money has been given to the bank responsible for most of the tax refund loans marketed by Jackson Hewitt Corp., the nation's second-largest tax preparation company.

"That taxpayer bailout money is being used to fund these high-priced loans is simply outrageous," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Refund anticipation loans, or RALs, are a lucrative business for the tax preparers. In 2006, 9 million consumers obtained such loans, paying $1 billion in fees.

Santa Barbara Bank & Trust is a small bank, but it is a big player in refund loan business. It made nearly 2 million refund loans last year, earning fees of $118 million – nearly half the company's after-tax income, according to the consumer consortium.

Meanwhile, more than one-third of Jackson Hewitt's revenue last year came from arranging the pricey loans, according to a recent article in Barron's.

Jackson Hewitt spokeswoman Sheila Cort confirmed that the Santa Barbara bank is the "majority provider" for its refund loan program, but directed other questions about the program to the bank.
Pacific Capital Bancorp, the holding company for Santa Barbara, said in a statement that it isn't using bailout money to expand its refund loan program.

"The company is utilizing this additional capital to support all of its lending programs, under the spirit of the (bailout). This capital was not intended to nor is it being used to build, to increase, or to fund the company's Refund Anticipation Loan program," it read.

But Fox countered that the bank's refund loan program would not continue if the firm didn't have the money to back such loans – providing the required "capital ratio" needed to continue to pass muster with regulators.

"Money is fungible," she said. "We can't say they are loaning out TARP (bailout) money for refund anticipation loans but (the bailout money) certainly assists the bank in maximizing the number of refund anticipation loans they can make."

How refund anticipation loans work
RALs work like this: When customers of storefront tax preparation companies learn that they have a tax refund coming, they are offered the chance to get the money almost immediately. For a fee, the tax preparer arranges a bank loan for the refund amount. The bank then keeps the refund when it arrives from the government.

IRS rules prevent tax preparation firms from directly granting the loans, so each partners with a third-party bank. H&R Block, the nation's largest tax preparation firm, works with HSBC Bank.

The loan fees are steep when viewed through the lens of a traditional bank loan. Expressed as an annual percentage rate, as required by Truth in Lending requirements, Santa Barbara charges customers an effective annual percentage rate of 113 percent.

Consumers usually are not sensitive to this fee, however, because they don't pay it directly; it is simply deducted from their refund.

Fees vary based on the size of the refund, but a consumer expecting a $2,600 refund could expect to pay about $95 in interest charges plus nearly $40 in processing fees, Fox said. Most must wait a day or two to receive their funds.

Refund anticipation loan consumers may not realize that taxpayers who file electronic returns get their refunds – for free -- in an average of 11 days.

For years, consumer advocates have criticized the loans as unfair and targeted toward the poor. The National Consumer Law Center says that two-thirds of refund loan applicants are recipients of the Earned Income Tax Credit, a special program designed to help poor working families.

"Refund anticipation loans take $600 million out of taxpayer-provided poverty assistance that's supposed to go to working families with children and instead goes to banks," Fox said.

Firms that issue the loans have also attracted the attention of regulators and faced a series of lawsuits. Earlier this month, H&R Block agreed to pay $5 million to settle charges by the California Attorney General's Office that the firm unfairly marketed the loans as early tax refunds. H&R Block admitted to no wrongdoing in agreeing to the settlement. In 2007, Jackson Hewitt paid $5 million to settle charges by the state that it unfairly marketed the loans to low-income consumers. The firm denied any wrongdoing.

Not everyone is happy about the Fed's half-point rate cut on Wednesday. Anyone who relies on interest income from bank certificates of deposits or other savings tools is about to see that income slashed. With each step down the Fed takes in interest rates, savers get pinched.

Bank CDs and money market rates are not formally tied to the targeted federal funds rate, but they generally move in parallel. The last time the Fed rate was at 1 percent -- for a year from mid-2002 to mid-2003 -- CD rates plummeted to a little over 2 percent.

"I remember there was quite a bit of pain," said Liz Weston, personal finance expert and author of "Deal With Your Debt."

The difference can be more than it might seem at first blush. If CD rates drop from 2.5 percent to 2 percent, a saver's income plummets by 20 percent.

"It can be really tough. People have gotten pretty used to supporting an OK lifestyle just on interest," Weston said.

Internet-only savings accounts, like those offered by ING Direct, HSBC, and others – which have higher yields than their brick-and-mortar competitors -- have also taken it on the chin as lending rates have dropped. On Oct. 9, one day after the last Fed rate cut, ING Direct lowered its savings rate from 3 percent to 2.75 percent, for example.

There is hope for those who are counting on the safe accounts with higher interest rates, however. A number of factors are combining to keep CD rates higher than they'd normally be at a time of such low Fed rates.

"In typical times CD yields are highly correlated with the Fed rate. But these are not typical times," said Greg McBride of Bankrate.com. Because banks are still scrambling to shore up balance sheets, they are doing all they can to attract bank deposits, and competition has helped prop up rates. Top 1-year CD rates have only fallen about 1.5 percent since September of last year, McBride said, while the Fed rate has declined from 5.25 to 1 percent during the same span. Careful shoppers can still find one-year CD rates for around 4 percent, he said.

