Judge Rules Sprint Early Termination Fees Illegal

Antiglobalism writes to tell us that an Alameda County Judge has ruled against Sprint Nextel in a class-action lawsuit, awarding customers $18.2 million in restitution for early termination fees. "Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users. The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee."

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Anybody think that this will change anything?

[flanksteak]

Prorated termination costs seem reasonable, especially given the subsidies on the hardware. I was surprised to see that Sprint is the only company that doesn't prorate. I figured the wireless companies would avoid any change that makes it easier for customers to change providers. When selling a commodity it's essential to avoid the profit-killing, competing-on-price, race to the bottom.

This will be appealed, so I don't see anything changing in the short term. The figures on the $55 million in uncollected fees is impressive. It would be interesting to know how much of that would be profit after subtracting the depreciated cost of subsidized hardware.

The disappearance of the 1-year contract bugs me, but at least it's easier to move up and down in rate plans once you've signed up.

And yes, it would be nice to have the option to buy unlocked phones from any vendor and use them with any provider, but I'd bet that less than a quarter of the customer base would make use of this on a regular basis. TMobile comes closest to supporting this now, but I left them when I got an IPhone and really do miss dealing with them. Their customer service web site is far superior to AT&T's.

Re:Anybody think that this will change anything?

[Rayeth]

The subsidized phone cost is really the root of this problem. I wonder if America would just be better off if we moved to a system like in Europe and Asia, where phones cost much more, and the plans are significantly reduced.

Re:Anybody think that this will change anything?

[Rob Kaper]

Plenty of people in Europe have subsidised phones on contract. Of course you can also go pre-paid, or buy a phone seperately, or get a SIM-only contract.. but there's no system in Europe in place which prevents subsidised phones.

The big difference is probably that we can get any phone from any store with basically any out of half a dozen different operators while in the US in most areas you have fewer choices of providers, if what I've been hearing here is correct.

Re:Anybody think that this will change anything?

[wealthychef]

it would be nice to have the option to buy unlocked phones from any vendor and use them with any provider, but I'd bet that less than a quarter of the customer base would make use of this on a regular basis.

Maybe only a quarter of the customer base would use it, but everyone would benefit by the increase in competition that would result.

Re:Anybody think that this will change anything?

[flanksteak]

I don't know about Asia, but I know in the UK all providers offer free phones for 18-24 month contracts. Termination fees are prorated, in that you have to pay for the remaining months on the contract. If you get cold feet early on, this is a helluva lot more than the $200 you have to pay Sprint today.

The primary difference is that it's much easier to buy any old (or new) phone and buy a sim on any provider. The networks aren't anywhere near as locked down as they are here.

Re:Anybody think that this will change anything?

[QuantumRiff]

The problem is, that if you bring your own phone, (or purchase outright) you are still paying for the subsidized cost in the plans.. Personally, it would make alot more sense to me if they split out the bill so that your Cell Service was (for example) $45, and the Phone purchase was $5 each month. (instead of a $50/month plan). Then, there would actually be a benefit to bringing in your own phone. Cable Internet companies, at least in my area, do this, I pay for internet, and I pay $x/month on top for the "cable modem rental fee".

Re:Anybody think that this will change anything?

[Sockatume]

Most phones are locked to a carrier in Europe, too. Fortunately unlocking is ubiquitous and cheap.

Re:Anybody think that this will change anything?

[mc900ftjesus]

You can do this in the US, the big problem is that you qualify for better monthly rates with a contract, this shouldn't be allowed. Phone costs are arbitrary in comparison to your plan.

In two years, a $99/month plan costs you $2376 before taxes. A $300 phone isn't such a big deal is it?

Re:Anybody think that this will change anything?

[Volante3192]

Or how about after your initial contract runs out? Right now I'm in a 2 year contract with AT&T. I don't expect my $40/mo to go down after I "pay" for my phone, even though that's the whole theory behind the contract.

Since the phone is now mine, why don't I get a lower, unsubsidized rate?

Re:Anybody think that this will change anything?

[superdave80]

This would be a good thing, but ONLY if phones were required to be used on any network. Imagine shelling out $500 up front for a phone with company X. Then after a month or two, you realize that their service/coverage/whatever sucks. Then you try to switch to company Y, only to find out that your $500 phone ONLY works on company X's network. That $500 for the phone starts to look a lot like an early disconnect fee.

Re:Anybody think that this will change anything?

[flanksteak]

America is also in the unusual situation of having two incompatible networks. The majority of US mobile phone customers are on CDMA, while only TMobile and AT&T are GSM. Even if you wanted to switch, the tech limits the choices.

This changes everything

[SlashDev]

If this goes through without appeal, other suits will follow and that will certainly impact plan pricing, since a large number of users don't want to leave their current provider because of those early termination fees.

I don't understand

[FredFredrickson]

The article was light on details.. why did they decide that fees that are clearly stated in a contract before people entered the contract are now illegal?

I hate cell companies as much as anybody, but that's how they subsidise those cheap phone prices.

Re:I don't understand

[rcw-work]

The article was light on details.. why did they decide that fees that are clearly stated in a contract before people entered the contract are now illegal?

Because cell phone companies aren't willing to negotiate contracts with consumers, and the few cell phone companies that consumers can choose from all have equally evil contracts.

Also, contracts are only valid if there's a quid pro quo - if there's no prorating, the judge may take that into account.

In the end, contracts are only binding if they are legal - you can't sell yourself into slavery, you can't contract out a hit on someone, etc etc.

Re:I don't understand

[manekineko2]

According to this article, it was a violation of California's unfair business practices act:
http://www.baltimoresun.com/business/bal-bz.sprint30jul30,0,2416808.story

"Wireless carriers say early termination fees are necessary so the companies can recover the cost of mobile phones, which they subsidize when customers sign long-term service contracts.

But the judge in her ruling said the contracts were "implemented primarily as a means to discourage customers from leaving" and that the company gave little regard to the cost of broken contracts."

And remember, in the United States, just because something is clearly stated in a contract doesn't mean the contract is enforceable. For instance, a contract to make yourself a slave will not be enforced by a court.

