More Credit Card Company Chicanery: Ban on Universal Default Gutted « naked capitalism

Thursday, March 4, 2010

More Credit Card Company Chicanery: Ban on Universal Default Gutted

This report from Katie Porter at Credit Slips, which describes another ruse by which banks are undermining new credit card rules, illustrates why we need principles based regulation in the US:

Did Congress’ effort to protect you from your card company with the Credit CARD Act inspire you to pore over the new Cardmember “Agreement” that probably arrived in your mailbox this week?…

The first place I looked in the Cardmember Agreement was the paragraph labeled “Default/Collection.” I was looking for the much-touted restrictions on universal default. Here is what I read, to my initial surprise: “Your account may be in default if any of the following applies: . . . we obtain information that causes us to believe that you may be unwilling or unable to pay your debts to us or to others on time.” Wait a minute? That sounds like my default (or purported default) on my debts to someone else is a default to JPMorgan Chase. Isn’t that what “universal default” is?

Actually, no, at least not as defined in the legislation. The Credit CARD Act prohibits raising “any annual percentage rate, fee, or finance charge applicable to any outstanding balance” with a few exceptions. Notably, absent from the list of exceptions is the ability to increase those charges based on a cardholders’ default to other creditors. But of course, that is not what the JPMorgan Chase agreement permits. Rather, it says that I can be in “default” for being unwilling or unable to pay debts due to others, not that my charges can be increased. Under the Cardholder Agreement, a default permits JPMorgan Chase to close my account without notice and require me to pay my unpaid balance immediately. That is pretty grim result for a late payment to another creditor, even if it is not “universal default.”

In her presentation on the need for a consumer finance watchdog at the Roosevelt Institute session yesterday, Elizabeth Warren made the argument (not quite this crisply) that the complex agreements that financial firms foisted on consumers were not proper contracts, in that there was no way that most consumers could evaluate what they were agreeing to (this gets to the notion we’ve discussed earlier, of good faith and fair dealing. While the contracts may conform to the appearance of contracts, they violate these fundamental premises that undergird all agreements).

And there is no reason these agreements need to be this complex. She noted that the Bank of America credit card agreement, when you include all the riders incorporated in the agreement, runs to 30 pages. In 1980, its credit card agreement was one page long.

More on this topic (What's this?)

The country's credit card statement (The Mess That Greenspan Made, 3/15/10)

'You Cannot Buy Groceries with Your House' (Financial Armageddon, 2/2/10)

Ways to Gain From a Debt Consolidation Program (Learn Mining News, 3/14/10)

Read more on Credit Cards, Default at Wikinvest

42 Comments:

attempter says:

March 4, 2010 at 7:18 am

There can be no “contracts” with gangsters, and no reasonable person can any longer deny that that’s what these rackets are, just gangs.

I’m looking forward to hearing Krugman say, “Look at how they gutted credit card reform, and what they’re doing to the CFPA. Shameful.
But health care reform’s gonna be just super, now pass the bill!”

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March 4, 2010 at 7:24 am

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Doc at the Radar Station says:

March 4, 2010 at 8:05 am

“…She noted that the Bank of America credit card agreement, when you include all the riders incorporated in the agreement, runs to 30 pages. In 1980, its credit card agreement was one page long.”

I’m seeing a common theme here with regard to verbosity. New laws are the size of Masonic Bibles. Computers to blame? Hmmm. Here’s an idea for economic stimulus: Laws, rules, credit agreements, all contracts, etc. have to be typed out by hand with no mistakes on manual typewriters. Each one-no copying, no form letters! Maybe we can whittle down the data level to be manageable by humans again.

Phil L says:

March 4, 2010 at 8:55 am

Is there a link to Warren’s Roosevelt Institute presentation? Thanks!

Alexandra Hamilton says:

March 4, 2010 at 9:17 am

It seems to me that the best option is to get out of debt as soon as you can and not to use the ‘credit’ function of the card. Just use it as payment tool and pay that down immediately.