"Because banks are hungry for deposits, that's keeping a floor under rates," McBride said. He expects CD rates to stay reasonably high for the foreseeable future, even if the Fed funds rate is cut again – to below 1 percent. "The credit crunch isn't going to go away overnight," he said. "... As long as there's a persistent credit crunch that will keep a floor under CD yields."

Ray Montague, manager of deposit customer services for Calabasas, Calif.-based Informa Research Services Inc., isn't quite as optimistic. While high rates are still available to Internet shoppers, average brick-and-mortar CD rates have already fallen to under 3 percent and will probably go lower, he said.

The key, he said, is that many banks are offering aggressive rates for "new money" from new customers. But those who automatically roll over CDs at their local bank without paying close attention can end up with rates just over 2 percent, he said.

Still, Montague doesn't expect the floor to drop out from under savings interest rates.

"It's not doom and gloom or anything," he said. "Regular brick and mortar banks will lower rates 5 to 10 basis points in the next few weeks, that's all." For example, a bank offering a rate of 3.25 today might drop that rate to 3.20 or 3.15.

CD and savings rates won't necessarily plummet immediately following the Fed's decision to lower rates. This rate cut was no surprise, and many banks have already "baked in" the lower rate. But financial advisers say it's critical for savers to shop around.

One tactic many banks use to minimize interest payments to careless consumers, while still attracting savvy consumers, is to offer high rates on "off-cycle" CDs, Montague said. He tells consumers to keep an eye out for 7-month CDs, for example, which often have higher rates.

"My suggestion to consumers is don't let banks automatically roll over CDs. Don't expect the banks to look out for your best interest," he said. "A lot of banks, especially the bigger ones, will not put their most competitive products on their Web site. You have to ask." He also said local bank managers have wiggle room when it comes to rates, so it pays to negotiate. A threat to move your money to a competitor might earn you an extra .10 or .15 percent. "You won't know until you ask," he said.

Help your elderly parents
Children of older parents should be particularly alert right now, said Weston. The elderly, who make up 70 percent of the CD market according to some studies, are unlikely to bargain for better rates or bother to shop around. Talk to elderly parents, she advises, even if it's difficult.

"These conversations can be really tough, especially if you don't talk about money often," she said. "But find a way. Try this: 'Mom and dad, we've been looking at our own situation and made some adjustments. Are you guys OK? We got a great rate on our emergency savings at XYZ bank, how about you?' A little hand-holding can go a long way."

The last time interest rates fell so low, con artists seized on senior citizens' fears of reduced interest income to peddle all manner of scams or unwise financial products, Weston said. She expects the same sort of fear-mongering to occur again.

Those who rely on interest income might be tempted to consider annuities now that CD interest is so meager. But seniors who consider switching from CD savings to annuities -- which promise steady returns -- should carefully consider the choice, she said. Annuities are not appropriate for senior citizens in low tax brackets, and should only be considered by high-net worth individuals who are looking for tax advantages, Weston said.

Savers penalized
The irony of the drop in savings interest rates is that the U.S. economy is learning the painful lesson that relying on credit is perilous, and that U.S. consumers really should be saving more money. On the other hand, interest rate policy offers a disincentive for savings right now.

Weston thinks tax policy should be altered to help consumers build up emergency savings.

"It would be so nice to have something simple like a tax credit for savings," she said.

In the meantime, the low Fed rates won't last forever and neither will low CD savings rates. So it's not a good idea to lock up a lot of money in long-term CDs, Weston said. The difference in interest rates between six-month CDs and three-year CDs is negligible. "I wouldn't go too far out because you're not getting compensated for locking your money up," Weston said.

On the other hand, even if the economy recovers or inflation reappears quicker than most economists expect -- and the Fed is forced to raise rates -- don't expect CD or savings rates to recover as quickly.
"What we've seen over and over is rates come up slower than they go down," Montague said. It should be no surprise: Banks will wait to spread the wealth.

RED TAPE WRESTLING TIPS
• Shop around for CD rates. Thanks to the Internet, shopping isn't that hard. For consumers who aren't worried about investing with a Web-based bank, there are many tools for finding the highest national rates, including msnbc.com's easy-to-use site, in partnership with Bankrate.com.
• To find CD rates by region, which will help you find a brick-and-mortar bank to invest with, look at msnbc.com's local CD rate search page by clicking here.

It's the empty houses, stupid.

In case anyone has forgotten the core of the current economic crisis, here's a reminder: empty homes, both present and future. Empty homes are behind all the supposedly worthless mortgage-backed securities that no one wants to buy on Wall Street. Fear of the coming avalanche of empty homes -- what the Center for Responsible Lending calls the "tsunami of foreclosures" -- has made Wall Street's mortgage-related paper nearly worthless.

It seems that filling those empty homes by dealing with foreclosures and stoking demand to buy homes should be the first order of business. So why -- as we discuss the most dramatic government intervention in nearly a century -- is there only passing mention of all these vacancies?

By every industry measure, foreclosure is a huge problem. Earlier this year, the financial services giant Credit Suisse estimated that there will be 6.5 million U.S. foreclosures during the next five years.