Re:I don't understand

[mr_matticus]

The problem is twofold. One, the ETF is charged indiscriminately, regardless of the value of the subsidy. This means that it is a deterrent from switching carriers for those who owe no subsidy. Two, Sprint does not prorate its ETF (or did not, as of this lawsuit) like e.g., AT&T does.

Addressing both of these concerns with a subsidy-recovery fee would be perfectly enforceable. The summary's implication that this may start a domino effect is a relatively obtuse statement.

Penalties for breaking contracts are upheld daily by law if disclosed. Penalties that are in no small part cost recovery, doubly so. However, it's been clear for many years that the cellular companies don't actually care about just covering their losses--otherwise they'd be able to tell you at any given point what your prorata share of the original hardware subsidy is. You as a consumer should also have the the right to pay the remaining subsidy amount plus a nominal penalty for processing ($~25), and then be placed on a month-to-month plan or walk away.

Re:Case Law Precedent?

[Osurak]

This sounds like a good time to get one of those $199 subsidized iPhones and walk away from the contract.

But isn't the whole mortgage crisis based on the same principle? People walking away from their contracts?

No, the mortgage crisis was caused by a combination of irresponsible lending practices by lenders and people attempting to live beyond their means. People walking away from the contracts was an effect, not a cause.

Judge Rules Signed Contracts Are Unenforceable

[Mesa MIke]

Surely EULAs are even less enforceable than signed contracts?

Re:Judge Rules Signed Contracts Are Unenforceable

[b96miata]

More disturbing to me is the fact that he overruled a jury.

From TFA:
" On June 12, a jury in the Alameda County lawsuit ruled in favor of Sprint Nextel, determining that its customers who canceled their service early had breached their contracts with the company and that early termination fees were warranted.

But in overruling that decision, Sabraw said the jurors appear to have erred in assuming the fees were valid, and she took issue with the way Sprint Nextel determined that its customers owed the fees."

Re:Judge Rules Signed Contracts Are Unenforceable

[Anonymous Cowpat]

I'd be more disturbed if the judge didn't have the power to overule a jury when they're wrong.

The argument is that the jury made a decision that the contract was breached, given that the fees clause was valid.

The judge has now ruled, as a matter of law, that the fees clause was not valid, which makes the jury's judgement of the facts at best irrelevant. Presumably there is now no fact to be tried by a jury - the part of the contract that the customers have supposedly breached is invalid, therefore no breach could have occured, therefore no fees.

Re:Judge Rules Signed Contracts Are Unenforceable

[hyperz69]

I guess Jury Nullification is dead... Long live Judicial Nullification.

Re:Judge Rules Signed Contracts Are Unenforceable

[Zordak]

Happens all the time. The judge has already decided her interpretation of the law (or even that there's insufficient evidence), but she sends it to the jury because a jury verdict is harder to overturn on appeal than a summary judgment. She was probably hoping that the jury would rule in favor of the customers, because it's less of a headache for her. They didn't, so she says, "Sorry, as a matter of law, this contract is not enforceable. So the jury's finding is moot, because it was based on the faulty assumption that the contract was enforceable." And since this is a state court, 7th Amendment doesn't apply, even if she had overturned the jury's finding. Like it or not, this is a very, very common occurrence.

Bad News

[LBArrettAnderson]

I hope that I read that wrong. You can get good deals by entering a long term agreement. I pay about $30 less per month for my collocation because I have a 2-year agreement. Are you saying that I should be able to pull out after a month and not have to pay anything? Even if my setup fee was waived because of the deal? That sounds unfair to the providers and if this continues it will result in higher prices for everyone.

Re:Bad News

[Solandri]

I hope that I read that wrong. You can get good deals by entering a long term agreement. I pay about $30 less per month for my collocation because I have a 2-year agreement. Are you saying that I should be able to pull out after a month and not have to pay anything? Even if my setup fee was waived because of the deal? That sounds unfair to the providers and if this continues it will result in higher prices for everyone.

You have it backwards. You aren't paying $30 less per month for being in a 2-year contract. People who aren't in a contract or who bought their own phones full price are paying $30 per month too much. The phone companies set up a pricing structure which included prorated charges and termination fees for subsidized phones, but didn't remove those charges for people whose phones weren't being subsidized. If I paid for my phone up-front or it's paid off, why should I be forced into a contract to get lower rates or be charged an early termination fee?

The way it should work is there should be a base monthly fee for phone service and only phone service. If you want the phone company to give you a phone for a no-money-down (or $50-$100 down), then it should be structured as a loan and added on to your bill. If you end your service before the loan is repaid, you're on the hook for the balance of the loan - that's your termination fee. Those of us with old or fully paid for phones shouldn't be paying extra just because the phone company's pricing structure assumes everyone's phone is subsidized.

Re:Bad News

[Galactic Dominator]

Nope that's not what is being said. They said the cell phone companies were screwing customers and that the termination fee didn't accurately reflect the cost of a broken contract.

The ruling was in favor of the class action plaintiffs because cell phone companies have operated in collusion in regard to early termination fees. Whether that collusion was orchestrated, or merely a in indirectly agreed upon measure to weasel more money from clients, the result is the same.

Re:Case Law Precedent?

[riceboy50]

I thought it had to do with irresponsible lending by the banks/borrowing by home buyers. Basically, the bar was lowered considerably by taking on high-risk mortgages as ARMs (Adjustable Rate Mortgages). When they tried to adjust the rate, the risk came back to bite them in the ass and the irresponsible borrower could not afford to pay it.

Re:Best News I have heard all day

[alen]

because this is america and people only make decisions on the number they see. you can charge more but then someone will charge less and have a termination fee and this company will get all the business because everyone will say they are cheaper and go with them

Re:Case Law Precedent?

[networkconsultant]

Lendee: My boss is a dick and I have no proof of employment! Morgtage Broker: We get commissions anyway so we'll get you a "Liar's loan" for the downpayment and the bigger the morgtage the bigger the commish! you just have to pay interest on the loan at market rates. Lendee: Awsome, so the government will subsidize my american dream? Morgtage Broker: Exactly.

Re:Case Law Precedent?

[Red Flayer]

To be a little more complete, the easily available credit also increased demand on real estate, thus driving prices upward drastically... and the combination of tightened credit availability and a slower economy has now caused prices to fall, leaving people in a negative equity situation.