Moopheus says:

March 4, 2010 at 10:12 am

If you use the card, you are using the “credit function.” If you can afford to pay it off every month, then you can afford to pay cash. Use cash and leave the card companies completely out of the loop.
- Krugger says:
  
  March 4, 2010 at 10:39 am
  
  Actually, wouldn’t it be better to use the cards and pay in full at the end of the month? That way you have an interest free loan from the card company and you also will likely grab a few rewards points (though not nearly as valuable these days). That would seem to hit them harder then just not using the card…
  - Rasheed Wallace says:
    
    March 4, 2010 at 12:43 pm
    
    Actually, not necessarily. By using the card, you continue to generate transaction revenue for the card company. The card company charges the vendor some cents on each transaction, which ultimately gets passed on to you the buyer as an increase in prices. You get some of it back in the form of rewards but not all of it. In fact, I would argue that you are actually paying for the rewards yourself. Just my 2c.
    
    Cheers bro!!
  - Mark in SF says:
    
    March 4, 2010 at 5:39 pm
    
    “Actually, wouldn’t it be better to use the cards and pay in full at the end of the month? That way you have an interest free loan from the card company and you also will likely grab a few rewards points (though not nearly as valuable these days). That would seem to hit them harder then just not using the card.”
    
    No, no, no. You are not “hitting them”. You are generating revenue for them. They charge vendors 2-3%. YOU PAY FOR THAT. Getting 1% back is hardly “hitting them”. That is not free money, though of course CC lenders LOVE the fact that the foolish public thinks it is.
- Alexandra Hamilton says:
  
  March 4, 2010 at 12:02 pm
  
  Agree. Pay cash whenever possible and feasible. However, in some instances paying cash is not an option, e.g. Internet sales and such.
  - mytwosenseworth says:
    
    March 4, 2010 at 1:34 pm
    
    I believe in paying with actual money insofar as possible, but obviously Internet purchases (and other things, such as car rentals) cannot be done by cash.
    
    I’m disturbed that American Airlines have gone to a credit card-only system for in-flight purchases (any others?). In light of the fact paper currency is supposed to be “legal tender”, and here there is no practical basis to refuse bills, I wonder if this could be challenged in the courts.
    
    Credit cards have their uses, but to be forced to swipe them when cash payments should be just as “acceptable” I think is a big problem. This creates a climate where people can too easily buy things they could only marginally afford, if having to save up the money and then purchase.
    
    Money is no longer the root of all evil; easy credit has been the source of most of society’s ecomonic woes for some time.
    - Michael says:
      
      March 4, 2010 at 3:39 pm
      
      Just to clarify, it’s the LOVE of money that’s the root of all evil. Money itself is just fine.
    - mytwosenseworth says:
      
      March 4, 2010 at 4:38 pm
      
      Yes, thank you for pointing that out. I am aware that is the true quotation, but for the purpose of posting went with the more familiar cliche. Remember that Horace Greeley got tired of trying to attribute the “Go West, young man” slogan to the proper source. Then again, isn’t having money pretty much an act of LOVE?

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Terry says:

March 4, 2010 at 10:25 am

Congress was right to not require a credit card lender to continue offering a line of credit to someone who is in default of other obligations. The stupid thing would have been to require the credit card lender to keep the line open for someone who is in default on other obligations. That is a guaranteed loss.

What the universal default provision of the CARD Act does is make it more likely that a credt card company will close a line of credit if the cardholder is in default of other obligations – since they can no longer price for that risk.

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Siggy says:

March 4, 2010 at 11:51 am

I have several credit cards. I use them as payment instruments and pay them off in their entirety when the monthly statement comes. Over the past 30 years, I have never paid directly calculated interest on my credit card purchases. I hold no credit cards that require an annual fee.

I am inclined to agree with Elizabeth Warren. It should not be necessary to have long complex contracts that the consumer is forced to accept if a credit card is to be had; however, I don’t see this recent revision to the Chase card agreement as being chicanery. I see it as being prudent and protective of their interests.

There was a time when obtaining a credit card was not easy. You had to apply and demonstrate capacity to repay. That era was replaced by the wholesale mailing of cards. That was replaced by wholesale theft from the mails of the cards and wholesale thefts thru the use of the stolen cards. That was followed by preapproved applications. That was replaced by identity theft. As a society, it seems that we steal a lot.

For me, the credit card is a means of payment that I find more convenient than cash, a travler’s check or a personal check. Before I retired, I traveled a lot and I used corporate cards. Each month I was required to file with my employer an expense report. I never saw the firm’s credit card agreement and cared less as to what it provided for.

