Sushi Money

In a long-awaited move, the Federal Reserve is setting out new consumer-friendly regulations intended to reign in credit card companies from overzealous and even unfair lending practices by financial institutions.

 The crackdown on credit card companies is finally taking a proactive approach to protecting consumers and reversing practices that have appeared overly greedy in recent years.  I’m a strong defender of free market economics and fair business practices, but too many credit card companies have lost their way in terms of serving clients’ needs, and instead have appeared nearly predatory in their approach to credit card account management.

“The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate,” said Ben Bernanke, chairman of the Federal Reserve, which regulates many U.S. banks. “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

And that’s the bottom line for many of consumers, a desire for clarity and a credit card agreement that isn’t changed at will by a company seeking higher profits.   I’ve noticed in some of my credit card statements that they are spelled-out more, and explained a little better than in years past, which is nice to see. But clarity in Disclosures Alone Won’t Solve Credit Card Issues according to Fed Chairman Ben Bernanke. 

“Twenty-five years ago, less than half of all American families had a general purpose credit card. Since then, the number of consumers holding such cards and the amount of outstanding credit card debt has grown significantly. The development of credit scoring and implementation of risk-based pricing have made credit cards available to more people. In addition to serving as a source of needed credit, consumers benefit from the convenience credit cards offer as a payment mechanism.”

“The rapid growth in the use of credit cards, and a corresponding increase in the complexity of available products, has reduced the transparency of the industry, Mr. Bernanke said at an open meeting of the Fed board. For that reason, federal banking regulators need to make improvements to give consumers “greater control” over their accounts.”

 Of course the banking industry and lobbyists do not agree:

“The Federal Reserve’s proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings,” said Edward Yingling, chief executive of the American Bankers Association.

With any new set of regulations there are some risks.  Government may overstep the bounds of balanced market dynamics and impose too many rules and binding regulations on institutions.  Those banking institutions may simply change their business practices in a negative way, avoiding regulatory issues and not making credit available to consumers as they have done in the past. 

“Card industry representatives have been quick to warn that the passage of new legislation or additional regulation could hurt all credit card carriers.”

“We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices, and reduced consumer access to credit cards,” said Yingling, the banking industry advocate. In short, everyday consumers will bear the real cost of these proposals.”

“Americans with shabby credit histories, for example, may no longer have similar access to credit. At the same time, consumers with good credit could soon find themselves facing higher interest rates.”

Do you agree?  I see their point, but I also think the banking industry is protecting its own at this point.  Certainly businesses are in business to make money, and they should do so as they deem appropriate…. within the bounds of the legal and regulatory structure.  But in this case, many consumers and now politicians and leading economists believe that the financial institutions have overstepped their bounds, unfairly targeting consumers.  

We will always walk a balance between too little and too much regulatory structure in business markets.  But in this case, I personally believe it was time that government stepped in to look at consumers’ interests compared to the financial profit incentives of the banking industry.  Sometimes the balance becomes skewed, and perhaps this is a small step to swing the pendulum back toward consumers’ interests.  

Besides, with today’s lending climate during the credit crunch, banking and financial institutions have lost a lot of credibility in terms of managing risk, and consumers are paying the price for their market turmoil induced by many of these same institutions.  By saying “credit may not be available to consumers” is stretching the truth when credit is really no longer available to a certain segment of consumers anyway at this point.  

As Congress examines the issue, time will tell how these regulations impact the banking industry overall.  Somehow I believe they’ll do just fine and find new ways to make money while lending money.

Depending on the rules that are adopted, credit card companies would be prohibited from:

• Making deceptive offers of credit without spelling out terms and limitations;
• Placing unfair time constraints on payments. A payment would not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay;
• Allocating payments unfairly among balances with different interest rates;
• Retroactively raising interest rates on pre-existing balances when a change in credit status occurs;
• Assessing very high fees for exceeding credit limits solely because of a hold placed on the account;
• Unfairly charging consumers security deposits and fees when issuing credit or making credit available;
• Unfairly computing balances using double-cycle billing;
• Prohibit overdraft fees because of additional “holds” when using debit card (such as when purchase gasoline).