Some of the problem is people signing stupid loans (A 5-1 ARM with a ridiculous teaser rate?). Because credit tightened up, in order to sell the home (or refinance) before the fixed period was up (almost everyone's plan), they would need to take a loss... which they couldn't do because they were in a negative equity situation.

I think that more so than people choosing to live beyond their means, it was people paying too much for properties they bought... the necessary market correction in property prices left a lot of people in bad shape. Speculation that property prices would continue rising is as much to blame as bad lending practices and poor budgeting.

Key Legal Principles:

[sampson7]

Two very interesting things about this decision. First, the Judge appears to have over-ruled the factual findings made by the jury -- a fairly unusual practice, and one that is not likely to be upheld on appeal. Second, the Judge appears to have returned to "first principles" of contract law in reacher her decision -- good for her. We need more of this type of rational thinking.

There are two key points in the article (couldn't the actual opinion) hitting these points:

On June 12, a jury in the Alameda County lawsuit ruled in favor of Sprint Nextel, determining that its customers who canceled their service early had breached their contracts with the company and that early termination fees were warranted.

But in overruling that decision, Sabraw said the jurors appear to have erred in assuming the fees were valid, and she took issue with the way Sprint Nextel determined that its customers owed the fees.

Interesting; because judges are usually very reluctant to over-ride decisions made by juries. Generally, juries make findings of fact and the Judge makes the finding of law. Here, the Judge said that the Jury clearly erred in finding the contracts valid. Which makes me think that the Jury instructions were extremely poorly written, or that the Judge feels very strongly that the plaintiffs made the legal side of their case so well that "no reasonable jury" would have returned the decision that it did. (Also, I note that the Jury appears to have awarded damages despite finding that the contracts were valid -- this semi-contradictory result may have persuaded the judge to go in the direction she did.)

The second interesting argument:

"Sprint did no damage analysis that considered the lost revenue from contracts, the avoidable costs and Sprint's expected lost profits from contract terminations," she said.

YES! It is a founding principle of contract law that the non-breaching party's damage recovery is limited to its actual losses and its cost to make up the breaching party's violation of the agreement. Traditionally, a contract that agreed to damages in excess of the non-breaching party's actual exposure (i.e., punative damages) were ruled invalid and "reformed" by the court into something reasonable.

However, the courts over the past few decades have been relunctant to follow this principle -- instead, most consumer contracts today contain a "liquidated damages" clause, where the parties agree ahead of time on an estimate of what the actual damages would be. To me, fundamental principles of contract law dictate that an agreement to excessive liquidated damages clauses (particularly in consumer contracts) should not be upheld. I'm glad to see a court finally moving in that direction.

Re:Key Legal Principles:

[Sockatume]

That actually sounds very equitable. If phone companies switched to a more reasonable termination penalty, perhaps pro-rata fee where you basically bought out your subsidised phone (which is an outstanding debt you owe to the company) then this decision would not affect them.

Re:Key Legal Principles:

[Sockatume]

I should say, if Sprint switched to a more reasonable termination penalty - it sounds like others are more reasonable and may not be affected by this particular decision.

Re:Case Law Precedent?

[retchdog]

Incredibly, I'm going to have to pay back my student loans while these "classic" parasites get a free ride.

Re:Case Law Precedent?

[AuMatar]

ARM5-1 isn't a stupid loan. Its a low rate for 5 years. The idea is that before the 5 years are up you either sell, or refinance to avoid the higher rate (possibly to another 5-1, possibly not). It's actually a smart idea if you don't plan on living there 30 years. Now if you want a bad loan, look at interest only, 3 month ARMs, and negative amortization loans.

Buy me out

[Sockatume]

Also, operators (particularly resellers like Carphone Warehouse) are willing to "buy out" contracts to encourage people to switch. They eat the termination fee on your behalf. Phone Company X gets its subsidy, Phone Company Y gets its customer, Customer gets his free or cheap phone.

ARMs got a bad rap on that one

[grocer]

An adjustable rate mortgage, in and of out itself is not bad. In fact, before the reforms brought on by Great Depression centralized home lending into one system, the local bank would give you a ballon loan for 5 or 10 years, then refinance it or bounce it, and so on until the house was yours. 30 year mortgages were an effect of the federal banking system and didn't become common until post-WW II.

The high risk mortgage comes in where people were allowed to outright lie about their income and took on mortgage products traditionally used by people who had sterling credit. But the key is the outright lie there...if you're making 20K and then the broker has fluffed and self-reported your income to 50K or 60K, it doesn't matter what kind of loan you have, it's going bad.

On top of that, everybody went "Real Estate always goes UP!!!" which is flat out wrong and then used that to rate a loan that should have been a D into a B or C, thus putting a whole lot less risk on paper and making mortgage backed securities look like treasury bonds when they more like junk bonds.

Re:Case Law Precedent?

[AKAImBatman]

I don't see where the "free ride" comes in. They lost the home, wiped out their savings, probably increased their debt, and (almost certainly) killed their credit rating. It will be a long time before they can attempt to own a home again, even if we assume they've learned from the experience.

Re:Is this s precedent in Canada too?

[damn_registrars]

Since Sprint operates in Canada, I wonder whether this can be taken as precedent in Canada as well. I'd be glad if it did.

I guess we always figured that our companies down here, even if they operate elsewhere under the same name, tended to dish out exclusive abuses to those of us living here. Apologies if you are subjected to the same level of customer dis-service that passes as normal here.

I recall previous discussions where European cell customers were astonished that we still pay to receive calls (and text messages) here in the states.

Re:Case Law Precedent?

[Red Flayer]

It's a stupid loan if you do not foresee a collapse in property prices in your area due to near-future restrictions on easy credit. This is what happened to many tens of thousands of people, and why so many people are hammered by a negative equity situation. They cannot sell, because they owe more than the vlaue of their home and do not have cash reserves... and theycannot afford their ballooned payments.

Sure, the lender will (if they are smart) renegotiate with the borrower... but many borrowers find it a better proposition to walk away and declare bankruptcy.

Yes, IO 3 month ARMs are REALLY bad... unless you're just flipping the property. Negative amortisation loans, same deal. Either case, you better know what's going on in the housing market locally before you jump in.

