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. œWe 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.

œIn recent years the playing field between credit card companies and credit cardholders has become very one-sided, Maloney said. œA 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 œserious concerns that certain aspects of this legislation œwould have unintended consequences such as more expensive and less accessible credit.

The Consumer Federation of America cites the key provisions of the œCredit 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.

œWe™re seeing a groundswell of consumer outrage about credit card practices, says Jeannine Kenney, senior policy analyst at Consumers Union. œPeople 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.

     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!

I don’t know who said it, but this seems more and more appropriate…

“The older I get, the smarter I used to be.”

I used to think I was halfway intelligent, and could understand most legalese I came across. But credit card agreements have always been a little confusing, and when I get halfway down the page I feel like I need a translator, or a brain massage! I just want to know my due date, grace period, billing and how the interest rates and penalties may be charged on the account. But it’s never that simple. One of my major credit cards recently sent “Important Changes” to my credit card agreement. This is a card I usually pay off each month, but sometimes go a few months with payments larger than the minimum due. It all looked pretty standard until I tried to make sense of the minimum amount due, and “adjusted” minimum amount due.

Honestly, I don’t really expect anyone to read this mumbo jumbo, but if you can make sense out of it (especially the adjusted minimum amount due) and know why they may have changed the terms I would be very interested! A good bet that the new terms bring in more dollars for the company, but there’s just too many “or” words in there.  This is really consumer friendly isn’t it?

Minimum Amount Due
Each billing statement will reflect a Minimum Amount Due. Payment is due by the time and date shown and in the manner prescribed on the statement. The Minimum Amount Due will not exceed the New Balance. You may pay more than the Minimum Amount Due, up to the entire outstanding balance, at any time. To calculate the Minimum Amount Due, we add together the following amounts, round the result to the nearest whole dollar, and then add any amount past due:
(1) the greatest of:
(a) 2% of the New Balance (excluding from the New Balance any over-limit amount and any late fees or over-limit fees);
(b) the lesser of:
(i) current billed Finance Charges plus 1% of the New Balance (excluding from the New Balance any over-limit amount, any late fees or over-limit fees and finance charges), or
(ii) 4% of the New Balance; or
(c) $15;
(2) any over-limit fees added during the billing period;
(3) any late fees added during the billing period; and
(4) 1/24th of any over-limit amount (the part of your New Balance in excess of your credit line).

Adjusted Minimum Amount Due
Summary: If you consistently pay more than the Minimum Amount Due outlined above, we may calculate your minimum payment without any late fees, over-limit amount or the additional 1% of the balance referenced in (1)(b)(i). If we do this, and finance charges are more than 2% of the balance, we may add $15 to your minimum payment. For information about how this works, read the detailed description below.
Detailed Description: We may adjust the outlined calculation above by removing the late fees in (3), the over-limit amount in (4) and “plus 1% of the New Balance” in (1)(b)(i). In the adjusted calculation, we will exclude only the over-limit fees from the New Balance in (1)(a). After the adjustment, if (1) is equal to the current billed Finance Charges, we will increase your Minimum Amount Due by $15 We will apply the adjusted calculation to your Account if:
the sum of your payments (credited to your Account in the six consecutive billing periods ending with the Closing Date of the current billing period) is greater than the sum of the Minimum Amounts Due (for the six consecutive billing periods ending with the Closing Date of the previous billing period, not using the adjusted calculation and including the amount past due in only the first of those six periods);
- the sum of the Minimum Amounts Due is equal to the sum of your payments and it is less than or equal to $90;
- the sum of the Minimum Amounts Due is zero and we used the adjusted calculation in the last billing period when your Minimum
- Amount Due was not zero; or
- it is the first billing period ending on or after November 16, 2007, and your Account was opened before that date.
If we adjust your Minimum Amount Due, we will do so for at least six billing periods, and if we stop adjusting your Minimum Amount Due, we will not adjust it again for at least six billing periods, regardless of your payment history.