And even if you pay your mortgage on time, foreclosures will likely hurt you, too. Each time a family is kicked out of a home, there's collateral damage to the value of nearby homes. The Center for Responsible Lending says that the closest 50 homes lose an average of $3,000 in equity every time there's a foreclosure. The organization estimates that 40 million families will lose nearly $350 billion in equity due to foreclosure collateral damage during the next five years.

The bleak outlook was published in April, which should make you wonder why Congress only became interested two weeks ago and then started acting with incredible haste. The crisis has been brewing for some time.

There are really two related but distinct economic crises facing America right now. There's the liquidity crisis on Wall Street, which has us all breathlessly watching CNBC, and there's the housing crisis, which is kicking 6,000 families per day out of their homes and is draining equity from the rest of the nation's homeowners.

The liquidity crisis has superseded all other concerns in recent days, even the presidential campaign. Wall Street's advocates, Henry Paulson and Ben Bernanke, generated enough panic that Congress appears willing to sign a check for $700 billion. For a while, those advocating for Main Street held out for a quid pro quo – immediate help with the housing market crisis -- but the resistance lasted less than a week.

'A game of chicken'

"This was kind of a game of chicken and I'm afraid it looks like the consumer advocates in Congress are the ones who blinked ," said Adam J. Levitin, a bankruptcy expert at the Georgetown University Law Center.

Details of the not-quite-completed-bailout-plan are still emerging, but by all accounts it will not include the most obvious and direct tool to stem the empty house problem: adjustments to bankruptcy law that would allow judges to modify the mortgages of at-risk homeowners.

Such assistance could still materialize in Congress, but the Senate voted to reject the idea in April, spurred on by agressive bank lobbying. By agreeing to this bailout deal without fixing bankruptcy law, Main Street's advocates have surrendered nearly all their leverage.

I understand the theory that giving banks more money to lend can ultimately help restart demand for housing by making it easier for consumers to get loans and, as demand increases, boosting housing prices. But isn't that how we got here in the first place?

The proposal to help at-risk homeowners was simple: allow bankruptcy judges to rework loans (essentially, lower the mortgage principal and payments) to keep them in their homes and out of foreclosure. Sadly, supporters of the plan surrendered and instead focused on CEO pay -- a populist issue that's a distraction from the real problem of empty homes.

Critic sees bailout as 'unfair and ineffective'

"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."

The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.

The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.

There is the HOPE NOW alliance, set up by Congress this year to encourage at-risk homeowners and banks to renegotiate mortgages voluntarily. By all measures, it's been a failure. Banks aren't answering their phones when consumers call; trusts that service mortgages have perverse incentives in place that make foreclosure more profitable than renegotiated loans.

Allowing modification of home loans in bankruptcy would encourage banks to negotiate new terms, as it would allow the banks to avoid court costs and delays. Once bankruptcy courts set a few price points on modified loans, voluntary participation would likely follow.

The financial industry, which has long resisted modifying Chapter 13 bankruptcy, says that such a change would deal the mortgage-backed securities industry a body blow. Allowing judges to reduce the principal owed on a mortgage -- lenders call this a "cramdown" -- would lower the overall value of mortgage instruments, as a built-in bankruptcy discount would have to be applied, which would, in turn, harm consumers by restricting the flow of credit, banks say.

No sign of 'bankruptcy premium'

But Georgetown's Levitin published a study last month that indicates that other loan markets are not adversely impacted by bankruptcy modification. There's no difference in mortgage rates between primary residence loans and vacation residence homes, for example – and there would be if there were a "bankruptcy premium," he said.

Levitin argues that proposed Chapter 13 bankruptcy changes would in fact be "market neutral." Bankruptcy judges are well trained in determining consumers' ability to repay a loan, meaning many banks would get 50, 60, or 70 cents on the dollar, up to twice as much as they would realize after going through the costly foreclosure process, he said.

And neighbors would certainly agree that such a home loan modification would be preferable to another empty home.

"The contagion began on Main Street, and it has to be fixed there," said Day, from the Center for Responsible Lending. "You are not going to get at the root of this and really restore the economy until you stop all the foreclosures."

Other empty home proposals

Even with the bankruptcy option, not all homeowners would be able to stay in their houses, and there are already millions of empty homes.

To address that problem, David Colander, a professor of economics at Middlebury College, has another idea. He wants part of the $700 billion bailout to go directly to U.S. consumers in the form of housing vouchers. The vouchers could be used to pay off loans, or even better, to persuade some renters to jump into the homeownership market. Nothing greases the housing market quicker than turning renters into owners, he said, calling it a "trickle-up policy."

"Unlike a tax cut, or a temporary stimulus fiscal package, this plan would have a directed effect on the housing market and hence on the mortgage backed securities market," he said.

If carried out in conjunction with a bailout of financial institutions, it would raise the value of securities purchased by the government because home values would rise as demand increases, Colander said.
To ensure the plan maximizes the purchase of primary residences -- as opposed to investment -- the vouchers would be income-based, under his plan.

Of course, such direct intervention into a market -- giving consumers free money -- contradicts long-standing free-market policies. But then, so does having the federal government purchase $700 billion in bad loans.

When a college student who has just run out of money and maxed out her credit card gets that bailout from dad, what's the first thing she does? Throw a party, of course.

And so it is on Wall Street. The federal government just slapped its plastic on the table and said, "Put it on my credit card."