*whew*

[AP31R0N]

This is good news for Sarah Conner.

Interest Only makes sense for some people

[grahamsz]

An I/O loan would be great if you were on a variable income - perhaps self-employed or on commission.

That way you can make IO payments in the leaner months and when you get a big check you can pay down your loan.

There's nothing inherently bad about ARMs either and even NegAms have a place.

The real problem here is that people signed things without reading them over and understanding them. What percentage of the general public could even work out a loan payment?

I had a slightly surreal experience buying a car. We negotiated $20k even with a 0% rate for 5 years while I was sitting with the finance guy at the dealership.

Me: "Ok, so that's $333 a month"

He shot me a strange look, and proceeded to punch the numbers into his calculator (including the 0% interest rate) and was surprised to get the same figure as i'd worked out in my head.

If the finance guy are a car dealership is that slow, i dread to imagine where the average person is.

Re:Interest Only makes sense for some people

[lastchance_000]

The point was that he's the *finance* guy, and the calculation was 20000/60, not usually a challenging task for someone who works with numbers all day.

Re:Interest Only makes sense for some people

[Red Flayer]

The point was that he's the *finance* guy, and the calculation was 20000/60, not usually a challenging task for someone who works with numbers all day.

Except his job is not to work with numbers all day. His job is to make you feel good about your purchase and borrowing decision, since he's the last person you spend significant time with before you take delivery. It helps compensate for the slimey feeling you get after dealing with the sales slob and the sales manager.

YMMV. My experience is pretty much limited to central NJ and (a little bit) eastern PA car dealerships.

Re:Interest Only makes sense for some people

[swillden]

An I/O loan would be great if you were on a variable income - perhaps self-employed or on commission

It also makes a lot of sense for people who are planning to be in a home for a short time and need to free their income up for other things.

I'm going to be buying a house in a couple of months, and I want the closest thing to interest-only I can get. I'm buying because (a) there's not much of anything available for rent in the small town (pop. 1000) I'm moving to, (b) I think I can make some money by fixing the home up for when I re-sell it (there's also good reason to expect a real-estate boom in the area in the next two to three years) and (c) I'm also going to be building a new home, and I'd rather free up my income for costs incidental to that process. In addition to interest-only payments, I also want to put as little down as possible, so that I can put most of the equity from my current home into the new construction, rather than locking it up in my interim living arrangements.

So, I want minimal closing costs, as little as possible down, and a huge five-year balloon, to keep my monthly payments as low as I can get them. I want a five year balloon, though, nothing shorter, in case the home is hard to sell. I don't think that will be the case, but it's a risk I need to manage. If I need to I can make the payments on the new home and the interim home for a while, and the four years between the move to the new home and the balloon on the interim home will give me plenty of time to sell.

That sort of loan makes perfect sense for a solvent individual with an income that is more than capable of making the payments with ease and a top credit rating. It's a really bad idea for a low-income, debt-ridden person with a shaky credit rating, because clearly they're taking the deal not because they have some financial strategy for it, but because it's the only way they can get a payment that they can make.

The problem isn't the type of loan, it's making it to the wrong person.

Re:Case Law Precedent?

[notamisfit]

They had six months living in a house they knew they couldn't afford. And if they didn't know, they should have known. Sadly, the lenders knew they were going to get their fix of government bailout crack regardless, and more than likely rubber-stamped the application without thinking twice.

Re:Case Law Precedent?

[squarooticus]

Actually, the root cause is that the availability of artificially cheap money (read: credit) by the Federal Reserve misprices risk: this has resulted inâ"at leastâ"the tech bubble in the late 90's and the housing bubble in the 00's.

Since no one in power recognizes or at least wants to admit that the Fed is the cause of these problems, expect a new bubble to appear soon.

Re:Case Law Precedent?

[geekoid]

there is no guarantee the house will be higher value in later years, especially 5 years away.
It's a bad loan, and a bad investment.

Of course, I am extremely hardline. I wouild make it illegal to have a home loan longer then 10 years, and not allow balloon payments.

Yes, people would still get homes, they would lust need to become more reasonably priced.

The cost of a home compared to income has become stupid. Compare it to 40 years ago.

Yes, I do own a home, my second one in fact.

Changes in service terms.

[sidragon.net]

Sprint, very frequently, changed rates for various services under the contract. Contract law in most states allows one party to terminate the agreement without penalty when the other imposes material changes. In this situation, they have been known to lie, which I experienced personally (specifically regarding their text message rate hikes). Glad to see both the market and now the courts punishing them for this ridiculous behavior.

Lifting by the boot straps?

[scorp1us]

Whether Sabraw's ruling will stand isn't clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule - backed by the wireless industry - which might decree that only federal authorities can regulate early termination fees.

Sorry, Charley, Tenth Amendment says no:
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

You just can't make jurisdiction up, but they certainly do try. They'll try to call it "interstate commerce", even though that provision was meant to keep the interstate commerce unimpeded, and not to be a source of power grabs.

Re:Case Law Precedent?

[SydShamino]

Yes, creating risky or bad debt by giving loans to people who cannot afford them was a key part of the problem.

But the reason the crisis has exacerbated, and badly hurt major financial institutions (CitiBank, IndyMac) is because the process of debt selling allowed bad debt to be masked as good debt. There were insufficient safeguards to make sure that the people (investors, businesses, financial institutions, etc.) that put their money into these debts knew that they were as risky as they truly were.

Consider the Freddie Mac situation. As a quasi-private company, Freddie Mac is directed to make a profit. However, as a quasi-government entity, they have special rights such as the right to use the Federal Reserve as their bank, and the right to guaranteed loans at preset rates. These guarantees made Freddie Mac have an impeccable credit rating, despite the fact that, to continue growing their profit, they kept buying more and more debt that was downright awful.

In other words, Freddie Mac's credit rating didn't reflect the junk nature of their assets. The same is true for CitiBank and IndyMac and other banks that held debt that they may-or-may-not have known was bad, but wasn't being shown as bad on their books.