Today, if I see a spurious charge on my monthly statement I will fight it and I will also drop the card. To me, the credit card abuse seems to be affecting that segment of the population that uses credit cards as a way to finance individual purchases at a rate that exceeds current spendable income. That fact is a profoundly negative circumstance.

While a credit card agreement ought to be a principles based contract, the fact that the issuers are motivated to stipulate vague terms and remedies to protect their position in the loan balances they have extended strikes me as being indicative of a much larger and deeper problem.

The question I have is: Why do so many people have to rely on the credit card for their purchases? Why do so many people find difficult, if not impossible, to payoff the monthly balance when the statement is rendered.

I do believe that fair dealing in the extension of credit by way of a credit card is long overdue; but, why do so many people run afoul of self serving, buried away clauses in over long agreements?

My conclusion is that it isn’t just the credit card issuers. There is a responsibility to perform that acruses to the credit card user that is being abused as well.

I’m not so sure that banning a ‘universal default clause’ is a sound idea. The use of credit is not a universal right and as it is not, is not reasonable that the extender of the credit be entitled to establish the terms of the credit?

Mind The GAAP says:

March 4, 2010 at 6:11 pm

I think this is pretty well dead on.

The one thing I would add is that given the sheer unpopularity of such a move (as demonstrated by many other posters here), if the banks can get away with this–and imo, they are, for the most part, justified in their actions here–any significant changes to any of their other policies are about nil.

Robert says:

March 4, 2010 at 12:09 pm

What I find rotten about universal default is that it’s hitting people when they’re down. A person who is unable to pay back a debt needs forbearance, perhaps via the bankruptcy process, and not more debt piled on in the form of interest and fees.

There’s also the case of people being able to pay but missing a payment because they aren’t perfect (and none of us are). In this case, there is no substantial increase in the riskiness of the loan and no reason to hike the interest rate by 10 percentage points except for pure greed.

Josh says:

March 4, 2010 at 1:00 pm

I mean seriously, anyone who thinks that the banking system is not just a legalized group of loan sharks (given a government monopoly, as even the mafia often tried to “work things out”) simply does not understand how the world runs.

Banking used to provide a social good. But, now, the only good they are interested in is satisfying their bonus checks. They would sell out their own mothers if there was a good buck to be made.

Unfortunately, the government is complicit as they have made the regulatory burden a nightmare and removed any chance of competition in the market. A friend of mine was interested in starting up a competitive credit card business/bank that was more consumer friendly. This has become impossible these days because the government has given the current crooks a monopoly. The start up costs and regulations give the current players a huge advantage. Unfortunately, until there is more competition, where companies can offer more consumer friendly credit, the game is only going to be getting worse on consumers.

Rich

psychohistorian says:

March 4, 2010 at 12:30 pm

Why are we treating the folks at the bottom of the ladder different than those at the top? Rule of law does not seem to apply to those at the top. Why should it apply only to those at the bottom of the economic ladder?

Going forward why is American society going to persecute those at the bottom of the economic ladder and not those at the top? Sounds like a recipe for a revolution.

Eagle says:

March 4, 2010 at 1:42 pm

Don’t get a credit card if the terms bother you then. Surely it can’t be a surprise that much of the population does not want to have to cater to the illiterate. Systemic risk must be controlled, but there is no indication that regulation of personal finance gets us there. Not in that principles-based utopia of Japan, and not here.

As far as the length of Bank of America’s card agreement, how many pages of caselaw and legislation affecting Bank of America’s credit card business are there now as compared to 30 years ago?

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Holly McLachlan says:

