Pushing Credit Card Reforms

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This article is a joint post by Matt Jabs and guest author Kevin Bowen, a content writer for RESQdebt.com

Actual aid or just another form of welfare?

Should Congress speed up the credit card reform legislation that they passed earlier this year?

That’s a question under consideration on Capitol Hill at this time, with important implications for those in credit card debt. A bill dubbed the Credit Card Rate Freeze Act, introduced by Banking Committee Chairman Chris Dodd (D-CT) seeks to expedite the credit card reform legislation known as the CARD Act (of which he also authored.)

  • The bill was passed by the U.S. House of Representatives on a vote of 331-92.
  • The legislation has been blocked in the Senate, thereby keeping the sweeping credit card reforms passed in May from going into effect on December 1st, 2009.

Dodd was dumbfounded when the Senate froze his Freeze Act, saying this:

“Consumers obviously have a responsibility to spend within our means and to pay what we owe. We bear that responsibility. But the credit card industry as well has a responsibility to deal with their customers honorably. There is nothing honorable about what’s happened with these significant rate increases and fees. Most importantly, they don’t have a right to rip off American families, especially when the Congress has already gone on record opposing the very actions they’re engaging in,” Dodd said on the Senate floor.

This will provide us a window of about 12 weeks between now and around the first of February, during this holiday season, to just put a stop to these outrageous rates and fees being charged to people.

Ninety colleagues here voted for the bill this spring. Why wouldn’t you join us today?”

In the short term the legislation promised to:

  • stop random interest rate increases and universal default on present balances
  • tighten over-the-limit-fees
  • force banks to use proportional interest and penalty fees
  • mandated periodic reviews that can lead to rate reductions

These short term promises leave many wanting, and wondering if the bill will actually do more harm than good in the long run.

Why expedite the bill?

Advocates such as Rep. Carolyn Maloney, D-N.Y., pushed the bills accelerated passing as a way to cut down on some of the questionable policy changes credit card companies have adopted in preparation for the bill. According to news reports, some credit card companies are meeting the new legislation with higher fees, raised interest rates, account closures, and other measures taken by the banks to limit their exposure. According to a recent Rasmussen Reports survey, half of Americans have seen an interest rate hike in the past six months.

“Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last spring. Rather than use the time – time they asked for – since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers,” said Rep. Carolyn Maloney, D-N.Y., who sponsored the original legislation.

With passage, these provisions would have moved into effect Dec. 1, 2009. While some of the legislation is already in effect, there is evidence that some lending institutions are already having trouble meeting compliance deadlines as they exist in the original bill. An expedited procedure would simply increase pressure on institutions that are already struggling to get ready.

Why was it froze by the Senate?

Implementation is the hard part, according to Congressional testimony from Federal Reserve Chairman Ben Bernacke – companies must adopt new policies, systems, procedures and even new written language that it presents to customers. The chairman also noted that problems could fall particularly hard on small and local banks, which often are relying on the same companies to help them make the upgrades.

Creditors must make extensive changes to their systems and business models in order to comply with the Credit CARD Act,” he said.

In a Federal Reserve survey of 57 American credit institutions and 23 foreign-owned institutions with American operations, 75 percent of banks did not expect to reach compliance until February 2010. This possibly points to the troubles these institutions are facing in being ready, particularly if it were on an expedited December schedule.

John Carney of the New York Times had this to say:

At first glance, Dodd’s proposals look like pragmatic attempts to relieve the tough economic problems faced by ordinary Americans. Unfortunately, the unintended consequences of the proposals may wind up creating even worse problems.

Mr. Dodd’s new proposals are guided by good intentions. But he and other lawmakers need to look to the future and see where that particular road may lead.

Carney argues that Dodd’s CARD Act, Freeze Act, and other sweeping legislation are too meddling while simultaneously slowing economic recovery and allowing for fraud of the increased welfare programs.

Is the damage already done?

Is Dodd’s bill too little too late?  If Congress was going to teach the banks a lesson, shouldn’t they have either froze rates in May with the original bill, or perhaps refused to grant so much bail out money to the industry?

Remember the Rasmussen Reports poll referenced earlier that said half of all U.S. cardholders have already seen their rates increase since the C.A.R.D. Act legislation was passed earlier this year?

“Knowing that the Credit CARD Act would finally protect consumers from these abuses, the industry has tried to make one last grab for their customers’ pocketbooks,” Dodd, D-Conn., told the Senate on Wednesday.

“The reason we allowed a gap period between the passage of the legislation and the imposition of the regulations or the statutory requirements was because the industry came to me and said, you know senator, we’re going to need some time to administer, to change how we provide these kinds of benefits to people. So would you give us a little window here to operate?” Dodd said.

What do you think?

While it appears to be beneficial, American’s have many reasons to be wary of more regulations.  Is the damage already done?  I mean… what more can the credit card banks do that they haven’t already done, with or without the passing of this Credit Card Rate Freeze Act?

Should the government further entangle themselves in matters of economics, or should they leave well enough alone?