Things that could have prevented this:
1) Congress has decided that our country is more stable when people own their own residence, so it encourages home ownership. Freddie Mac exists for this reason. I think this conflicts greatly with their charge to earn a profit. Wikipedia says this: "Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, because of the size of their holdings and the widespread perception that they are government backed.", which to me indicates that they agree. This quasi-goverment thing doesn't work. They should have been government owned, or privatized completely.

2) To avoid your home-town bank from getting its fingers (and your money) dirty in less-than-reliable debt, the depression-era Glass-Steagall Act, among other things, prevented banks from offering things like investments and insurance. The late-90s Gramm-Leach-Bliley Act repealed those parts, allowing banks, insurance companies, and investment firms to co-mingle. It's been argued that this relaxation of regulation also contributed to the crisis, as it allowed institutions that need to be stable for financial security (banks) to engage in the riskier activities of investment firms.

Re:Case Law Precedent?

[j79zlr]

These people weren't given a loan, they applied for it. Now you can say that the lending institution shouldn't have given it to them, but they should have also known that they couldn't afford it. $5,000 net monthly would seem to be around $75,000 anually, $3,500 in monthly mortgage payments would be about a $600,000 mortgage. No rational set of human beings could begin to think that they could afford that. Undoubtedly they thought they could tough it out for a few years, make a huge return and move on. I feel absolutely no pity for them. They were idiotic and got exactly what they deserved. It shouldn't be the place of society to protect people from themselves.

About damn time

[Radical Moderate]

I got into a battle with Verizon over termination fees years ago. After getting raped for going over the minutes in my plan, I opened an account with another carrier and moved my number. When Verizon tried to charge me for early termination, I explained that I had moved my number to a new carrier, which the courts had recently ruled was a consumer's right, but I would be happy to continue paying the monthly fee for my Verizon account ( I had a couple months left on my plan), and they could assign me a new number if they wanted to, although I wouldn't be using it.

They said it didn't work that way and I had to pay termination fees. I had three phones, and the termination charge was about $300 per phone. After about 6 months of harassment and threats they finally gave up. I'll never give those losers another dime.

Re:About damn time

[AK Marc]

So they are rapists because you couldn't stay off the phone and used more minutes than you paid for. Interesting.

No, they are rapists because they charged him a cancellation fee for canceling lines he did not cancel. He wanted to keep those accounts open to the end of the contract and pay on them, but they refused because they could extract more for asserting that he violated a contract that he did not violate.

You did terminate your plan and broke contract.

He didn't terminate the plan. He wanted to keep paying on the plan.

You broke contract by moving the number, and offering later to pay the remaining months doesn't change the fact that you broke contract.

Can you point me to where in his contract he is not allowed to port his number? He wished to continue the contract on those lines, but was denied that. Unless you can point to the part of his contract he violated "Thou Shall Not Port" not being in mine, and I checked, then I will presume you a liar and a troll. Oh wait. AC. You are a liar and a troll. Sorry, my bad. I fed a troll.

Re:Contract? Court Review?

[DragonWriter]

So, does this mean that any contract could potentially be reviewed by a court and parts of it thrown out?

This ruling is a product of the fact that this has been a feature of contract law in this country since before this was a country, yes. It doesn't "mean" that in the sense that suddenly now that will become the case where it hadn't been before.

Re:Case Law Precedent?

[AKAImBatman]

They had six months living in a house they knew they couldn't afford.

You think that's a free ride? Let's go over this again:

1. They have no home. Back to apartments for them.
2. They lost their savings.
3. They probably took on more debt.
4. Their ability to get new credit or make large purchases (e.g. a vehicle) is now stunted.
5. They have no hope of seeing another house for several years into the future.
6. Any long term plans they made are probably shot.

So how exactly is that a free ride? It sounds to me like they'll be paying a hefty price for quite a long time!

Re:Case Law Precedent?

[retchdog]

It looks like it's going to be a long time before I can "attempt to own a home" in the first place, so my sympathy there is guarded.

I didn't say that nothing bad has happened to them; just that we seem to heavily subsidize (if not reward) people who take absurd efforts to appear affluently-middle-class, as well as the system of accomplishing this. It's an artificial sustenance of a lifestyle which is increasingly at odds with actual productivity.

Re:I don't get it

[DragonWriter]

What exactly are the charges? Did Sprint Nextel not describe the early termination fees in their contracts? Why would an early termination fee be illegal?

Because early termination fees are liquidated damages, which are only permitted in certain cases (extremely roughly, where they serve as a reasonable proxy for actual damages that would otherwise be hard to pin down.) By not, for instance, prorating the early termination fee (which is notionally justified by the damage Sprint suffers due to subsidizing phone purchases in anticipation of the profits of the contract over the minimum duration), Sprint made it so that the fees are not a reasonable proxy for the damages that justify the fees.

Re:Case Law Precedent?

[nabsltd]

$5,000 net monthly would seem to be around $75,000 anually,

Actually, it would be around $94K gross (in a state with income tax), and it would be closer to $500K mortgage, assuming the interest rates were typical for some of the "shaky" loans that were made.

They still definitely overcommitted, but where I live, $500K doesn't buy a whole lot of house. There's no way I could afford to buy the house I live in right now, but I got lucky and bought a while ago at the bottom of the market and was close to the same state they were for a while ($1,200 house payment on about $2,800 net).

They were at 70% and I was only about 43%, but today even with a lot more pay, I'd be over 60% if I wanted to buy my house today (assuming the same percentage down payment as when I really bought it).

Re:Case Law Precedent?

[Cytotoxic]

They had six months living in a house they knew they couldn't afford.

You think that's a free ride? Let's go over this again:

1. They have no home. Back to apartments for them.
2. They lost their savings.
3. They probably took on more debt.
4. Their ability to get new credit or make large purchases (e.g. a vehicle) is now stunted.
5. They have no hope of seeing another house for several years into the future.
6. Any long term plans they made are probably shot.

So how exactly is that a free ride? It sounds to me like they'll be paying a hefty price for quite a long time!

OK, I'll play too:
1. They didn't pay for the home so it wasn't theirs.
2. These are normally zero down loans, no savings invested.
3. Took on more debt... Huh? While probably true (if you can't handle credit in one situation, likely enough you can't handle it elsewhere) - it really isn't relevant to the free ride.
4. Bad credit - that's a consequence, but it doesn't benefit the person that loaned them the money, so still not involved in the free ride argument.
5. Yep, goes with 4.
6. Plans built on quicksand... still not relevant to the free ride.