Banks, you see, recently cried "Uncle," and our money has been volunteered to save them. To no one's surprise, that means you and I are now going to pay hundreds of billions of dollars in small increments over several decades to backstop the excesses of the banking industry. My questions are: Will we at least get frequent flier miles and will they be worth anything?

Remember, this is the same industry that would show no mercy to a depositor who dipped 78 cents into the red when buying a hamburger with a debit card. The same banks that routinely charge $35 in fees to lend the shopper that 78 cents. I assure you, we will not get the same kind of return on our largesse.

And I don't want it. What I want is something much more valuable: In exchange for our money, I want the banking industry to behave. I want a sense of fairness and honor to return to the marketplace, and I want the industry to freely accept new rules, regulations and to learn a little restraint. A little humility would help, too.

Here's what will happen as part of the Treasury Department bailout plan. No one is going to knock on your door and say, "OK, drop $5,000 in this hat please." We're just swiping that national credit card now and we'll pay later. As with credit card purchases, we won't really feel this immediately. We're not going to trade in a national park or a few fighter jets. Instead, we'll just print more money. That's because the federal government can quite literally print all the money it wants. The consequences of that are not immediate, but they are real. Higher debt means a higher "minimum balance payment," so there's less to spend maintaining that park, dilution of the value of the dollar, perhaps ultimately inflation and less value to your savings and bonds.

But that's probably a fair price to pay to stop the crazed unwinding of Wall Street and its entangling alliances—a trend that has been accelerating over the past 10 days. It's time to take all the bad mortgages and all the bad bankers and give them all one big national enema so we can start over.

What about all those bonuses?
There are some issues where silence is disturbing, however. Recall that many, many charlatans made sickening amounts of money by pushing the financial crack of bad loans around America over the past decade. For brokers, the commission checks were huge. On Wall Street, the annual bonuses were big enough to pay for new homes in the Hamptons. But no one, so far, has asked for the return of that money. These folks knew how to game the system, and they knew as long as they grabbed the money and ran, they'd get away with it. They have.

As many have suggested, we've nationalized risk but privatized profit. We've taken the two worst elements of socialism and capitalism and blended them. We encourage outrageous business practices -- the equivalent of playing the lottery repeatedly -- that encourage boom and bust cycles of soaring profits followed by ruinous results. As CNBC's Jim Cramer says "We're all communists now." This must be the last time.

It is not hard to pick through the ruins and find irony. Investigators are still sniffing around trading patterns, but it appears a feeding frenzy of short sellers played at least some role in the takedown of Wall Street's biggest names. In other words, Wall Street almost ate itself, or rather was nearly eaten alive by shorts -- speculators who borrow someone else's shares in a company and sell them, betting that a company's stock will go down so they can buy them back at a cheaper price. When enough short sellers pile on, there's a feeding frenzy that can ultimately lead to a self-fulfilling prophesy, with all those outstanding shares of stock being sold by profiteers.

Fearing the virus-like band of speculators might continue to target other banks, Wall Street took the extraordinary step of banning short sales on Friday. That's odd, because those who talked about placing limitations on oil market speculators were often laughed at by investors as unsophisticated. Stock in double standards has exploded in recent days.

End the 'Great Divorce'
Still, we are better off making a deal and moving forward, as long as that deal bails out both homeowners and banks together. But a simple bailout is not enough. Now, things must change. The cult-like worship of unregulated markets must end. Never again do I want to hear someone preach to me about the market's infinite powers to heal itself. Stop arguing that all government intervention and regulation is bad, or that people who lose their home should just suck it up and deal with the Darwin effect. The high priests of unbridled laissez faire need to go take a long vacation now while reasonable people find a sensible middle course. Because you, Wall Street, and you, absolute capitalists, you could dish it out but you couldn't take it.

Today, I believe, we are offered a fresh start. We have an opportunity to set our economic system on a wise course for decades. And we have a chance to end what I call "the Great Divorce" between American companies and consumers. Remember when a Comcast technician renamed a customer's account "Bitch Dog." Ever read 1,000 comments in a blog about bank overdraft fees? Consumers and companies hate each other right now, and for decades have been engaged in a war that benefits neither.

It's time for a new social compact between government, industry and consumers that recognizes we're all in this together. Because now, we are all stockholders in many of these companies. It's time for an end to the mean side of America, the side that cheered while companies cheated people out of nickels dimes, quarters -- and eventually their homes. An end to get rich quick schemes and late-night infomercial hawkers who are enabled by mortgage backed securities. It's time for a "free market" that is not a free-for-all market. It's time for a transparent market where consumers have exactly as much information as the companies they're dealing with, so they can make solid decisions and the engine of the free market can do its work honestly.

In short, it's time for a return to honor, to a world where no company would ever base its business model on duping consumers, and a world where shoppers don't lie about defective products or emotional suffering. Tying new standards of fairness and transparency -- along with regulations and regulators with real teeth -- to any bank bailout is a way to get the whole country behind the plan. And, I believe, it's the only way forward. Because what happened to America this time is simple: We let the cheaters win for too long, and now we all have to pay.

Whenever mom gave you money as a child, she probably issued this simple, sage advice: "Don't spend it all in one place." Now that government stimulus checks are arriving in mailboxes around the country, major retailers are trying to rewrite mom's advice.

