New Limits on Credit Card Companies: Is Hell Freezing Over?

The End of Days must be approaching; for one of the few times I can remember in the past two decades, regulators in the United States of Corporations sided with the consumer instead of the corporation. Of course, credit card companies claim this will restrict many from the constant flow of credit. Considering this was the lobby that made bankruptcy far more expensive 2-3 years ago, it's a big change in the atmosphere. Thank you Federal Reserve for doing something for the American people for once.

Now, what will be more interesting to find out is, after rules were altered in favor of corporations for a few decades, if this is a short-term stance change or the beginning of an era where the actual citizens of the country matter more than the political donors. Either way, the ethos of "light" or "self" regulation, after burning down the country, seems to be out the door. Let's see if we overreact in the other direction. Surely there is some fair middle ground, but we'll probably miss it. We shall see in a few years.

• When the federal government approves new rules banning "unfair and deceptive" practices today by credit card companies, it will hand a victory to consumer groups who have long complained of lax oversight of the $970 billion industry.
• Even with all its lobbying power, the credit card industry was not able to beat back the most sweeping overhaul in decades. Financial companies and trade groups argue that regulators are overreacting to problems in ways that will limit the availability of credit to customers.
• Today's move by Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration is the first of what could be many attempts to further regulate the industry, as several members of Congress plan to codify the Fed's regulations next year and perhaps pass even more stringent rules.
• It also represents a significant shift in the thinking of the regulatory agencies, which still are run by Republican appointees. Analysts note that regulators have stepped back from an emphasis on educating customers about what they should do, primarily through disclosures, in favor of telling companies and customers what they can and cannot do. ("educating customers" and "letting the chips fall where they may" only works within a highly financially literate society - i.e. not in the U.S.)
• "It just shows how the world has changed," said Brian Gardner, who follows financial regulation issues for the investment bank Keefe, Bruyette & Woods. "Eighteen months ago the Fed was focused on disclosure and transparency, and now they're coming out with a prescriptive, rules-based guidance. It's a whole different world."
• The three agencies declined to release the final draft of the regulations. But the version made public in May would, among other things, prevent banks from raising interest rates on existing balances unless a payment was more than 30 days late, charging late fees without giving the borrower a reasonable amount of time to pay and applying payments so that debts with higher interest rates are repaid last. (the last one really bugs me) Sources said regulators would give card issuers until mid-2010 to comply with the rules.
• By limiting banks' ability to manage risk, regulators would be forcing the institutions to withhold credit, raise interest rates or eliminate such programs as zero percent balance transfers to compensate for it, industry officials and analysts said. (sniffle... so no more "free credit card with T shirt offers for every 18 year old on campus? darn)
• But the changes also could make it more difficult for millions of people with bad credit to get what is known as a subprime card carrying higher interest rates, some experts say. (credit is not an America right, is it?)
• Based on data collected from a group of banks, Oliver Ireland, a partner in the financial services practice at the law firm Morrison & Foerster, predicted that the amount that the industry stands to lose in annual revenue, if the rules go into effect as proposed, would be about $12 billion.
• Several consumer advocates and members of Congress said the card companies were trying to scare regulators into watering down the rules. They also pointed out that in recent months, banks have been amending terms on existing accounts while scaling back on credit card offers. (exactly - the things they are "threatening" to do if these rules go into effect - well, they are already doing them due to financial conditions)

Now if we could only get that airline consumer bill of rights thing passed so no citizen should be stuck on a tarmac for 7 hours, then we're really cooking.

Cramerica - for the corporation, by the corporation (but a little less so today)

Comments

[Jack K:]

Great article but I thought I would add my 2 cents.
"educating customers" and "letting the chips fall where they may" only works within a highly financially literate society - i.e. not in the U.S.)
But they credit companies write things in legaleze, so very few people actually can understand it.

"amount that the industry stands to lose in annual revenue, if the rules go into effect as proposed, would be about $12 billion."
Well, who stands to gain that? The american consumer. Maybe it can be put to better use. Or reduce the overall debt in the country.

2008 Dec 18 10:26 PM

[Big Al45:]

The rules will not take effect until 2010. Assuming the FED goes through with them. They may decide to postpone them because of "systemic risk"

This gives the industry plenty of time to pay off the right politicians and go back to business as usual.

2008 Dec 18 10:39 PM

[otbricki:]

Grand Moff Tarkin was told that the more you squeeze the more will slip through your fingers.

2008 Dec 18 11:05 PM

[dawase@gmai...:]

I'll believe it when the cc companies are made to comply... ie, never.

Just call me Mr. Pessimist.

2008 Dec 19 12:49 AM

[kirkf:]

It is interesting that in the related stocks, mastercard and visa were listed.
Mastercard and Visa are transaction companies. They do not in any way set the interest rates, or any other part of the agreements between banks and consumers. They charge a set rate to handle the transaction between the consumer and the issuing bank.

The related stocks are actually the banks that issue these cards, or the credit cards that hold their own debt such as american express and discovery card.

Kirk

2008 Dec 19 12:02 PM

[TraderMark:]

Such cynics about the US political system!! ;)

I don't blame you one bit...