It will be interesting to see what rules are ultimately adopted and applied, and how credit card companies react.  In some cases I expect credit card accounts may be cancelled or frozen without additional steps by consumers. But the banking and financial institutions cannot lash out without consequences to their own businesses.  While they are in business to make a profit, they are also in the customer service business.  There will always be another company willing to take customers who are not happy with their current bank or lending institution.    

Is this the long-awaited Credit Card Bill of Rights for consumers?   Not quite, and the Consumer Federation of America is calling for even greater regulation:

“We commend federal regulators for taking an important first step to stop credit card companies from pumping up their profits by using hidden traps and tricks that drive up the amount of debt consumers owe,” said Travis B. Plunkett, legislative director of the Consumer Federation of America. “We urge Congress to focus on enacting a permanent law that curbs abusive practices not addressed in this proposal.”

If I had the ear of the card company executives, I would advise them to jump right onboard this consumer-friendly train, and even make a huge PR effort to show what they are doing to help consumers. Bottom line?  Consumers want a credit card agreement that is fair and steady, and not at risk of changing overnight by a company who can assess fees and charges at will.  Perhaps in response to increased regulation we’ll see a trend toward term limited credit cards, with fixed contracts?   Hard to say, but I don’t think those offers will stop coming in the mailbox anytime soon.

There may be some good news for consumers this year as Congress will weigh a new Credit Card Bill of Rights that will help provide more protection from arbitrary decisions by credit card companies. The bill was introduced by Rep. Carloyn Maloney from New York, and primarily focuses on requiring credit card companies to treat the agreement with consumers more like a contract and to provide greater notice for any changes in rates, fees or billing cycles. It’s hard to see how this bill could be opposed from a consumer viewpoint, and as we’ve mentioned before it’s something long overdue.

“In recent years the playing field between credit card companies and credit cardholders has become very one-sided,” Maloney said. “A credit card agreement is supposed to be a contract, but what good is a contract when only one party has the power to make decisions?”

Many of the credit card companies have begun reforming certain practices, but the nickel and dime stuff continues unabated. I don’t think most banks and credit card companies really understand.

The banking industry says it is committed to consumer protection and responsible lending, yet it opposes many of the provisions in the bill. In a statement, Edward Yingling, president of the American Bankers Association, says he has “serious concerns” that certain aspects of this legislation “would have unintended consequences such as more expensive and less accessible credit.”

The Consumer Federation of America cites the key provisions of the “Credit Card Bill of Rights Act” would prohibit:

o Bait-and-switch interest rate and fee hikes for any or no reason at all during the life of the card;
o Assessing hidden and unfair interest rate charges by charging interest on balances already paid off;
o Unjustifiably maximizing interest charges by requiring consumers to pay off balances with lower
interest rates before those with higher rates;
o Charging late fees when consumers mail their payments seven days in advance of the due date; and
o Applying certain unfair interest rate hikes retroactively to balances incurred under the old rate.

“We’re seeing a groundswell of consumer outrage about credit card practices,” says Jeannine Kenney, senior policy analyst at Consumers Union. “People are fed up.”

Well, that’s how reform takes place right? After enough people demand change, the legislators usually come around. Will this affect the bottom line for banks and financial institutions that issue credit cards? Maybe, but there will always be fees, charges and money to be made in business. Personally I’ll take a lesser dividend cut if the credit card agreements were easier to understand and little more consumer friendly. It should be pretty simple: Agree to a card, rate and billing cycle. And don’t change anything unless the consumer defaults on payments. And if something is going to change? Then let us know in plain english.

For specific details, you can review the .pdf press release from the Consumer Federation of America (3-page pdf).

I may finally get that motorcycle I’ve been thinking about for a few years. With the rising price of gas and threats to cut off oil from third-world nutcases, who knows how much it may cost us to drive a car in the future. Harley-Davidson anyone? And what does insurance cost on motorcycles these days? I just remember driving that old Honda CB-750K years ago… what a great machine, and it cost peanuts to drive. Something to be said about a short commute, and saving on time and fuel costs. A little different than how the WA state GOP chairman saves time by not counting votes… doh!

