Disagreement in New Credit Policies
If you’ve been following along with the financial news you know that the Fed is working on some new policies to ensure the protection of consumers. One of the first things to go is the credit industry’s ability to change rates and terms for any reason at any time. Honestly, I’m surprised that was allowed as long as it has been. And, while we’re talking about it, why is it always after a disaster strikes that people start paying attention?
Anyway, the Fed has made some pretty aggressive proposals on the new laws they’d like to enact. Consumers and consumer advocate groups generally like the new proposals, while the banking industry is indignant and chanting that unwanted consequences will come of these changes. Obviously they don’t want the changes around, that means they lose money. And that’s exactly what consumer advocacy groups are saying. But, I’m in agreement with the OCC (Office of the Comptroller of the Currency). There is a point when the Fed’s new policies can go too far.
First proposal on the list for the OCC to dispute was the ban on repricing an existing balance after a credit card has expired because the terms cannot change even if the borrower’s risk profile has gone through the ringer. According to the OCC, this is not consistent with safe and sound lending practices.
Allow me to explain.
When the card is expired, that’s technically like refinancing a loan. When you refinance your car or your house, the new interest rate is based on your current risk profile, not the one you had when you initially signed the loan documents. As a credit card is still a loan – albeit revolving – those same rules should still apply. If the card is expired and the consumer has no wish to renew the account, then by all means, keep it at the same interest rate until it is paid off.
However, should they choose to have a new card, then the lender should have the right to reprice the existing balance just as any other lender would do. If the terms are not agreeable to the consumer, they can go somewhere else. But, by treating credit card lenders differently in this respect, they are forced to find other ways to protect their assets. That means limits will be slashed and less credit handed out. This tactic would seriously hinder anyone with average credit scores because it would be much harder to get credit unless you were in the top tier. Never mind those trying to rebuild their credit. What was intended to help consumers could potentially harm them.
The next one I don’t really agree with. In a letter to the Fed, the OCC said that the 30-day waiting period would seriously hinder the creditor from adjusting their pricing to reflect risk at a time when such an action would be meaningful. Well, duh! That’s the point. Credit card companies jump on that bandwagon so quickly that people who are late by like five minutes of the cut-off time lose their good rates in favor of the ceiling rates. The Fed proposed that credit card companies not be able to act until the payment is 30-days past due, the OCC countered with a suggestion of five days.
Personally, I think it should be 10-15 days. That’s the standard grace period on most loans, so it seems reasonable to me that we should treat the credit cards in the same manner. In my opinion, the OCC is contradicting themselves from their first point on safe and sound lending practices to this one. You can’t pick and choose when to treat this like a loan and when not to. It doesn’t make sense to say that they should be allowed to reprice at expiration just like any other loan, but then not extend the same grace period. And, when I say grace period, I mean the amount of time before they can officially jack up your rate.
Next on the OCCs agenda in their letter to the Fed was the labeling of credit card practices that were conducted before the new laws were implemented as “unfair and deceptive.” They believe it would lead to a good deal of civil lawsuits. If the Fed pushes this retroactive labeling through, many consumers could take their credit card companies to court. I don’t think that’s right. While I’m not defending anything the credit industry has done – believe me! – I don’t think it’s fair to put them in a precarious legal situation for something they were following the rules for at the time.
I think the government wants to look like the give a damn, so they want to implement this as a way to make up for their lack of attention before. Sort of like the emotionally unavailable parent who’s great with expensive gifts. That just doesn’t sit well with me. I’m glad the Fed is taking an interest now, but the credit card companies should not be put under any retroactive labeling that could result in civil suits.
The reform of the credit card industry is a good thing, but I agree with the OCC in that I think the Fed is getting a little overzealous with their proposals. Protecting consumer interests is important, but it is equally important to balance the industry along with that. There are some suggestions I agree with and others I don’t. Ultimately, I think credit cards should be treated just like any other loan and have the same documentation requirements, grace periods (see my explanation above), and refinancing options.
What do you think? Is the OCC right and the Fed may be going too far, or is the OCC only protecting the banks interests?
Related posts:
- The Credit Cardholders Bill of Rights
- The Fed Plans Restriction of Card-Rate Increases
- In Defense of Credit Card Fees
- Watch out for the traps
- Credit Card Day of Reckoning This Thursday?
1) Why should credit card companies be allowed a refinance period not available to other types of lenders? Mortgages can’t expire; car loans can’t expire; in fact, I can’t think of any other form of loan that permits the lender to ‘refinance’ merely because a certain amount of time has elapsed. It may be similar to refinancing in principle but in fact other loans don’t permit the lender to force refinancing on an otherwise compliant borrower so I see no reason why arbitrary ‘expiration dates’ should make an exception for credit card companies. I can understand the need for the ability to reassess over time but that should not impact existing loans – if they don’t want to continue to offer the same terms after the expiration period then only the debt incurred subsequent to the change should be affected.
2) I think 30 days is more reasonable simply in light of the present practices. Credit card companies did this to themselves – in making grace periods so difficult they’ve made consumers not only wary but out right hostile. Consumer confidence needs to be rebuilt. Thirty days is more in line with utilities which credit cards in many ways have come to resemble even more than they resemble other financing because of the dependence on them. It may well be best for the card companies themselves long term by weaning them off the late fee gravy train.
