ECONOMIC ANALYSIS:

Thinking about Payments

by Fred Cederholm

The legal fiction of the “effective date” is central here. Is the payment consummated (or made effective) when sent? When received? When processed? Or... when posted? You can just bet that “the recipient” is going to use whatever works to their advantage.

I’ve been thinking about payments. Actually I’ve been thinking about bill processing, systems/programming, effective dates, service charges, restructurings, a horror story, and services reps. Believe it or not, most people pay their bills on time, or they at least try to. We presume that all will taken care of when we make that payment, our outstanding obligations will be cleared (or at least mitigated), and we won’t encounter any problems, fines or penalties. As you continue, you’ll see that’s not always so.

You see bill processing systems run the full gamut. They can be manual, automated, integrated, segmented, one-step, multi-step - you-name-it. Most of the time we could care less—that is, unless we encounter problems, fees, and/or penalties. These can snowball to complicate our lives in more ways than we ever imagined! Most billing systems are now automated - using computers or some other forms of integrated data processing equipment. Now... these technological wonders can process hundreds—even thousands—of transactions in a fraction of a second; but they don’t TH*NK on their own, they pretty much do what they are told to do by their programming software, or by the manual overrides of their Information Technology (IT) supervisors. Like in the military circles, “I was only following my orders” may be an explanation, but it’s no defense when wrongs occur and adversely impact the public.

The legal fiction of the “effective date” is central here. Is the payment consummated (or made effective) when sent? When received? When processed? Or... when posted? You can just bet that “the recipient” is going to use whatever works to their advantage in regards to that other significant legal fiction—the SERVICE CHARGE. You would be amazed how much the so-called service charges, late fees, and penalties contribute to a bottom line. Then again... you may be intimately familiar with the charges, you just question where (or what) exactly is the service? Who is really being “serviced” by the charge?

This unwinding debacle of the housing bubble passing its gas, and the collapsing sub-prime, Alternate-A, and jumbo loan defaults morphing into escalating foreclosures have triggered a whole lot of terminations and lay-offs. I’ve noted at least 15,000 cuts nationwide in the past week alone. The question is how many of these are the folks who process the payments from those still making them? Such terminations can create lags in payment processing as will each time a mortgage is packaged and re-sold, or the servicer changes. It’s ten PM, do you know where YOUR mortgage is tonight?

Last week I heard from a friend who had learned they've been "late" on their mortgage for the past five months; they've also been in "growing arrears" all that time! What happened started six months ago when their payment was PROCESSED after the due date. A late penalty kicked in. The following month, the payment was processed on time, but the prior month's late fee was deducted first. Month number two's payment was short by the penalty amount deducted first—making them in arrears on the payment-in-full. You got it, a second penalty was assessed. Next month, ditto and so on and so on. It took five months to bring this "arrears" to the attention of my friend. He was livid because the arrears had popped up on a credit report and not because he was ever contacted by his loan's servicer du jour.

I had him check his bank statement to see when the payment of six month's ago was deducted (or dinged) from his bank account. Well guess what? The payment was deducted from the account TWO days BEFORE the due date, but the payment was not credited to the mortgage loan until TWO days AFTER the due date. I'm sure this was all because the servicer utilized a "multi-stage" system. That is, cash the check (or process the electronic transfer) immediately, escrow the funds, and then post to the individual loan ledger later—when they get around to it. There are float considerations at work here, too.

This nightmare scenario could occur with credit card payments, or even with monthly utility bills. I’ve personally dealt with both. Now... a $5, 15, or $25 fee applied to a 100,000 plus “isolated incidents” a month soon become a BIG windfall for the companies in question. I have always called and complained to get credit for the charges—even if I have to deal with their service reps in Bangladesh, Singapore, or Calcutta! I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

Copyright © 2007 The Baltimore Chronicle. All rights reserved.

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This story was published on August 27, 2007.