2008 Dec 19 04:02 PM

[nukldrager:]

Credit card companies don't have any use for financially smart people. They make it easy for fools to spend more than they make. Schools don't help either at least through the 12th grade. As we watch the de-construction of our economy one can't help but wonder if any of it has been engineered for greater governmental control over the population.
it certainly is becoming the result as more and more politics takes on the additional mantel of business management. They can't even do their jobs as described. They do the job they get paid for not the job they were elected for. And, as an aside, re the electoral college. Passed into law to protect the people from the "tyranny of the masses" What does that mean. Even in lawyer speak?

2008 Dec 20 12:13 AM

[Angry Physi...:]

<i>By limiting banks' ability to manage risk, regulators would be forcing the institutions to withhold credit, raise interest rates or eliminate such programs as zero percent balance transfers to compensate for it, industry officials and analysts said.</i>

That is a heaping load of pure bovine scatology.

The issue is not managing risk---it is stopping clearly deceptive practices. It is preventing bank's ability to fool customers into thinking they have a good deal when they don't. Nobody would stand for it if buying a car was infiltrated with such flim flam, even if there was an impenetrable 30 page "disclosure" form. Banks love disclosure requirements because they can stuff absolutely everything in there from the mundane to really critical, and nobody can discern which is important and what is legalistic mumbo-jumbo.

Banks will have the ability to price risk the old fashioned way: credit lines and interest rates. Sure, the front page interest rates will likely go up---and this means that the cardholders will have much clearer ways to compare one offer from another. They will go to the bank that actually does offer them the best deal, not the footnote-encrusted best* deal***.

That's the real reason some banks don't want this, as they will have to face honest competition and consumer pushback. Of course, all banks will be in the same position, and honest nicer ones should approve this move.

2008 Dec 22 12:27 AM

[Jason Rines...:]

1) Necessity creates innovation. I am in Consumer Healthcare marketing. I can state clearly that there has been a sea change of consumer knowledge about finance and economics. The American public does use computing, the Internet and Google.

2) Don't disagree with your dumb down comment. The dumbing down occurs when a citizenship feels it has plenty of the necessities of life. That would not be as harmful if the U.S. citizen had all the necessities with wealth rather then debt that was thought of as wealth.

3) The citizenship will remove those from power that faiiled to do there job and pillaged the system. This is called voter revolutions and occur four years after every deflationary crisis going back to the 1840.

4) America will likely change it's feelings about Central Banking/Fractional Reserve lending. I think of Coca Cola as an analogy. Coke makes you feel good, but makes you fat and unhealthy. Think Coke Zero in the future. It will be an era of frugality,

Remember, the crowd of the Roaring Twenties was not much different then this current crowd. The looting was more severe and our culture has less religious morals but noting gets people together and God fearing then necessity and the need to connect and problem solve. Merry Christmas!


On Dec 20 12:13 AM nukldrager wrote:

> Credit card companies don't have any use for financially smart people.
> They make it easy for fools to spend more than they make. Schools
> don't help either at least through the 12th grade. As we watch the
> de-construction of our economy one can't help but wonder if any of
> it has been engineered for greater governmental control over the
> population.
> it certainly is becoming the result as more and more politics takes
> on the additional mantel of business management. They can't even
> do their jobs as described. They do the job they get paid for not
> the job they were elected for. And, as an aside, re the electoral
> college. Passed into law to protect the people from the "tyranny
> of the masses" What does that mean. Even in lawyer speak?

2008 Dec 24 08:44 AM

[Jason Rines...:]

The U.S. will come to relearn the meaning of a 'value proposition'. I lived by the rules and my fundamental VC training and offered a strong value proposition for my businesses. My reward is survival and soon thriving. I love it when there is no competition left :)


On Dec 22 12:27 AM DrChaos wrote:

> <i>By limiting banks' ability to manage risk, regulators would be
> forcing the institutions to withhold credit, raise interest rates
> or eliminate such programs as zero percent balance transfers to compensate
> for it, industry officials and analysts said.</i>
>
> That is a heaping load of pure bovine scatology.
>
> The issue is not managing risk---it is stopping clearly deceptive
> practices. It is preventing bank's ability to fool customers into
> thinking they have a good deal when they don't. Nobody would stand
> for it if buying a car was infiltrated with such flim flam, even
> if there was an impenetrable 30 page "disclosure" form. Banks love
> disclosure requirements because they can stuff absolutely everything
> in there from the mundane to really critical, and nobody can discern
> which is important and what is legalistic mumbo-jumbo.
>
> Banks will have the ability to price risk the old fashioned way:
> credit lines and interest rates. Sure, the front page interest rates
> will likely go up---and this means that the cardholders will have
> much clearer ways to compare one offer from another. They will go
> to the bank that actually does offer them the best deal, not the
> footnote-encrusted best* deal***.
>
> That's the real reason some banks don't want this, as they will have
> to face honest competition and consumer pushback. Of course, all
> banks will be in the same position, and honest nicer ones should
> approve this move.

2008 Dec 24 08:52 AM