Speaking of saving time (and money), if I owned a Bank of America credit card I think I’d take a short walk to the shredder. Seems America’s largest bank has been indiscriminately hiking interest rates on consumer credit cards. A common theme for several credit card issuers, but usually an interest rate hike is tied to some marked change in a consumer’s risk profile, credit score, etc. But there’s a lot of consumer debt out there influencing the economy. When a company jack’s up rates without explanation however, I think I’d try and find a different credit card. Isn’t BofA the same company that issued credit cards to many consumers who didn’t ask for them? From the BusinessWeek article:

Adam Levin, CEO of Credit.com and former head of New Jersey’s Division of Consumer Affairs, says he is surprised Bank of America would risk bad public relations with its rate increases, given the congressional hearings in December. The bank risks alienating new customers and existing ones by being so brazen, he says, adding, “Either Bank of America has more financial troubles than it is willing to admit or it has a level of institutional arrogance that is unacceptable.”

The stock market action has been ugly lately as well. More uglier than most today was American International Group (AIG). One of my relatives has had an ownership interest in this stock for over 6 decades only to see the investment lose a third of its value in a few months. The stock has hit a five year low based on subprime and financial derivatives exposure. Lots of folks were concerned about the stock last year, but in December AIG came out and stated they viewed their risk exposure as “manageable”. Something’s very different today, and you can bet a lot of folks will be asking why. IBD indicated that “AIG’s independent auditor, PricewaterhouseCoopers, said the insurer had a “material weakness” in its internal controls over financial reporting and oversight.” Ouch.

Are we in a recession? Lot’s of folks think so (which brings out some good advice on how to Recession-proof Your Life). Most consumers seem to think the economy is terrible however, regardless of whether that’s reality or perception (after a while the difference doesn’t matter).

It looks like there may be more selling to go in the stock market. Is the market being influenced by the 2008 tax benefits for capital gains and dividends? Hard not to become more conservative, but sticking to the retirement plan is a must. With a Democratic congress and an election year bid for a new party, our future tax situation may be very different in the years to come.

For a closer look at how your income tax situation might look after the 2008 elections, Barron’s Taxing Vote article provokes quite a bit of thought. The implications for the market over the next several years are somewhat disheartening… all I see are a lot of folks selling while the selling’s good:

“Bottom line: Investors would be wise to start planning now for aggressive tax hikes. The new administration likely will try to pass new tax legislation in 2009, before the Bush tax cuts expire and before the 2010 mid-term elections. And some planners warn that capital gains levies could be retroactive for all of 2009, regardless of when the bills would be passed.”

But while we send money to the IRS for our 2007 tax liability, a lot of folks can look forward to getting a nice fat tax rebate check back in the mail in a few months. So… what part of the economy are you going to stimulate?! For many of us it will have something to do with gasoline or credit cards. Probably both, and a summer vacation to boot. I think we’re going to need it.

     As the “credit crunch” continues, and lenders re-evaluate just how they will lend money, and to whom… I’ve realized that my mailbox has received a temporary reprieve.  In what way?  Well those dozens of credit card offers I normally receive have miraculously stopped!  We normally get so much junk mail that I haven’t really looked at what was coming in until recently.   The end of the year fills the mailbox with requests for charitable donations and other needs, but as I was looking at my desktop pile of junk, I realized I haven’t seen a new credit card offer in at least 2-3 weeks!  Wow!

    I certainly don’t miss the credit card offers… and maybe the lenders are even going to save quite a bit of money from slowing the incessant flow of offers to consumers.  I’m sure they’ll resume at some point, but for now it’s nice to have a few less envelopes in the mailbox.   Why have the offers slowed?  Can’t be sure, but I suspect it has to do with the lenders re-evaluating business practices, and how they target and evaluate credit risk.   It’s not only the lenders re-evaluating credit risk these days.  Fair Isaac Corporation is introducing a new FICO scoring model to more accurately evaluate consumers’ risk profiles.  The Wall Street Journal Online published a review of this process in Default Lines: The New Math of Credit Scores.