You should stick with mom.

Many stores are making an offer that sounds pretty good -- turn your government refund into a gift card at our store and we'll add 10 percent to the balance. For example, take a $300 check into any Sears and you can walk out with a $330 Sears gift card.

Meanwhile, Wal-Mart is offering free Visa-branded bank cards -- which can be used anywhere -- to consumers who load them with stimulus checks, waiving an $8.94 "card-issuance fee." Other fees, however, remain in force, so giving all your money to Wal-Mart is a bad idea, too.

With all these stimulus checks floating around the country -- $110 billion worth -- it should come as no surprise that retailers have concocted creative ways to get their hands on them. While electronic deposit payments arrived in May, paper checks will continue to be issued through July. Many of these 10 percent offers require presentation of the paper refund check.

But the usual advice about gift cards applies here: Cash is almost always better.

Destined for the sock drawer?

Getting the 10 percent bump in gift card value might seem attractive, but you can bet the retailer who gets your money will come out ahead. In fact, that 10 percent is carefully calculated: researcher RK Hammer says 10 percent of all gift card value goes unspent. Meanwhile, last year, Consumer Reports said that 27 percent of consumers have an unused gift card lying around somewhere in a sock drawer. So don't mistake the offer as generosity. And in the meantime, you've ignored mom!

"The big drawback is you have to use all that stimulus money at that retailer," said Michelle Jun, a staff attorney at Consumers Union. "And you may end up leaving a balance on your card."

There are other drawbacks, too. People who do use gift cards tend to spend more than the value of the card when they shop -- something that's called "lift" in the retail industry. Consumers generally overspend by 30 to 60 percent, said Tina Henson, CEO of Plastic Jungle, a gift card exchange site.

In other words, retailers win either way.

Another unanticipated risk: Retailer bankruptcy

But there is another way you can lose, and lose big: If the retailer who gets your stimulus money declares bankruptcy. To a bankruptcy court, a gift card is an unsecured debt; that means the plastic can become worthless overnight. This rather stunning fate happened recently to consumers holding Sharper Image cards, and last year, to those holding Bombay cards.

The story of Sharper Image cards is quite tortured. After initially declaring the cards unusable, a bankruptcy judge later allowed the store to accept the cards under this crazy condition: Consumers would have to buy something worth at least twice the value of the card in order to use it.

The bottom line is this: Consumers who hold gift cards are running more risk than they realize.

There is an exception to this otherwise party-pooper advice on stimulus checks and gift cards. If you already plan to buy one big-ticket item at a store making such an offer, it does make sense to use a stimulus check offer as an instant 10 percent coupon. But to be safe, get the gift card and turn around and buy what you want the same day. That way, you won't forget about it, lose it or risk a surprise bankruptcy.

Meanwhile, anyone who is tempted to give a stimulus check to Wal-Mart and get a bank card in return should really find another way to cash the check. The cardholder agreement for the Wal-Mart MoneyCard lists 13 different fees. Stimulus check users are exempt from only one. They'll still have to pay a $4.94 "monthly maintenance fee," a $1.95 ATM transaction fee, 75 cents to check their balance at an ATM and $2 to call an operator and ask for help.

Letting Wal-Mart nickel and dime you isn't going to help stimulate the economy! Just keep the cash. It'll be much easier to follow mom's advice that way.

For a fairly comprehensive list of stimulus check offers, you can visit this Web site.

More on the perils of gift cards can be found at the Consumers Union Web site.

A mistake last week by student loan firm Sallie Mae temporarily wrecked the credit scores of a million loan holders, with some victims saying their scores had sunk 100 points or more. While the scores have since been fixed, the Sallie Mae mishap provides a startling look at the impact of credit scores, how fragile the credit-scoring business is and how severe the punishment can be for one credit-related error: a potential cost of hundreds of thousands of dollars to individual consumers.

Earlier this week, Sallie Mae said it had changed the way it sends monthly payment information to the credit bureaus, and that change inadvertently caused about one million loan holders to end up with a serious blemish on the credit reports. The college lending giants offers borrowers graduated payment plans that allow former students to pay a little less in the initial years after they leave school, and a little more later. Sallie Mae's change caused the bureaus to view those on graduated payments as "arrangements made with credit grantor to make partial payments." That sounded to the credit bureaus as if the borrowers had signed up for a reduced payment plan after being delinquent, which carries with it a serious credit score stigma.

As to whose fault the errors ultimately were, take your pick: Sallie Mae, for changing the payment information provided to the bureaus; the bureaus for reporting the errors; or Fair Issac, the company that invented the formula used to calculate the scores?

Sallie Mae spokeswoman Martha Holler said the glitch affected "roughly 10 percent of our 10 million customers."

The impact was severe and immediate. Borrowers who discuss their credit scores on a message board created by credit score inventor Fair Isaac left panicky notes for each other all week, some claiming their scores dropped by close to 150 points after the glitch.

One victim who spotted the problem late last week said his credit report was pockmarked by errors.
"So I just ordered my new Score Watch report and under "Understanding your FICO Score" it says: 1 serious delinquency 60 days past due; Balances past due $3,013; Recently missed a payment 2 months ago. None of it is true."

