Tuesday, July 14, 2009

Clamping Down on Credit Card Companies

We can help fix the broken credit card industry. And I can sum up how in four words: Consumer Financial Protection Agency"

- Elizabeth Warren on the Rachel Maddow Show, MSNBC

The credit card industry is gearing up to fight real truth in lending guidelines being developed in an effort to clamp down on unsavory lending practices.

Among provisions being discussed? Credit agreements that people can read and that provide clear, concise detail on interest rates and what triggers a fee.

Interestingly enough I last week I received a notice from Bank of America informing me that the credit card I closed months ago was converting to a variable interest rate and there was nothing I could do about it....even though I closed the account a while ago because of its quadrupled minimum payment.

Other shady bank "tricks and traps":
a. Banks that refuse mortgage or other payments, citing returned checks, where returned simply means they sent your check back to you without ever presenting it to your bank for payment.

b. Banks that arbitrarily move payment due dates with little notice in effort to prompt a late payment.

c. Residual interest charges on payments made before the due date.

Here's an article from the New York Times about the effort to crack down on these shady practices and more.

June 17, 2009, 9:48 pm
Elizabeth Warren on Consumer Financial Protection

By Catherine Rampell

The new financial regulatory proposal released Wednesday by the White House would create a new consumer financial protection agency. It would have broad new authority to protect homeowners from unsuitable loans.

The idea is the brainchild of Elizabeth Warren, who is also reportedly being considered to head the new agency. Ms. Warren, a professor at Harvard Law School, is currently chairwoman of the Congressional Oversight Panel created to oversee the banking bailouts.

In addition to her academic research, Professor Warren has left a long record in the popular press on her own views about consumer debt and the government’s role in consumer financial protection — both on her blog, Credit Slips, and elsewhere. In recent years she has written relevant op-eds for The Chicago Tribune, The New York Times and The Boston Globe, among other publications. She has also done TV interviews about these ideas.

Most notably, she laid out the argument for a new agency in the journal Democracy in summer 2007. Presumably taking a cue from Ralph Nader, the essay was titled, “Unsafe at Any Rate.”

Some excerpts:

Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products.

They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products — a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.

She notes that not all of consumers’ credit problems can be wrung out of the system, given some consumers’ irresponsibility:

Indeed, there can be no doubt that some portion of the credit crisis in America is the result of foolishness and profligacy. Some people are in trouble with credit because they simply use too much of it. Others are in trouble because they use credit in dangerous ways. But that is not the whole story. Lenders have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt.

She argues that some consumers who do try to protect themselves often get taken advantage of by untrustworthy “experts,” whether in the mortgage market or at payday lending institutions:

Even worse, consumers wary of creditor tricks may look for help, only to rush headlong into the waiting arms of someone else who will fleece them – and then hand them over to the creditors for further fleecing.

She also describes problems she sees with the existing regulatory system, among them a “regulatory jumble” wherein consumer financial products (like subprime mortgages) “are regulated based, principally, on the identity of the issuer, rather than the nature of the product.”

She describes what her ideal consumer financial product safety commission (F.P.S.C.) would do:

Like its counterpart for ordinary consumer products, this agency would be charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new financial products for safety, and require modification of dangerous products before they can be marketed to the public. The agency could review mortgages, credit cards, car loans, and a number of other financial products, such as life insurance and annuity contracts. In effect, the F.P.S.C. would evaluate these products to eliminate the hidden tricks and traps that make some of them far more dangerous than others.

An F.P.S.C. would promote the benefits of free markets by assuring that consumers can enter credit markets with confidence that the products they purchase meet minimum safety standards.

She also responds to anticipated arguments that such an agency might over-reach, over-regulate or at the very least regulate poorly:

With every agency, the fear of regulatory capture is ever-present. But in a world in which there is little coherent, consumer-oriented regulation of any kind, an F.P.S.C. with power to act is far better than the available alternatives.

While Professor Warren acknowledges that consumers can still do stupid things and get themselves into trouble, in the end, of course, she concludes that a new agency and/or regulatory structure aimed at safeguarding consumer interests would “eliminate some of the most egregious tricks and traps in the credit industry.”

Not surprisingly, the financial services industry has pushed back against many of Professor Warren’s ideas about consumer protection.

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