Piggybacking?  I thought I understood most financial credit and loan practices, but this one was new to me.   People with poor credit scores who anticipate needing a major loan such as a mortgage, can rapidly improve their own credit by riding on the credit history of people they don’t even know.   I was suprised this was possible, and there are even companies who specialize in helping consumers do this!  Apparently it’s not technically illegal, at least yet.  And some people are even making a decent monthly income by letting other people use their excellent credit history.   I never thought about letting others become “authorized users” on my credit cards… too much risk there for me.  But in this case, it’s carefully set up so that the “authorized users” are not given credit cards or access to any personal information.  But once designated as “authorized users” they receive the benefit of years of good payment history on those particular cards.   In a few months time, someone with a poor credit score can rapidly raise their scores to qualify for better loans and rates.  Seems pretty shady from my perspective… a mortgage lender wants to know the true and accurate credit history of a potential borrower.  All financial risk decisions and mortgage origination is based on the premise that they have accurate information… or at least as accurate as possible.  In this case, they are not getting a true picture.   What if someone with really poor credit history gets a loan based on great scores that only recently jumped up?  Maybe those borrowers shouldn’t have loans… if they default it costs the industry, and indirectly other consumers, for the cost of that default.  I suspect the practice will change with revised trending by the credit scoring companies.  They could simply add a trend of credit scoring to see how the credit scores changed over time.  If a credit score history was at consistent levels for a long period of time, and then jumped up rapidly in the months before a consumer applied for a loan, that would raise some eyebrows or prompt further investigation.   Or they could shorten the period of time that an “authorized user” benefits from based on the credit history of the original card-holder.   I wonder what other practices occur out there that I have no idea about… probably many!  In the world of money people become very creative.

For more information on piggybacking, the article on Yahoo from the AP is an interesting read: Piggybacking Roils Credit Industry. 

*** UPDATE – June 11, 2007 ***

It seems the piggybacking scheme is not lost on Fair Isaac Corp after all…  the company who began FICO scoring has decided that as of September 2007, adding someone to your credit card agreement as an “authorized user” will no longer benefit them with your entire credit history.  The change will not affect “joint users” but a joint account holder is equally responsible for the debt whereas an authorized user is not.   Should be interesting to watch how the credit scoring industry changes over time.

You may have read the recent article Fed Wants to Clear Credit Card Confusion by Jeannine Aversa of the AP. She discusses how the U.S. Federal Reserve may try to clear up confusing rules and pitfalls by credit card companies. Wow… wouldn’t it be nice to have 45 days instead of 15 days notice if a credit card company wanted to change rate or late payment terms? There’s a host of other potential changes, and in my view it’s about time! Congress has recently been wrestling with the same issue as consumer complaints have continued to rise over the whims of credit card company actions. How many of us really understand the terms of a credit card agreement? I don’t… I know the basic rate, and due date of the monthly bill (although that seems to change sometimes as well). I ensure I pay the bills on time and watch for any issues the credit card company may raise about rate terms, etc. But most of that language just seems to imply they can do anything they want at any time.

Fortunately most of the credit card companies are starting to feel the consumer backlash and reigning in some of the most egregious practices such as universal default. If I’m late on some payment one month I don’t think it’s appropriate for a different credit card company to raise my interest rates. Sure, it may indicate that a consumer’s credit risk has changed in some way, but that shouldn’t allow them to change rate terms on unrelated debt… that’s the heart of universal default. Certainly we don’t have to use credit cards, and we do agree to the terms of use when we activate the card. But I applaud the Fed’s efforts to improve disclosure and help consumers understand what they are really agreeing to in the first place. I think all most consumers really want is clarity and a fair agreement. Yes, business is business… but some companies will nickle and dime consumers at every turn. If the credit card companies cannot or will not respond effectively to consumer complaints, then legislation and fed intervention will probably happen. That’s not always a good thing… but in this case the political climate is leading the way and I have to agree that consumer’s interests must be balanced more fairly against a credit card company’s efforts to make profits.

–Updated–

CNN/Money has a great article about Credit Card Companies being as “tough as ever” while discussing fees, charges, etc. We are due for some change…. literally!