The exact way that it is a free ride is that they agreed to pay X dollars to live in a house, then they didn't pay X dollars and continued living in the house. The entity that made the loan did not get paid what they were promised. They also get no benefit from any of the negative financial consequences that happen to the buyer. That is a free ride.

Now, outside of that transactions they may have had a lot of bad things happen to them financially. That doesn't really enter into the calculation. Maybe it would be simpler if we were not talking about a house. What about a nice silk dress instead? Let's say they promised a dressmaker $50 per month for a year for a nice custom made dress. The dressmaker delivers the dress as promised. The buyer accepts delivery and has a nice time wearing the dress to parties and gets lots of great compliments. The buyer never makes the promised payments. After about 6 months the dressmaker repossesses the dress. Can you see how that would be a free ride? Can you see how it is the dressmaker who is the aggrieved party?

Even if the party-goer has horrible financial luck and wound up in a tough situation and so couldn't afford the 50 bucks, it really doesn't change the calculus. She took advantage of the dressmaker for 6 months, and now the dressmaker is stuck with a dress that cannot be sold for anywhere close to the promised sum.

Re:Case Law Precedent?

[Teufelsmuhle]

Perhaps it's not the place of society to protect idiots from themselves, but it the place of society-at-large to protect itself from the idiots.

Let's say Couple A and Couple B are both bidding on a house. Both couples make roughly the same amount of money, have roughly the same amount of savings, and so forth. Couple A is sensible, and not willing to spend more than they can afford. Couple B, on the other hand, is more willing to take the risk, and bids up the house to a level they really can't afford. It only takes a couple of iterations of this sort of bidding war to inflate home prices to the point where sensible couple A has to choose: either join the fray and pay a little more than they can afford, or stay out and either rent or buy less house. This pattern escalates higher and higher, and sooner or later, all of this ends up in the kind of collapse we are now seeing, all of which could easily have been prevented had the proper checks been in place.

So I ask, wouldn't it be to the benefit of society (read - all of us who might someday like to buy a home) to ensure that these checks are in place and properly enforced?

Re:Case Law Precedent?

[gnick]

A dress? Really?

This is a perfect place for a car analogy and you went with a custom-tailored silk dress? I mean... Driving around for 6 months without making payments and getting the car repossessed ~= A free car rental with the credit penalty being the only downside. It's that easy.

A dress?

Re:Case Law Precedent?

[AKAImBatman]

1. They didn't pay for the home so it wasn't theirs.

I haven't finished paying for my home either. Obviously it's not truly mine. It's the bank's by way of lien until I finish paying it off. However, I do get to live there as long as I continue to make good on my loan. Welcome to mortgage 101.

2. These are normally zero down loans, no savings invested.

The original poster explicitly said: "Needless to say within 6 months of blowing through their saving is came down to deciding to sell the house or starve to death."

Whether they got a zero down loan or not, they lost their savings in a futile attempt to be responsible after the fact.

3. Took on more debt... Huh? While probably true (if you can't handle credit in one situation, likely enough you can't handle it elsewhere) - it really isn't relevant to the free ride.

My presumption is based on the fact that they actually made a serious attempt to pay for that home. If they managed to blow through all their savings in an attempt to pay for it, I can practically guarantee they also took on further debt as a direct result. Whether it be from putting groceries and goods on credit cards that didn't get paid off, or from borrowing to pay off bills they couldn't afford, there's a good chance they are now saddled with additional debt.

5. Yep, goes with 4.

Well, I'm glad we can agree on something. :-P

6. Plans built on quicksand... still not relevant to the free ride.

Not necessarily. If they had gone through a better decision making process, there's a good chance they could have found a home that met their needs just as well and still be living in it today. i.e. The plan itself isn't always flawed. Sometimes it's just the execution. Which seems like a fairly likely situation if they foolishly obtained a house that had a $3500/mo mortgage on a $5000/mo income. As a home owner in a major city, I can tell you there are more affordable places to live.

Let's say they promised a dressmaker $50 per month for a year for a nice custom made dress. The dressmaker delivers the dress as promised. The buyer accepts delivery and has a nice time wearing the dress to parties and gets lots of great compliments. The buyer never makes the promised payments. After about 6 months the dressmaker repossesses the dress. Can you see how that would be a free ride? Can you see how it is the dressmaker who is the aggrieved party?

I can see that the dressmaker would be a moron. Dresses lose most of their value as soon as they're worn. They don't make very good collateral against a loan. A house, on the other hand, usually gains value rather than losing it. Which means that the bank can repossess the home and resell it for what is left on the loan. The bank ends up getting their money, plus whatever profits they made off the borrowers while they were borrowing. A win-win deal for banks.

The only reason why things have gotten bad is NOT because people are defaulting on their mortgages. The banks hedged their bets and thought they would be fine in any situation. The reason why things have gotten bad was that banks got greedy and lent a massive number of loans they knew were unreasonable. The result was that the market flooded with repossessed property and the banks starting taking a loss.

So I guess your analogy does work. The banks were as foolish as that dress maker! :-P

Re:Case Law Precedent?

[Grishnakh]

You think that's a free ride? Let's go over this again:

1. They have no home. Back to apartments for them.

Actually, it's worse than that. To my knowledge, most decent apartment complexes do credit checks on prospective renters. So if you have bad credit (like a recent foreclosure), many apartments will not rent to you. So where are you going to live now? A lot of these people probably ended up either moving in with family, or renting ghetto apartments.

Re:Case Law Precedent?

[Red Flayer]

Actually, the root cause is that the availability of artificially cheap money (read: credit) by the Federal Reserve misprices risk: this has resulted inâ"at leastâ"the tech bubble in the late 90's and the housing bubble in the 00's.

Ah yes, the old "it's the Fed!" canard. It has nothing to do whatsoever with relaxation of regulatory controls on the bankig industry that are not within the scope of the Fed. Right.

Since no one in power recognizes or at least wants to admit that the Fed is the cause of these problems, expect a new bubble to appear soon.