March 4, 2010 at 3:05 pm

Don’t get a credit card if the terms bother you then. Surely it can’t be a surprise that much of the population does not want to have to cater to the illiterate.
If the credit issuers had refrained from “catering to the illiterate” over the past 20 years, we not now be having this particular discussion. Like Siggy, I largely agree with Elizabeth Warren; excessively long “contracts”, presented to the consumer only after he’s divulged all his personal data, are not legitimate. They don’t magically become legitimate because of the misconduct of any portion of the user population. As to case law, or regulation increases over the past 30 years, I have no doubt the burden on the issuers is greater now than 30 years ago. I also have no doubt it’s a damned sight less than 30-fold greater.
The explosion in contract verbiage is not restricted to this segment of business; it’s evident in EULAs, evident in just about every consumer “contract” I need to read today in order to ascertain my status vis-a-vis a vendor or service provider. It’s abusive of a previously beneficial relationship between buyers and sellers and it’s fundamentally stupid. No one can quantify the loss to business in this country due to potential consumers choosing to avoid doing business on account of all this gotcha gamesmanship. However, I know I have postponed a/o declined to make purchases of goods & services when blindsided by hellishly one-sided “contracts”. I doubt I’m unique in this. And it is precisely the higher value customers who are most likely to walk away humming “screw you too, bud” under their breath. As to the lower value customers who have the sense to be angered by all this — they have access to Craigslist, cash and barter as well.
You are arguing in favor of a cannibalistic mode of doing business.

Ed says:

March 4, 2010 at 3:41 pm

I see that one person at least has pointed out that for all practical pusposes, you need to use a credit card to fly somewhere (and yes, you need it for internet purchases too). I think this puts the “these agreements don’t matter because you don’t need a credit card, just use cash!” arguments in perspective.

If a private industry acquires such a dominant market position that you need to use its products to do basic things like travel, then yes, it definitely should be regulated.

Jack says:

March 4, 2010 at 3:52 pm

It was my understanding that there is no covenant of good faith and fair dealing at the time of contract formation. Generally the covenant assumes that all the terms of the contract are agreed upon and creates a duty not to do something that, while more or less consistent with the terms of the contract, do not meet one party’s reasonable expectations under the contract. In other words, it doesn’t really apply to difficult to understand terms in contracts given to laymen. I agree though that if companies are allowed to require people to sign contracts that are incomprehensible to laymen, the terms should at least be somewhat fair.

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Mark says:

March 4, 2010 at 5:48 pm

I see predatory lending as little different than being a crack dealer. It ruins peoples lives every bit as much as a crack addiction does.

Except in this case the government is on the crack dealers side by being the enforcer of the predatory contract.

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rita says:

March 4, 2010 at 5:57 pm

Consumers should use credit cards as a convenient form of payment and not as a loan. This means that the balance should be paid in full every month. It has terrible anti-borrower loan terms and should be used a loan only as a last resort. The length of the contract is a result of regulation and litigation over the last 30 years and of the wider issuance of credit cards to a broader spectrum of consumers. The last pronouncement I got concerning changes to my credit card had a brief summary of the changes before it went into the actual language of the changes. Consumers can and should do some shopping for better terms and conditions.

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Stuki Moi says:

March 5, 2010 at 1:55 am

As JPMC will react the same, regardless of whether the payments you default on are theirs or anyone elses, while at least some others do not; the obvious moral of the story is to keep your other creditors current with advances on your JPMC card.

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March 5, 2010 at 2:57 pm

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Sinclair Noe says:

March 5, 2010 at 7:20 pm

Perhaps someone can confirm or deny what I think happens with a credit card contract.

The credit card companies can unilaterally change the terms of the contract (within regulatory guidelines). When you continue to use the card and make payments on the card, you have accepted their revised terms. But this is a two way street.

I believe the cardholder can unilaterally alter the terms of the contract, in writing. (Be sure your letter to the CC company is as obfuscatory as their contract). Continue to make at least 3 minimum payments. The credit card company will surely cash your payment check, thereby accepting the terms that you have revised.

I know this sounds pretty simplistic, but it is the basic idea of a contract – if one party can revise the contract, the other party can revise the contract.

Your thoughts please.
sinclair@bank-o-meter.com

Greg says:

March 16, 2010 at 12:52 pm

The problem with this idea is that when the bank changes the terms of the credit contract with you, you can only accept the terms if you borrow more money from them (basically giving them something you weren’t already required to give them under the terms of the old agreement).

The only way the borrower could create a new contract would be to change the terms of the agreement (a right that the agreement most emphatically does not give the consumer, btw) and then get the bank to give you something new in exchange for the change(s) in terms. Simply making three, or twelve, or twenty regular payments wouldn’t be enough to create an enforceable contract with the new terms you’ve proposed since you were already obligated to make those payments under the original deal with the cardholder.

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March 8, 2010 at 10:05 am

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