  “The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.”

   I was reading a comment (somewhere?) about financial companies such as Washington Mutual who are struggling with consumer defaults and bad loans, and it was described how their business practices may have attracted greater risk by targeting a greater share of the market through consumers that were not “served” by other institutions… implying that these consumers were a poor credit risk in the first place, and now are defaulting on loans.  Lots of parallels throughout society there, and I suspect credit card offers via mail may generate the same risk if not carefully screened and evaluated.
   

It will be interesting to see how the new FICO process really works out for consumers.  Of course as the article cites, a new FICO scoring process is not going to change our overall credit history… the “record” of our use of credit. It’s just going to evaluate that history in a new way.  And it’s not going to make sure our credit history is accurate either… I don’t like surprises when I decide to apply for a loan, or to find out I’m the victim of identity theft because some schmuck has been using my credit history illegally!   So for peace of mind and financial well-being, I think it’s important that we take responsibility for our own credit history by conducting an annual review.

You never see those market drops coming… especially on a day the Fed lowers rates.  At least I don’t, so that’s where diversification saves the day.    And why was the rate reduction just not low enough today?  Not enough of a rate cut?  I think that’s just journalistic license in the absence of any better explanation.  Okay, maybe because the “market” thinks the Fed doesn’t get it, and the credit situation is just getting worse.   But the quarter point reduction was expected, and the Fed left the door open to more rate cuts- if and when necessary.  The market reacts to the short-term however, and wanted more “relief” say the experts.  Like anyone really knows?  For millions of ARM (and other) borrowers at least today should spell relief.  Interest rates have now been cut three times since September and many of the ARM resets over the next 6-12 months will not be quite as severe.   The Fed will probably cut again, and I’ll bet the market grudgingly responds.   But first lenders need to figure out how to lend money again or we’re not going to get anywhere.  And I suspect that’s what’s got Mr. Market really troubled.

Well, not everyone appreciates the government’s effort to try and help homeowners facing mortgage challenges. I can understand both sides of the issue, I just think that doing something is a lot better than nothing in the current economic climate. A recent USA Today editorial makes a similar case, and says “Freeze those teasers.” But others take a more hard line view such as Mr. John Berlau at the Center for Entrepreneurship at the Competitive Enterprise Institute. Interesting viewpoint, but I just don’t think it’s really that significant over the long term. Reform is necessary in the mortgage lending industry, and I suspect legitimate mortgage lenders will work a little harder to ensure clients understand the terms of mortgage loan contracts in the years ahead. Is it Congress’ turn now? We may see additional legislation to try and help people facing ARM resets and foreclosure. How do you feel about it?

     There’s a new variation of the telephone scam going around.  Maybe I just haven’t heard of it, but this one involves being called at home or on your cell phone by someone pretending to be from your credit card company.  They say they are an offical from Visa or Mastercard, and that your account may be subject to fraudulent activity.  And get this… they already know your credit card number!  What they don’t know is your 3 or 4 digit security code, and that’s what they need.  So they talk and talk, and let you know that you’ll be receiving a credit to your account for $XXX dollars, and all they need is to verify the numbers on the back of your card (front for American Express)…. which of course includes your security code! 

     Some consumers have given all this information to a seemingly official person from Visa or Mastercard… then after having second thoughts they called the credit card company themselves.  Guess what?  The credit card company said that fraud just had occured after the previous call.. and it was a good thing they called to verify.  Visa or Mastercard will promptly close the account and issue you a new card.   Personally, I try never to accept calls from a bank, credit card company or other financial institution.  Instead I will tell them I’ll call them back, and then after finding the official customer service number I will dial it myself.  That way I can verify that the contact or information request is real.

    Have you been the victim of fraud?  Or do you have any lessons learned or advice regarding financial fraud?  The people who do this sort of thing will continue finding ways to fool people into giving away information.  It’s important to be vigilant!