3) Depends on the policy – was it actually ‘unfair and deceptive’? If so, there’s no real protection from suit now – ‘the government didn’t say not to’ isn’t a really good defense in court for any egregious practice. It doesn’t work in a court room any better than it did with your Mom. If the policy really was egregious then the relabeling may well set loose the hounds but it’s really only gonna turn them out a little earlier than they otherwise might have been. The wolf is at the door – labeling it ‘front door’ isn’t gonna do much more than let him in a bit sooner.
1.) Credit cards are still lenders by definition and as such have the right to reevaluate their borrowers’ risk levels…and, for point of clarification, home equity lines of credit have the same privileges. They can increase the rate and decrease the line amount available to the borrower based on risk and do not have to refinance to do so. They do have to notify the borrowers and explain the reasons, though. At any rate, if at the expiration date the lender feels a consumer is a risk, then they should have the option of increasing the rate. The consumer then still has the option of moving their funds elsewhere, and if they do, then the amount under the previous conditions should remain the same until paid in full. The consumer is NOT choosing to refinance, therefore, the old terms apply. In this case, I’m not talking about borrower’s who are compliant and have followed the rules. They would not be considered a risk. Within this structure I’m referring to the new laws that disallow unfair practices, therefore, if a consumer’s credit report reflects some inability to repay the debt, then the lender should have options. Your point that the only debt that should be affected should be the debt incurred after the change isn’t consistent with lending practices. Right or wrong, that’s the way it is. You do not get to pick and choose which debts you keep at what rate and which are changed. The fact is, credit cards are lenders and a refinance includes ALL the debt. Again, we come back to the consumer’s choice in this case. If they don’t like the offer on the table, they have the option to walk away and refinance elsewhere. But, as it’s the credit card company lending the consumer money, if there is a risk to their assets – again, in terms of the new laws – then they have a right to increase the rate at expiration.
2.) Requiring 30 days because you feel like credit card companies brought it upon themselves and need to be weened from the late fee gravy train, as you put it, is not really a reason to institute the policy. Everyone’s in it to make money, and while I agree that some of the credit card companies’ practices need to be reined in, they still have to turn a profit in order to exist and offer their customer’s competitive rates and promotions. To that end, credit card companies aren’t the only ones to blame here. Yes, they’ve got some shady practices, I won’t deny that. However, consumers need to take a little responsibility for their actions as well. They need to be reading the disclosures and acting accordingly. Some people don’t and it’s their irresponsible use of credit that concerns me with a 30 day waiting period. Why do you need 30 additional days to make your payment? A 10-15 grace period is sufficient, and more than enough time to get a payment made. If you can’t make the payment within that time, then you probably can’t manage your debt very well and don’t need the card to begin with.
3.) There was clearly a gray area in this department and it’s safe to say that some credit card companies were toeing a line. However, they weren’t out of compliance and that’s the issue. It’s not about saying ‘the government didn’t say not to,’ technically, they weren’t doing anything illegal. If there was something occurring that was questionably illegal, then take it to court – whether it’s relabeled or not. But, putting credit card companies in a legal situation that invites civil suits en masse is only going to affect those of us who are compliant to the rules. We are going to lose out on the many benefits and competitive rates. As I said, these companies are in business to make money, if they’re not making money, then what’s the point of being in business? And they’re going to lose money on all sides of this issue, plain and simple. But, in my opinion, it’s not justified to cause legal action for something that was not illegal at the time because credit card companies did it to themselves. That’s about as much of an argument as ‘the government didn’t say not to.’
1) The point on home equity is duly noted. The problem is that credit card companies are not nearly so judicious in their use of that power – as you yourself have noted – and they have and do penalize otherwise compliant borrowers for even the most trivial of excuses. Home equity, again as you note, is more accountable to its borrowers.
Regardless, because they do does not mean that they should. I concur on being able to reassess but only as they are exposing themselves to new risk – aka new loans via new purchases. A compliant borrower should not be forced out of a contractual agreement by duress which is precisely what changing the terms of an existing loan does in your example of taking their business elsewhere. I don’t see any problem in allowing credit card companies to refuse to assume new risk as circumstances change but I see a big problem in allowing any lender to change the terms of an existing agreement on an existing loan without very good cause which seems to me to be the problem the Fed is trying to address.
2) My actual reason is to bolster consumer confidence damaged when credit card companies have used draconian practices. While it is in fact a loan the resemblance is closer to a utility in actual usage and it seems perfectly reasonable that a lender with much the same flexibility as a utility be required to give similar leeway. Credit cards market themselves as indispensable – as such they have no valid complaint when held to the same standard as other indispensable services.
3) No, compliance isn’t necessarily the issue in civil suit (here it isn’t) – practice is. In criminal law you’d be correct but not in civil. If the practice is indeed deceptive and unfair compliance with Federal guidelines is no defense. They can hardly argue ‘we didn’t realize’ with any credibility and ‘the Fed didn’t tell us not to’ is almost as weak a defense. Civil law assumes you have enough sense not to injure others either deliberately or negligently and here it’s the credit card companies that must take responsibility for their actions. Buyer beware is not a defense against a seller’s bad acts and neither is ‘there wasn’t a law specifically against that’.
The credit card companies are already vulnerable to suit – and it’s gonna get a lot nastier as binding arbitration falls under the judicial chopping block. If I were them I wouldn’t be wasting my time worrying about Fed labels – I’d be working up a settlement plan to try and head off most of the suits.