'Sickening indeed'
Said another: "I was notified of a 140 pt drop in my credit score. Sickening indeed."

Holler said that the erroneous change only impacted Equifax credit reports and scores based on those reports. The error was fixed before Experian and Trans Union updated their files. And she said all the scores were fixed by Tuesday evening.

"Customers' credit scores were corrected (Tuesday) to what they ... should have been absent our error," she said. "We fully understand the importance of one's credit rating and that is why we worked with great urgency to fully resolve the situation. We sincerely apologize for this error."

Consumers worried about the Sallie Mae incident can examine their credit reports for free at AnnualCreditReport.com, if they haven't done so in the past year. But the only way to really make sure things are back to normal is to examine your credit score, which must be purchased at AnnualCreditReport.com or at various other outlets online.

The Sallie Mae mistake raises disturbing questions about credit scores. The most obvious is this: Why can one company, making one error, have such a devastating impact on consumers? A 100-point drop in a credit score can turn a prime mortgage borrower into a sub-prime borrower. Last month, I explained that a 100-point difference can nearly double the interest rate a mortgage borrower must pay, costing a consumer an astounding $750,000 extra in interest during the life of a $500,000 loan. Even a 50-point drop can cost a consumer about $150,000 more.

Can one blemish -- real or accidental -- cause that much of a penalty? Yes indeed, says John Ulzheimer, who helped design the credit score formula at Fair Issac and now runs consumer advice site Credit.com. He is also author of the book, "You're Nothing But A Number."

200-point drops
"One black mark can damage your score that significantly. In fact, we've seen many scenarios where scores have dropped more than 200 points because of something derogatory hitting the credit files," he said. Making matters worse, a single black mark will have a deeper effect on those with perfect credit that those with already damaged reports. "Higher scores will be damaged more by new derogatory information," he said.

Liz Pulliam Weston, MSN columnist and author of "Your Credit Score," says she has seen simulations showing that one late payment can knock 100 points off of a credit score in the 800s. Still, she says, it usually takes a series of events "to really trash a score." While the scroing system works well in general, accidents clearly happen.

"The scores are pretty robust on a macro level, but may not be on an individual level...Overall, the scores seem to do what they're supposed to do, but that doesn't mean individuals don't get unfairly punished for bad data," she said. "Bottom line, lenders don't care about individuals--they want to make a profit, and if they wind up excluding a few good risks because of bad credit info, oh, well."

While the Sallie Mae mistake was corrected quickly, the sheer volume of consumers it affected suggests at least some were directly harmed by the incident because they applied for credit last week while the lower score was in force.

"Who knows how many people were declined credit or approved at disadvantaged rates and have no idea why?" Ulzheimer said.

But the incident raises another issue that Ulzheimer frequently complains about. Credit reports are notoriously riddled with errors -- mistakes most people discover only when they are in the middle of a major purchase. At that point, it's often too late to get the scores fixed in time for a mortgage to close or a car to be purchased. Generally there's a 30- to 45-day lag time when fixing credit report errors, Ulzheimer said, because lenders send data to the credit bureaus in large batches, only once a month.

Bureaus could move more quickly
The Sallie Mae incident reveals that credit bureaus can update their files more frequently, and they should be willing to do that for any consumer who has a mistake in their file.

"Credit bureaus can update information in 24 hours when they're motivated to do so," he said. Right now, however, a consumer's only option to quickly fix a credit report error is to hire a third party "rapid rescoring" company. "You could spend $1,000 or more just to update your own credit reports," Ulzhwiemer says. "That's a joke." And consumers have little legal recourse against the furnishers of bad credit information or the credit bureaus that store it.

For Sallie Mae borrowers, there's nothing funny about last week's incident. Many reacted to the change by immediately changing their repayment plans to surrender the graduated payment advantage, thinking that would fix their score. Now, they must undo those changes. And of course, they live with the knowledge that their credit scores, and their financial lives, are indeed one corporation's mistake away from serious complications.

Did major credit card firms conspire to change their member agreements and limit consumer rights? Consumers may find out now that a federal appeals court has revived a class-action lawsuit alleging such anti-competitive practices by banks.

In 2005, a lawsuit was filed against a "Who's Who" of credit card issuers, claiming the companies colluded to limit consumers' rights by implementing mandatory arbitration clauses. The banks even formed an "Arbitration Coalition" and swapped tips on writing enforceable agreements, the lawsuit alleges.

But it was dismissed by the U.S. District Court for the Southern District of New York in 2006, when that court ruled the plaintiffs were unable to prove consumers had suffered any harm. In legal terms, the court found the plaintiffs did not have "standing" -- that is, without identifiable harm, there was no legal claim to argue.

On Friday, the U.S. Court of Appeals in New York reversed that decision, agreeing with the plaintiffs' that it is feasible to prove cardholders had been harmed through a lack of competition. Specifically, the court found the plaintiffs might be able to prove that a card which "limits the holder to arbitration is less valuable ... than a card that offers the holder a choice between court action or arbitration," and that cardholders may have "been forced to accept a less valuable card as a result of the banks' alleged collusion."

The case was sent back to the lower court.

Defendants in the case include of Bank of America Corp. Capital One, Discover, Citigroup and Washington Mutual.

