Bad Hippo

The New York Times has a double dose of consumer credit pieces today. If you haven't seen them yet, the first is an editorial about the intersection of bankruptcy law and the rise in home foreclosures.  Interestingly, the editorial's primary concern is not with the changes from 2005, but about a 30-year-old provision prohibiting the modification of repayment terms on primary residence mortgages in Chapter 13. The editorial argues that this provision may have been sensible when most mortgages were straight-forward, low-risk loans, but that with the rise of riskier, more complicated mortgage products, courts need more discretion to protect homeowners.

Second is Erik Eckholm’s article, "Enticing Ad, Little Cash and Then a Lot of Regret" about the new wave of mail-order-financed computer companies, such as BlueHippo, Circuit Micro, and Financing Alternatives, where customers make small installment payments through bank-account deductions in exchange for computers that (ideally) arrive by mail. I had heard BlueHippo’s radio ads and wondered about the service. I have my own variation on the motto, "if it seems too good to be true, it probably is," which is that, "if it's a new, heavily advertised financing option aimed at low-income people that seems reasonable at first, it's probably not." So I'd assumed there was something fishy about the service, but I hadn't had a chance to look into it. Fortunately, the New York Times did the investigation for me.  It turns out that Better Business Bureaus across the country have been flooded with complaints about these services. Financing Alternatives is currently the Norfolk, Virginia office's number one subject of complaints. The Orange County office has had a similar relationship with Circuit Micro. And attorneys general in Maryland, Illinois, and West Virginia have taken action against BlueHippo.

In theory, a service that enables low-income consumers to buy computers using small payments over time is a good idea. These days, computer competence is a basic prerequisite of upward-mobility. Most higher educational institutions assume (or require) that their students have computers. Obtaining the skills to compete with their middle-class, My Space-entrenched peers is crucial for the younger generation of low-income people. For low-income parents who want their children to do well, finding them a computer is a pressing concern. There are two major problems with these computer sellers, however. 

First, the price of computers has fallen dramatically in the last few years, but unsophisticated low-income consumers are unlikely to recognize the depth of this drop. Many are probably unaware of the fact that they can obtain a good new computer for $500 and a working used one for even less. (Don't forget that they are often buying their first computer, so it's harder for them to shop over the internet where the best computer deals are.) It is the lack of this crucial piece of knowledge that can lead them to think that $1,800-$2,000 or more is a good price for a financed computer. If low-end computers still sold for $1,000-$1,500, as they did not that long ago, these would be quite reasonable financing prices.  But the market has changed in consumers' favor. 

Mainstream retailers should recognize this opportunity and target their low-priced computers to low-income families, offering lay-away plans and perhaps more reasonable financing options of their own. This price drop also means that businesses buy new computers much more frequently than they used to, presenting a great opportunity for business-charity partnerships aimed at getting the older, but still functional, computers into the hands of low-income families. Here, in Boston, virtually every savvy low-income family I’ve worked with has obtained a computer this way. But I suspect that in places without the same non-profit and university infrastructure, much more work needs to be done.

The second problem with these companies is that they don't seem to be delivering the computers. With computer prices dropping faster than low-income people's perceptions of them, someone should be able to make a tidy profit by charging twice the going rate – and delivering a functional product, no scams necessary. But this is not what's happening.  The New York Times article focused on a family that received a series of broken computers. Others say they never received any at all. Circuit Micro got in trouble for allegedly deducting $40 fees from the bank accounts of "customers" who had not yet committed to a purchase. And although BlueHippo claims that its delays in shipping computers are due to inconsistent customer payments, the Better Business Bureau has issued a national warning about the company. This really should present a good opportunity for reputable computer sellers, but in the meantime, low-income buyers beware.

Comments

[Phil]

Amusingly.... I went to the NYT article referenced here, and guess what was at the bottom of the page? An ad for Blue Hippo! Your mileage may vary, but take a look. The "deal" is even worse than I thought. The reason there's no credit check is that you have to pay pretty much the full (inflated) price up front before you even get anything! And they've got your bank account number; so good luck canceling future deductions.

[Angie Littwin]

Thanks for the tip. The BlueHippo ad appeared for me too. I guess they're not exactly getting their money's worth out of their Google ads. Anyway, I looked through their terms, and they're a bit ambiguous. It appears to say that the contract is half financing and half law-away, i.e., the customer gets the computer partway through the payments. But when I did the math, "partway through the payments" means after the customer has paid $2178.48! And even then, the order still takes six weeks to process. I certainly hope there's very little financing taking place after that.

If I'm correct, and these plans are 95% law-away and %5 financing, that's an even bigger reason for mainstream, better priced retailers to start targeting this market. There's no need for such a high mark-up if the companies aren't even offering financing. Also, the fact that I'm not sure how it works, even after studying it closely, is indicative of a poor disclosure system.

[lmclark]

Regarding the NYT editorial, I am told that there is a bill proposed to do exactly what the editorial suggests -- remove the protections of 1322(b)(2) for home mortgages. Originally, I had thought that the argument for this special interest protection had to do with protecting the secondary market for home mortgages. How interesting it is that that market (at least at the subprime level) is experiencing stress despite this protection. And how ironic it is that the law as it is currently written still visits the downside risk that the secondary market obviously took not on the investor but on the borrower.

[Bob Lawless]

On the NYT editorial and lien stripping, I don't know if the bill was actually introduced. A quick search on THOMAS did not turn up anything, but I did not spend much time looking. There was a lot of discussion about such a proposal in a committee hearing. I have a blog post here: http://www.creditslips.org/creditslips/2007/05/stripping_in_ch.html about that committee hearing.