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1 Matt Jabs

Yeah… this all boils down to a lack of integrity from all involved parties. Consumer, industry, and government uprightness is simply too much to ask for these days. We all just have to start with ourselves.

2 Kevin@OutOfYourRut

I’m always suspicious when they roll out a “reform bill”. The promised reforms end up looking more like tinkering, the net result of which are mostly more forms coming in the mail telling us why we’ll have to pay more, as if that’s going to fix anything.

I’m thinking along the lines of the flood of privacy policy forms we now get for nearly everyone we do business with telling us who they will share our information with and under what circumstances, rather than the hoped for outcome–that they won’t share our information with anyone.

jeff @ sustainable life blog–that may be the reason it’s being ignored in any quarter.

I need a job with a company that writes waivers and disclosures, that’s a job with a future.

3 Len Penzo

As always, consumers best defenses are: 1) to always read and understand what is being agreed to before signing on the dotted line, and; 2) only charge what they can afford to pay off at the end of each month.

If everybody who is interested in signing up for a credit card did that, then there would be a greatly reduced demand for government intervention.

I still find it ironic that Congress, which is completely unable to control its own spending addiction, continues to preach fiscal responsibility and regulate the credit card industry.

Congress needs to get its own spending problem under control first. If they don’t, the consumer protections afforded by Dodd’s bill will be a moot point – whether they are eventually implemented or not.

That’s my $0.02 anyway (after taxes)

Len
Len Penzo dot Com

4 Matt Jabs

“Congress needs to get its own spending problem under control first.”

That’s the most accurate statement I have heard today!

5 Credit Card Chaser

Well said Len – I agree with you so Matt does that mean that we can lump together and make our opinion worth $0.04? 🙂

6 Bull Moose

I understand and agree with most of what Jeff, Kevin, and Len are saying. From a personal standpoint, however, I see the need for these types of reforms on the banking sector in general and companies focused on unsecured lending in particular (Citibank, HSBC, etc.).

It is easy to preach personal responsibility and blame the consumer for spending more than they had. However, in the last four years, due to my children’s medical emergencies and relocating for a job twice after job loss, I can tell you that when faced with life using credit or dire circumstances (untreated life-threatening illness or homelessness), using the credit is the choice albeit a difficult one.

The overall problem began when two years ago, banks started to see the economic winds changing and began lowering credit limits while increasing rates and fees to preserve their multi-billion dollar profits (and in the meantime our government hands them so-called bailout money to do the same).

While my income remained high and my payments continued to be made on time, I saw my credit limits slashed which led to lower credit scores, which led to higher rates, which led to an endless cycle that the banks instituted and have sinced reaped the profit from.

Had I not experienced it, I wouldn’t have had any empathy for those caught in the banks’ Universal Default snares. But now I realize how the justification for the practice is an absolute fallacy.

7 Credit Card Chaser

I am with you on the frustration of having a credit limit lowered because I had a Chase credit card have the credit limit lowered from $10,000 to $1,000 without notice at all even though I have perfect credit and I have never made even one late payment. It is very frustrating but of course it is perfectly within their right because they are the lender and there is no reason why anyone should have to force them to lend money to me even if I have stellar credit (we have certainly seen the mess that happened when the govt tried to force banks to have lax lending standards for home loans in lower income areas and we all know how that story turned out).

I know from first hand experience how frustrating it is to have a credit limit unexpectedly decreased (although I just applied for and was approved for a different credit card to make up for it so I can still keep getting cash back rewards to my hearts content) but I don’t think that that has anything to do with the Universal Default provision (I won’t get into that though because I have made my thoughts known on Matt’s Universal Default post already).

My one big concern though is that if the government continues to invade more and more into the private industry that it will only make it harder for people to have access to much needed credit in the first place (and Matt, I am referring to people that use credit responsibly – aka people like myself and this gentleman who always make payments on time or pay off balances in full or need a line of business credit or just want to get cash back, etc. 🙂 ) – Joel

8 Credit Card Chaser

Also, in regards to “preserving billion dollar profits” it is worth pointing out that that is simply not the case as Bank of America’s credit card division has in fact posted massive losses for the last 5 quarters in a row and yet people still continue to accuse them of making massive profits while they are just trying to not get overwhelmed by the large number of defaults: http://www.creditcardchaser.com/boas-credit-card-business-is-losing-money-yet-still-catching-flak/

9 Ann

Bull Moose’s comment proves exactly why credit card companies have been taking the steps that are now being called abusive: “. . . when faced with life using credit or dire circumstances (untreated life-threatening illness or homelessness), using the credit is the choice. . . .”

How would you like to be lending money to someone who is borrowing from you to stave off homelessness, or under the duress of life-threatening illness? Sure, they need it and depending on your religion you might see your rewards in heaven, but are they good credit risks? Hardly. Are you being a good steward of your stockholders’ money, that they are counting on for their retirement? Are you acting responsibly toward the people who work for you, who will be out of a job if you go under? Short answers: No and No.