Hmm, seems to me that the Fed policy of moderate ((unspoken)~4% cost inflation) and (spoken) low wage inflation will correct the issue, since it will bring the money supply more in line with GDP.

Re:Case Law Precedent?

[Grishnakh]

I'll add my spin on this one. I'll even go with your silly dress analogy (how on earth did you come up with this anyway?).

Let's say they promised a dressmaker $100 per month for a year for the dress, and then $1000 per month for the next 5 years afterwards (some more realistic numbers, since custom dresses usually cost many thousands of dollars, judging by what I've heard about bridal gowns). The dressmaker does a credit check, and finds that the buyer makes $15k/year working in fast food. The buyer can afford the $100/month, barely, but no way can she afford the $1000/month. The dressmaker decides to approve this financing for the buyer, knowing there's no way she can afford it after the first year. For the first year, the buyer pays the $100/month. Then, when the payments go up to 1k, she defaults. Dressmaker is outraged!

Who's the aggrieved party here? The one who stupidly made the loan, or the one who took advantage of the stupidity (ruining her credit in the process)? Personally, I think the blame falls on the lender, for making such a stupid decision. There's definitely times when people should be punished for taking advantage of the system, but this isn't one of those times. These lenders were absolutely corrupt and stupid for approving these loans, and they deserve to lose their businesses over them. The bad buyers are already getting punished, in a way; their credit is ruined, and they won't be buying a house again soon. That's punishment enough.

Also remember, the lenders never actually lost anything. The people borrowed money to buy these houses, and they used the houses as collateral. Remember that word? This means that the lenders agreed that these houses were worth what they were lending for them. When the buyers defaulted, the lenders repossessed the houses, and even kept all the mortgage payments already made. If the lenders can't get the same amount for those houses, that's their problem: they should have though about that first, instead of assuming that realty values always rise.

If you're going to lend money to people, it's up to you to make sure they're worthy of lending to. This is especially true for large financial institutions, who can easily afford to do all the necessary credit checks. The whole concept of the ARM is rooted in greed, and the lenders deserve to go out of business for making so many bad loans.

Re:Case Law Precedent?

[Furry Ice]

Yes, and that's why we shouldn't subsidize the risky loans. There's no way the financial institution would actually offer a loan that they know could not be repaid if the institution had to take the hit when the borrower walked away from the deal.

But instead of taking that hit, the lender lets the government bail them out of their stupid lending decisions so at the end, society is responsible for protecting people from themselves. We're protecting irresponsible lenders. The irresponsible borrowers take a bad credit hit which can have fairly nasty consequences, even to the point of making it difficult to get a job. The lender doesn't have to deal with those kind of consequences.

That bailout needs to go away. When Fannie Mae and Freddie Mac got into trouble, it almost did, but then the government bailed them out, so we're right where we always have been.

Perhaps you don't feel sorry for irresponsible borrowers, but they actually have an effect on the market that hurts everyone. If I want to get a 15 year mortgage at a decent interest rate, I have to remember that I will be placing competing bids with others who probably have 30 year loans, perhaps even interest-only loans with much lower payments. Those people will be easily able to outbid me, driving the price of the homes I am interested in beyond my means. In the end, I may be forced to take a different type of loan so that I don't end up in a dangerous neighborhood. The lenders love this, and will do everything they can to encourage it. The best way to discourage it is to make them pay for their own mistakes!

Re:Case Law Precedent?

[Anonymous Coward]

This is pure BS. Perhaps some played it as you describe, although it's incredibly stupid of them to have done and their credit is completely fucking shot now.

However, there's plenty of others that are completely devastated now. Like me. I told the loan agent up front what I could afford per month. I was told the home I was looking at would be less per month than I had set as a limit. So I agree, we get to the closing table, and I'm giving a totally different figure that's higher than what I had set as my limit. When I tried to back out, I was blindsided by a host of financial terms and figures that could only be described as pure fucking magic to my eyes, because none of those financial things are simple basic algebra. They shuffle money here and there and I'm told to just not worry about it, I wouldn't have been approved if I couldn't pay it.

Ok, I payed for almost 2 years on the home, struggling the whole way, only to have a major item go out and require replacing. One partial payment incurred a massive backlash of fees and they didn't even count my payment, and the next few payments didn't count either according to them. In the end, I've lost the home, couldn't get anyone to rent to me anymore because of it, my credit is completely shot and my savings is completely gone. Several loans I had to take out to cover major items in the home such as AC and water heater (you cannot live in the Midwest without AC, you die) I'm still on the hook for even though I don't even have the item anymore.

Now tell me, you callous asshole, that the past two years have been a fucking "free ride". I will now have to declare bankruptcy, I have no home, can't get anyone to rent to me so I'm stuck living with relatives, and all of my savings is gone. But that home did me such good, didn't it?

Re:Case Law Precedent?

[infinite9]

They were idiotic and got exactly what they deserved.

Since you're here, you're most likely an intelligent person who would never sign a contract without reading and understanding it. That's not normal. Unfortunately, normal is sign without reading. I'm not saying it's smart or right, just what most people do. Most people have no idea what's in their mortgage contract. Instead, they listen to the (dishonest) sales pitch from their broker and believed them. It's no wonder so many people are surprised when their mortgages reset. These are people who have no idea what amortization is, or how the math behind their loan made a reset inevitable. Most people can't calculate how or weather a bank is making money form their loan.

But you can do all those things. So to you, they're stupid and deserve it. I'll agree with the first part, but not the second. They absolutely should lose their homes. But a significant part of the blame falls with the machine that lured them into a trap because of greed. They didn't have a chance.

Re:Case Law Precedent?

[Sancho]

Closer, but not quite.

The dressmaker agreed to sell the dress for $100/mo for the first year, and then an undetermined amount for the next five years. At this point, any reasonable person would say, "Screw you!" "Oh no!" the dressmaker replies, "The market for dresses is through the roof! In a year, you'll be able to sell this for way more than you paid and upgrade to a new, better dress!"

If only it was just stupidity...

