Thursday, February 26, 2009

Time for Rational Regulation of Credit Card Lending Practices

Government has a necessary and legitimate role in regulating and preventing trade practices that are deceptive and/or predatory.

I believe this includes unsecured credit lending to consumers.

Senator Robert Menendez has introduced Senate Bill 392 - Credit Card Reform Act of 2009.

Senator Menendez is a Democrat, and one of the type I would have reason to dismiss out-of-hand, were I driven by rank partisanship.

But I am not and I believe we should all take a close look at Senator Menendez's proposals and, from what I see of them, offer our support (necessarily sidelining the narrow interests of Delaware, vis a vis our resident credit card heavyweights).

Kudos to Senator Menendez for taking action in this arena.

Some of its provisions :

  • Creates Opt-In for Underage Consumers
  • Requires credit card issuers to receive “opt in” approval from young consumers under age 21 before they mail credit card solicitations to these consumers.
  • Prohibits Unilateral Changes in Credit Card Agreements

    Prohibits credit card issuers from changing the terms of the credit card agreement.
  • Prohibits Universal Default
  • Prohibits credit card issuers from increasing a cardholder’s interest rate based on activity unrelated to their credit card agreement – for example, a late payment on another bill or a change in credit score.
  • Ban on Retroactive Rate Increases
  • Prohibits interest rate increases on existing balances.
  • Limits Penalty Interest Rate Increases
  • Limits penalty rate increases to a seven percentage point increase.
  • Limits Late Payment Fees

    Requires issuers to state clearly on a billing statement the postmarked date and the amount of the late payment. Does not allow late fees or other adverse consequences for payments made by the postmarked date.
  • Makes Fees Reasonably Related to Cost

    Requires that any penalty fee, such as a late payment fee or over-the-limit fee not exceed an amount that is reasonably related to the cost that the issuer incurs as a result of the consumer’s action.
  • Requires Verification of Ability to Pay

    Credit card issuers may not offer credit or raise credit limits to consumers unless they determine that the consumer will be able to make the scheduled payments under the terms of the agreement based on their current income, obligations, and employment status. The Federal Reserve would provide the appropriate formula for determining ability to pay.
  • Ban on Deceptive Credit Card Offers

    Stops bait and switch tactics by requiring “pre-approved” offers to be a true, firm offer containing the material terms such as interest rate, fees, and amount of credit; requires such offers to be honored by the issuer.

As opposed to infantile straw man arguments of those inveighing against libertarians, wholesale opposition to government regulation of private activity is not what it means to be a libertarian, at least in my own corner of being a libertarian.

Criminal law is an example of government regulation.

To me government regulation should intervene against or arbitrate direct harms inflicted on individuals by other individuals (especially those doing so in a collective manner).

By harms I mean illegitimate or unjustifiable damages; damages that are not ultimately self-inflicted but rather the result of exploitative, predatory, or violent behavior.

This is a very simplistic breakdown, but it comes down to whether someone's harm can be said a result of actions they took or decisions they made with "eyes wide open", rather than with the wool pulled over them.

All that said, the credit card industry just screams for accountability and anti-predatory regulation.

The differential of resources and motives between massive faceless consumer credit card issuers and the vast swaths of individuals to whom they offer these transactions is so disparate as to have effectively institutionalized predation, specifically on the most financially-vulnerable individuals.

When the "fine print" is not only fine but almost unintelligible even to a half-decent contract attorney (who isn't writing credit card agreements for a living) AND that fine print contains incredibly-punitive, arbitrary, and usurious terms and conditions that turn individual lending into a form of "gotcha" economic servitude, it is time to look at statutory boundaries and baselines on this type of activity.

Now there are always unintended consequences. Will this mean higher rates all around? Will this mean credit becomes unduly constrained? Perhaps.

Should the issue be revisited with regularity and frequency through (historically-absent) congressional oversight of such regulatory action? Absolutely. If it isn't working or is having deleterious effects, it should be corrected.

But with rational, reasonable regulations I doubt we will see the credit card goliaths cut off their noses to spite their faces, by over-reacting to such a targeted measure as proposed by Senator Menendez.

I hope, moving forward, that those who are far more ready than me to make government the omnibus regulator of all human activity will do away with another favorite straw man : that "free markets" mean economic free-for-all. (No one believes that, save perhaps a few anarcho-capitalists.)

If we can dispense with straw men characterizations of ideologies we believe we must somehow some way and any way contradict, we might begin to rationally debate the proper way in which free markets can most broadly reflect the legitimate exercise of economic freedom, restricted only to prevent harm rather than engineer all manner of outcomes, economic social or otherwise.

Rational, fair consumer credit card regulation to facilitate consumer awareness, transparency, and predictability is a goal for which I believe we can, the most of us, reach productive comity.

I welcome it.


Anonymous said...

I'm not an anarcho-capitalist, but to be fair to their arguments, I think it's worth pointing out that they're against fraud and place limits on the enforceability of contracts. I'd imagine that in an anarcho-capitalist system, we wouldn't see the free-for-all you imagine but rather an evolution in credit that matches many of the goals of this bill. For example, unilaterally changing the interest rate after loaning the money could be seen as fraud and would probably lead to the nullification of the contract in an anarcho-capitalist arbitration.

Tyler Nixon said...

Thanks, Miko. Perhaps I should delete that reference, out of fairness. I don't know any anarcho-capitalists personally so no one has ever explicated this viewpoint in detail to me. I am sure there is more nuance than my off-the-cuff reference perhaps gives credit, as far as referring to economic "free-for-all".

Thanks for stopping by.

Anonymous said...

Good post, Tyler.

On the subject of credit card debt, if you add that to mortgage debt, and express the sum as consumer debt as a percentage of GDP, look at what has happened since 2000. In 2000, consumer debt was about 50% of GDP; by the end of 2008, we doubled this to about 100% of GDP!!!

Do you know when the last time this happened? 1929!

An NPR editor aptly named this "Twin Peaks".
(scroll down)

Now ponder what Joe LaVorgna, chief U.S. economist for Deutsche Bank, has to say in a terse note made public the other day:
"We should forget trying to get a good deal for taxpayers because even trying will hurt.

"Ultimately, the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and or significantly higher taxes down the line," the document says."

He may well be right, the hole is that deep!

Perry Hood

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