ALL credit has become more risky in the last few years, and higher risk increases the reward that lenders demand. If they demand too much reward, they’ll lose good customers and therefore money, and if they demand too little reward, they’ll also lose money. It’s a difficult balancing act, and inevitably some will get it wrong.

Congress can further complicate the lenders’ balancing act, but where is the evidence that Congress knows what it is doing better than the market as a whole? The only law that Congress can never repeal, no matter how hard it tries, is the Law of Unintended Consequences.

If Congress succeeds in lowering the rewards companies receive from higher risk debtors, which is obviously its goal, then one or both of two things MUST happen: Either more lenders will go broke, reducing the supply of lenders (not a good thing for debtors or for the shareholders and employees of those lenders) or lower risk debtors will be forced to make up the difference or bear the inconvenience of going without credit, shifting the cost from one group of debtors to another.

I hope we can all understand why someone would charge groceries on a credit card rather than see their children go hungry, even if they have no clue how they’ll pay for it. But as a public policy matter, we should be asking why they don’t qualify for food stamps, not how we can stick the credit card company with their grocery tab.

10 Credit Card Chaser

@Ann

Wanna write a guest post for me? lol – well said! – Joel

11 Financial Samurai

Hey Len – You’re right that is ironic of Congress who can’t reel in their own spending to preach to others. Do as I say, not as I do!

Thanks for the post Matt. Good things to think about, those Evil Credit Cards! lol

12 Credit Card Chaser
13 Hope to Prosper

Len, you crack me up. The problem is, if we had to wait for Congress to balance the budget first, nothing else would ever get done.

Seriously, I have been following the CARD Act for a couple of years, since back when it was the Cardholders Bill of Rights. And, it is long overdue to protect consumers from preditory credit policies, such as Universal Default and nasty due date tricks.

Many are quick to blame consumers who have been iresponsible with credit and they definitely have been. But, that doesn’t give banks the right to abuse customers, which they are doing to the extreme.

Two wrongs don’t make a right.

14 Len Penzo

Yikes. Just for the record, I do not advocate banks abusing their customers.

I don’t believe I intimated that in my original message, but if I did, I want to clear that up immediately.

15 Credit Card Chaser

I don’t think that Len was saying that it was OK for banks to abuse their customers. I think one thing that each and every reader of this blog can firmly agree on is that it is always wrong no matter what for a credit card company to market in a deceptive matter or to hide things from the consumer. Where maybe you and I differ (not really sure but just hazarding a guess from your brief comment) is that I believe that people should be held accountable for their actions and it is the individuals responsibility to be financially responsible and if one makes a late payment then they deserve to be hit with higher interest rates, fees and penalties and they should learn to manage their money in a responsible fashion rather than rely on Uncle Sam to intervene and force the credit card companies to soak everyone with higher interest rates, fees, and penalties because they aren’t allowed to single out the individuals with bad credit as well anymore.

16 Kevin@OutOfYourRut

CCC–If it is abuse from the banks, we need to blame ourselves (I’m using that term loosely of course). But the fact is that if we pay the fees, endure the credit limit reductions and interest rate hikes, and still remain their customers, we’re doing our part by acting like abuse victims by staying with them because we can’t imagine life without them, no matter how bad they treat us.

It may not be possible to move balances to another card in this environment, but the mistreatment should serve as a call to begin paying off the balances we have, and eventually to cut off the offending lenders.

If getting mad at our debt is too abstract to imagine, then maybe getting mad at the banks will be easier, and motivate us to get out of debt. It’s a matter of channeling negative energy into a positive direction. If we can, the abuse will turn out to be a blessing in disguise.

17 Rick Vaughn

I have a hard time understanding what takes so long to change these policies. Maybe someone can explain that one to me?

Anyway, although it’s still not a fair fight the credit card companies did lose the battle on this one. I’m just curious how long these laws will be in place. After the next election? or permanent?

18 Mike Murphy

My question is this: My basic understanding of the CARD act was to keep credit card companies from raising interest rates for no apparent reason and to regulate the fees that they charge.

As a fellow Debt prisoner, it seems to me that the grace period given to the credit card companies has allowed them to increase all interest rates in order to offset not being able to charge crazy fees. Problem is, I NEVER pay any fees because I pay attention to my due date, limits and avoid fees at all costs possible. The way I see it, the CARD act has hurt me greatly because all of my interest rates have doubled due to the market changes and economy (whatever they want to use as an excuse) and now there is nothing I can do besides paying WAY more money than I should have to in interest or default and ruin my credit completely. Is there anything in the bill that addresses the fact that the credit card companies basically said, “OK, go ahead and pass a bill saying that I can’t increase interest rates because, thanks to the grace period, all of my customers will be paying 20% + in interest by February 2010 anyway.” ???

Will the passing of the CARD act in February change anything with these horrible rate increases for Excellent standing customers like myself?

19 Matt Jabs

In a word… no.

I agree Mike, they have really out-done themselves this year, that’s for sure!

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21 creditcardbest

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