Can't go to court
Mandatory arbitration clauses appear in nearly all consumer contracts now. They force consumers who have a dispute with company to forgo lawsuits -- even class-action lawsuits -- and instead file claims with an arbitration board. Some argue that arbitration is more efficient and brings swifter dispute resolution. But several consumer advocacy groups oppose arbitration clauses, saying they limit consumer rights and could spell the end of class-action litigation. Legislation proposed by Sen. Russ Feingold, D-Wis., would outlaw binding arbitration clauses. Meanwhile, several legal cases challenging arbitration clauses are working their way through the courts, including the conspiracy case revived by the appeals court.

"I think it's an important ruling," said Paul Bland, staff attorney at Public Justice, an advocacy group which opposes arbitration clauses. "The defendants' argument amounted to the idea that even if all of these banks did get together and agree to have an identical term in their credit card agreements that limited the rights of cardholders in significant ways, that the cardholders had no claim under the antitrust laws … because these limitations supposedly benefited the cardholders. The Court rightly rejected this decision, holding that restricting cardholders' choices and rights does harm them."

Conspiracy theory
The case alleges a far-flung conspiracy by credit card companies. "(Beginning) before late 1998 or early 1999, defendants began communicating with each other and their co-conspirators concerning the imposition and use of mandatory arbitration clauses," the lawsuit alleges. "After preliminary meetings and communications, the banks formed an 'Arbitration Coalition' to recruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups. "

Ultimately, the card issuers' cooperation led to "the removal of all non-arbitration credit cards from the market, thereby depriving the cardholders of meaningful choice in the area of credit card services, and a diminution in the overall quality of credit services offered to consumers," it alleges. "Banks participated in a group boycott by refusing to issue cards to individuals who did not agree to arbitration."

While the appeals court ruling is a victory for arbitration opponents, it is a limited one. The court made no ruling on the legitimacy of arbitration itself, or even on the collusion claims. It merely ruled that the plaintiffs might be able to prove real harm to consumers if they also prove anti-competitive conduct by the card companies.

Card companies say the core allegations of the lawsuit are baseless.

"Today's appellate court ruling is not a decision on the merits of the banks' arbitration policies or practices," Citigroup spokeswoman Janis Tarter told the Reuters news service. "The plaintiffs' allegations, however, are without merit, and we are confident that a court will agree once all the facts are presented."

'Nearly identical'
But Bland thinks the revival of the case will likely create an intriguing opportunity for consumers to gain new insights into cooperation between credit card companies.

"I don't know what the truth is about why pretty much every large credit card company adopted arbitration clauses that are nearly identical in the space of about one year ... but if the plaintiffs are right that the banks did get together and agree to adopt uniform contract terms, that will be very significant in the broader public debate taking place in Congress," Bland said. Arbitration supporters often argue that consumers who dislike arbitration can avoid relationships with companies that require it, but collusion would make that impossible. "If all the major banks got together and agreed to take these rights from their customers, how much choice do they really have?" he said.

While the case goes forward , it still must clear several legal hurdles before a judge entertains arguments about the legitimacy of arbitration clauses. One issue still to be decided: Some of the defendants have asked the court to compel the plaintiffs into arbitration.

Having taken a look at what credit scores are -- and what they aren't – in Friday's column, we're ready to look at how they came to be used for purposes for which they were never intended and how they gave birth to a cottage industry aimed at manipulating them.

You might be surprised to learn that even the people who invented credit scores say their use has gotten out of hand. And if lenders learn a simple lesson – that they should rely a little less on a number and a little more on interpersonal skills when making loans -- the current credit crisis might have a silver lining.

"There became an over-reliance on credit scores," said Lisa Nelson, vice president of global scoring for Fair Issac, who is in the unusual position of telling banks they put too much stake in her product. "Lenders became came too overly focused on credit scores."

Express mortgage vetting that leaned too much on credit scores made a lot of companies a lot of money during the go-go days of the housing bubble. Bear Stearns was one. Now, many of those companies are in the cross-hairs.

Bear Stearns' collapse was precipitated by the implosion of two hedge funds last year that invested chiefly in risky mortgages. That turned out to be a mortal blow to the company, and Bear Stearns' collapse may yet do wider damage to the economy.

But can credit scores themselves be faulted?

'Very smart but very limited'
You can blame credit scores for a lot of things -- unfair mortgage interest rates, sneaky auto insurance premium hikes, to mention a few. But you can't blame them for the housing meltdown, say supporters of the three-digit numbers that control so much of consumers' lives.

"Credit scores are very smart but very limited in what they do," said John Ulzheimer, who worked at Fair Isaac for nearly a decade and now runs consumer advice Web site Credit.com. He's also recently wrote a book called "You're Nothing But a Number."

Fair Isaac is on a crusade to correct overly ambitious descriptions of just what credit scores can do. They do not, strictly speaking, predict a borrower's ability to repay a loan, says Fair Isaac spokesman Chris Groppa.

"The score actually quantifies the odds that borrowers will become seriously delinquent in repaying ANY creditor within the next two years -- card issuers, banks, retail stores, etc," he wrote in an e-mail. "The score does not predict the risk for one specific loan or credit account unless, of course, the consumer only has one credit account on file at the credit bureau. This mischaracterization is a subtle but common misperception about FICO scores (the original credit score invented by Fair Isaac)."