[grocer]

The lenders writing these loans were creating mortgage pools with say 70% Class A loans, 20% Class B, and 10% Class C. Being in the lending business, they then made all these mortgages available to mortgage brokers, who sold them as retail products. Brokers don't get paid unless the loan closes and with the assumption of appreciation and the ability to do self-reported income, they misrepresented what kind of credit risk buyers were to sell loans. Suffice to say, the problem is there was a third party who carefully made it look that buyer really could afford payments over the life of the loan.

Collateral merely means the lien holder must be paid first in any sale after the origination of the loan. Lenders don't care about equity, that's not what they're generating income from. They're looking at the income stream from the loan and the collateral deal is secondary, it's to make sure if the loan goes bad, they get paid first. Lenders are not in the business of buying & selling real estate for profit, they in the business of selling money.

Re:Case Law Precedent?

[norminator]

Wow, I don't think you understand the responsibilities of mortgages and other sources of credit.

1 2 & 3: They made mortgage payments for 6 months, in addition to their car payments, credit card payments, etc. People that do things like this also tend to eat out a lot, which gets expensive. There's more money going out than there is coming in, so that's where their savings goes until they have no savings left, at which point, they start missing bills or paying them with credit cards, thus creating more debt, and eventually creditors come after them.

4 5 & 6: If they declare bankruptcy, which they will probably have to do after taking on so much debt, that pretty much stops them from getting a home (or any other type of loan) for the next 7 years. Even after the 7 years, the fact that they declared bankruptcy will still come up, they will never really be free from it.

Not to mention the fact that money problems put a huge strain on a marriage. Money problems this bad will very likely lead to a divorce unless the husband and wife make an extraordinary effort to grow up really fast, and make major sacrifices. Normally people get into this kind of debt because they're not grown up and they don't know how to make sacrifices. That's an incredibly hard change to make.

In your silk dress analogy, you act as if there wouldn't be any repercussions from not paying for the dress. The dressmaker would not take the dress back, it's already been worn and used for 6 months. The dress maker wants money, so the buyer gets turned over to collections, where agents call and harass the buyer and the buyer's spouse, and they're not nice about it. Collections agents will use insults, question the strength of the marriage and try to pit the buyer and the buyer's spouse against each other. Also, the buyer's credit suffers, so the buyer has a harder time getting loans, and the loans the buyer gets come at a higher interest rate. This is all assuming the buyer doesn't just report the buyer to the police for theft, which is more likely.

To say that they got a free ride is far from the truth. They will suffer quite a bit, even if they did "get to" skip very few months of paying any of their bills before it caught up with them.

I'm married and have children. I make a respectable amount of money and own a decent home. I also have more debt than I'd like, but I've never ever missed a payment on anything. Even so, the debt is a very real burden that I'd rather be free of. If I stopped making payments the burden would turn into a crushing weight, not a free ride.

Come back to the discussion after you've taken on some responsibility.

Re:Case Law Precedent?

[notamisfit]

It's not up to lenders to fake reality for their lendees. Then again, it's not up to Fannie Mae and Freddie Mac to fake reality for the lenders, it's not up to the Federal Reserve to fake reality for Fannie Mae and Freddie Mac, and it's not up to the American people to fake reality for the Federal Reserve. The only acceptable solution would have been to pull the whole government shebang out of the housing business. What would be left after the inevitable collapse might not be pretty, but it would be *honest*.

Dealing with debt collectors

[Fantastic Lad]

You should keep an eye on the three credit reporting agencies. Verizon may also sell your debt to third parties who might continue to come after you.

When it comes to unfair debt collection, the collection agency is in dodgy water. It seems to me that collection agents are going to be rather afraid on some level of a big possible whammy. --That is, they are just a thin legal line away from being an extortion racket. --A company falsely decides that you owe money, sends it into the collection system, and then professional collectors are allowed to harass you until you pony up. On some level, these guys know the accusations which can be leveled at them, and while they may never have heard them, they probably spend a portion of their time having one-sided arguments in the car or shower with invisible accusers. Gotta love those self-imposed fears; they always take on the meanest possible face when in the imagination. So that stuff is always gnawing on at least some employees at the collection office.

It's like dealing with government employees during a tax audit, (been there). I noticed in the couple of civil servants I dealt with during the process that they were clearly harboring a gnawing guilt, that they were permanently stressed over the fact that at any moment the subject might leap up and scold them for being over-paid system leaches. I suspect they spend a good deal of internal energy dealing with this guilt or trying to shore up rational defenses against the idea. I remember the agents I was dealing with offering up excuses and defenses for things I'd never said or even implied, and one lady who reacted very strongly when she was questioning my write-off of a bicycle, (which she at first Ah-Hahed! as though it were evidence of my trying to get away with something). When I explained that I didn't drive a car and that a bicycle was my primary means of transport partly because that's all I could afford, she physically recoiled and started blustering apologies and rationalizations not just for her assumption, but for her own use of a car. It was as though I had laid out a big speech about how she was using tax-payer dollars on a selfish means of transport when she could easily take the bus to work, a job where she shook down people who worked harder than her at more worthwhile tasks and why was she being such a coward in life rather than go out there into the world and get a real job like everybody else? --All of that unspoken accusation was suddenly on the table, and it had all come from her! Her baggage. Cool. --Without even trying or ever really pushing the advantage, I discovered all kinds of buttons you could press in these people to torment them if I had chosen to do so. And that was just during a routine audit.

So unless you're dealing with a sociopath, then the same general rules will apply to collection agents; a low level fear that what they are doing is questionable or that it might in fact be illegal if the paperwork isn't clean; those fears are automatically going to reside in their minds, or at least their bosses' minds. Just bringing a little pressure to bear, not even directly, but simply through asking questions which are normal enough on the surface, but which will cause the secondary cascade of unspoken thoughts to lead to thoughts tied to fear buttons, (like that thing with the bicycle), will make their day that much more difficult and your case that much less appealing. And unlike with government employees, these guys aren't guaranteed to have a job the next month if they don't bring home lots of bacon for the company, so anything which makes your case file seem like one to shuffle to the bottom of the heap is good.

But mainly the big thing is the amount they hope to collect from you. It has to be at least equal the cost of employing the agent during the time required to process your case. The longer you drag it out, the less and less you are worth. If you kick up a fuss and insist that the company which sold them your 'debt' was n