Credit card companies, once having had Washington in the palm of its hand, is now facing a backlash as “gotcha” fees combined with a lot of Americans paying credit card rates that a generation ago would have landed the lender in jail (no joke, on an NPR show that I participated in, a caller said his uncle, a former loan shark, was in wonder of the credit card industry’s practices. Said uncle did 15 years of hard time for lending at 17%).
However, reading the reforms currently under consideration for the industry, the proposals do go after some of the more dubious practices but fall far short of imposing stringent controls such as usury ceilings (one could imagine old balances being grandfathered and new balances being subject to limits).
Card features have been finely tuned so as to capture the hapless or unwary, so the proposals will have more bottom line impact than they appear to. However, the flip side is that MBNA had estimated (according to a bankruptcy lawyer I know) that the bankruptcy law changes implemented in 2005 would enable them to earn $100 more per month per borrower who made use of Chapter 13, which would produce $85 million a year to them. So I wonder how the impact of the proposed regulation would net out against what the credit card companies gained from the 2005 changes.
If implemented, the new rules mean, horrors, that credit card issuers would not reap as much profit from chronically indebted card users as in the past, which might in turn lead them to be more stringent in extending credit to them. That would clearly be a terrible outcome.
Another blow for credit card companies not mentioned in the article is the probable death of frequent flier programs. Oh, they won’t officially be killed, but the often-difficult-to-use miles (which can be accumulated on certain credit cards) will become well nigh impossible to use unless fuel prices drop in fairly short order. And once consumers figure that out, they will abandon cards tied to airline reward programs, most (all?) of which carry annual fees.
From the New York Times:
Consumer advocates say regulation of the credit card industry has long been without teeth. But as card holders struggle under the weight of big balances, high interest rates and fees, their pleas to lawmakers for help may well mean that the industry will face some significant regulation by early next year….
Until now, credit card companies have primarily been required to disclose their lending terms to borrowers. But consumer advocates have for years been saying that disclosure is not enough.
They have been pushing the federal government to take firmer control over the industry — specifically, spelling out the circumstances under which lenders can raise and calculate interest rates and impose fees….
The proposals for banks and other general-use credit card issuers are coming from a couple of directions. Working with the Office of Thrift Supervision and the National Credit Union Administration, the Federal Reserve introduced its proposals in early May. It has asked for comments and expects to formalize proposals by the end of the year.
At the same time, the legislation most likely to succeed in both the House and Senate sets similar rules on consumers’ behalf. Representative Carolyn B. Maloney, the Democrat of New York who wrote the House bill, and Senator Christopher J. Dodd, the Democrat of Connecticut behind the Senate measure, said they planned to bring their measures to the floor for votes before Congress adjourns in September.
The House and Senate bills as well as the Federal Reserve require that lenders apply payments to the debt with the highest interest rate. All would ban “double cycle” billing, in which interest is charged on some already repaid debt, and all would extend the time required, currently 14 days, between a statement mailing and payment due date.
All the measures would, under various conditions, prohibit lenders from raising interest rates on existing debt. The central bank proposes that except for increases caused by changes in stated variable and introductory offers, lenders may increase interest rates only if minimum payments are more than 30 days late.
Only the Dodd bill prohibits charges for paying by mail, phone or online, and restricts marketing and offers of credit to consumers under 21.
The credit card industry continues to stand firm against regulation, especially law made by Congress. John G. Finneran Jr., the general counsel at Capital One Financial Corporation, testified in House hearings in March that “it would be unwise — especially at this time — to enact broad legislation that sets payment formulas in statute, redefines critical product features and limits the tools of risk management for consumer credit.”
Ken Clayton, senior vice president for card policy at the American Bankers Association, in Washington, contended in an interview that “regulation can have unintended consequences, including reductions of popular low introductory-rate balance transfer offers and higher prices for prime borrowers.” Fewer balance transfer offers could stifle job creation by entrepreneurs who use credit cards to borrow at the lowest possible cost, he added….
Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the Federal Reserve acted last fall after the House approved legislation that would have transferred some of the Fed’s regulatory power to other agencies. “At that point, I said use it or lose it,” Mr. Frank recalled. “And subsequent to that, the Fed began using its authority, and is now proposing rules similar to those in our credit card bill.”….
Randall S. Kroszner, a Federal Reserve governor, said the central bank began considering the need for additional rules to protect consumers last year after it reviewed the comments on its proposal for greater lender disclosure of credit card terms. “Many of these comments were submitted by consumers who indicated that in many cases, disclosure alone was not enough,” Mr. Kroszner said.
The House measure has 149 co-sponsors. Twenty of them, including two Republicans — Representatives Chris Shays of Connecticut and Walter B. Jones of North Carolina — sit on the 70-member House Financial Services Committee that must approve it before the House can vote.
Ms. Maloney said opponents had argued that her bill controls prices. “But saying so does not make it so,” she responded. “We set no caps on fees or interest rates.”
Mr. Dodd said he is hoping to get bipartisan support in the 21-member Senate Banking, Housing and Urban Affairs Committee that he heads. He said passage requires public support. “People must do something, whether organizing online or through community coalitions, or calling their elected representatives and saying, ‘I need this, it’s personal.’ ”
Lawrence M. Ausubel, an economics professor at the University of Maryland and a bankruptcy expert, called lenders’ warnings about unintended consequences “severely overblown.” Nothing in proposed legislation would prevent the card industry from continuing to be profitable, Professor Ausubel said: “One can even tell stories where it enables more consumers to emerge from financial trouble without declaring bankruptcy, so collections might go up and profits improve,” he said.
None of the bills or proposals deals with the lenders’ mandatory binding arbitration clauses that became standard in the late 1990s. Those clauses made class-action lawsuits charging lender wrongdoing almost impossible to bring, said Mr. Mierzwinski of the Public Interest Research Group.
Legislation called the Arbitration Fairness Act of 2007, written by Senator Russell D. Feingold, Democrat of Wisconsin, and Representative Hank Johnson Jr., Democrat of Georgia, ensures consumers the choice of jury trials. And in late April, the United States Court of Appeals for the Second Circuit ruled that a lower court must hear a case challenging mandatory arbitration.
Adam J. Levitin, an associate professor of law and credit specialist at Georgetown University, said the proposed rules do not go far enough.
“When the Federal Reserve or Congress tries to nip off specific abuses that the credit card industry practices, it becomes a game of Whack-A-Mole,” Mr. Levitin said. “As soon as they put the kibosh on one, the industry figures out another.
“I think this has led to an endgame of restricting card issuers to a very limited number of price points — explicit interest rates and fee categories — and letting them compete their hearts out,” he continued. “But I don’t think Congress or the Fed has recognized that reality yet, or has the political will to do it.”