The distinction apparently was lost on banks, which during the past 10 years came to rely more and more on credit scores. Some even bet their business on the numbers, and lost.

Credit score fixers
Meanwhile, the increased reliance on credit scores forced home buyers in competitive markets into a shadowy den of thieves -- credit score fixers. There are now hundreds of companies who say they know the secret sauce that goes into calculating a credit score and claim they can help you improve your number quickly -- for a fee.

The shroud of secrecy around credit scores encourages this behavior. There are, in fact, legitimate ways to improve your score quickly, through what the industry calls "rapid rescoring." But it's nearly impossible for consumers to tell the difference between legitimate rapid rescoring and the snake oil salesmen.

The latter may take hundreds of dollars from consumers and merely send in automated disputes of every item in a credit report in an effort to remove one or two black marks.

On the other hand, the rapid rescoring industry has the blessing of the credit bureaus. Generally, consumers only discover mistakes in their credit reports when they are applying for a loan, when time is of the essence. It normally takes 30 to 60 days to clean up mistakes on a credit report because creditors only send in items to the bureaus once each month, Ulzheimer said. Rapid rescoring firms can fix errors and update credit reports within a day or two -- for $50 per report, per item, Ulzheimer said.

"You could spend $1,000 or more just to update your own credit reports," he said. "That's a joke."

While the service can be a life saver for consumers struggling to get a decent rate on a loan, its mere existence points out problems in the system, he said. If someone can change their credit score from 620 to 670 overnight, which number is the accurate reflection of their risk to a lender?

Credit 'scorecards' are key
Consumers can easily be tempted to use illegitimate firms to improve their scores – in part because it seems some consumers really do win the credit score lottery. There are countless stories from consumers who say they've removed one black mark on their report and pumped up their credit score 30 to 40 points -- which as we've seen could means thousands of dollars in savings each year.

If any single credit item could have that much of an impact on a credit score, it would cast some doubt on the efficacy of the scoring system, which would seem fragile if it were subject to such wild swings.

Both Ulzheimer and Nelson say no one change could have such a dramatic impact on a score. In fact, they say, there is no way to assign a point value to individual items. Each time a lender gets a credit score, the scoring formula is re-run on an entire credit report, and a new score is generated from scratch. Because account balances are generally fluid, there is no way to assign exact values to any item.

There is an explanation, though, for large swings. Ulzheimer says that consumers fall into different buckets, or scorecards, within the Fair Isaac formula. One scorecard is for those with short credit histories, or "thin" credit files. Another is for those who have filed bankruptcies. Another is the "derog" scorecard, for those who have derogatory (unpaid) accounts in their files. Each scorecard uses a different formula. When a consumer shifts from one to the other -- something called "scorecard hopping" -- their score can shift dramatically up or down. So, a consumer who jumps from the "derog" scorecard to the "clean history" scorecard may indeed see a big credit score increase, for instance.

That means consumers with perfect credit can suffer much more from a single mistake, or a single dispute with a lender, than a consumer with bad credit.

Meanwhile, the Internet is awash with ways to improve your credit score by small increments. One that seems to work is to shift balances among your existing credit cards -- it's better to have several cards with modest balances than one card with a huge balance and several cards with a zero balance.

Changes coming
Many score-enhancing tricks will be "gamed" out of the system, however, by FICO 08, the new credit scoring system that Fair Isaac is expected to release later this year.

One trick that will lose its oomph is the practice of adding "authorized users" to an account. Consumers have been able to tack other users onto their credit cards and essentially "borrow" their good credit. A small cottage industry formed during the housing boom to match up willing credit "donors" with consumers who had poor credit scores.

Fair Issac says the new scoring formula in FICO 08 will eliminate that trick and do a better job of assessing risk for consumers with so-called "thin" credit files, meaning they have few credit accounts. Recent immigrants frequently fall into this category.

But still unaddressed is the problem of unfair scores that arise from inaccurate credit reports, and the difficulty consumers can have fixing them. Ulzheimer said that simplest thing the industry could to do to clean up its act would be to force the credit bureaus to quickly repair errors.

"The score is only as good as the report it's based on," he said.

But even that isn't enough to save lenders from themselves when they rely too much on credit scores and don't take into account other obvious factors like income and assets. In his recent book, "The Two Headed Quarter," mathematician Joseph Ganem talks about the seductive power numbers have over people. Many can't resist the notion that numbers are objective and infallible, when in fact, they often require context to understand and can easily be manipulated. SAT scores, for example, once measured students' verbal and math ability. Today, they largely measure students' ability to afford expensive preparation classes, he says.

"People are very adaptable and very responsive to how they are being rewarded," Ganem said. Hyper-focus on credit scores naturally encourages lenders and banks to simply focus on improving those scores, rather than focus on being responsible borrowers. And mortgages lenders – and the investors who buy up mortgage loans – use credit scores to rationalize risky investments. "People give great weight to numbers so there can be accountability," Ganem said. "But in fact they have the reverse effect, because numbers can be manipulated."

De-emphasizing the credit score would get under control some of the lunacy of credit repair, rapid rescoring charges and credit score mythology. It might also take the jingle out of those credit score television ads, something that would likely benefit all consumers.