Wednesday, May 20, 2009

Regulation and More Regulation

Congress passed new restrictions on credit card companies that would ban extra fees and fluctuating rates and order credit card companies to provide more information on consumer’s debts. The Senate bill would ban practices such as charging consumers to pay by phone and sudden surges in interest rates. Payment above the minimum due would be applied to balances with the highest interest rates. The legislation bans the practice where a late-paying consumer is assessed interest on a prior month’s balance that had been paid in full in addition to the late balance. Issuers also will have to send bills 21 days before the due date and provide at least 45 days notice before changing any significant terms on a card. Opponents of the bill argue that this will raise fees across the board even for good credits, to compensate for the rising cost of not being able to completely rip off less desirable credits. I’m not so sure I agree. First of all, many of these tactics are incredibly scummy and predatory in nature and are the result of credit card companies not doing a good job of verifying credit of the consumers they choose to lend to. To make up for the fact that delinquencies are surging in the downturn, which somehow they hadn’t factored into their models, even though they routinely granted credit card lines of $50,000 to consumers who had income of around $30,000 a year, they unduly punish everyone across the board anyhow. Squashing some of the most egregious practices is a good thing. Making credit card companies inform consumers of how long it will take them to pay off their balances while only paying the minimum might wake a few people up and teach them some valuable lessons about compound interest and maybe not needing that new flat screen TV if your old TV still works and you can’t afford it. Furthermore, for those consumers in good financial shape who feel slighted because their credit card company raises their fees for no discernible reason, there is a simple solution; cancel the card.

Meanwhile, the administration is discussing giving a federal agency authority to police mortgages and other consumer oriented financial products. Sadly, we’re about five years late on this one, but maybe by the time the next housing bubble rolls around, we’ll have all the regulators we need in place. The agency may also have authority over mutual funds and insurance. So, um yeah, that’s a lot of sort of unrelated things. But maybe if they find a four-headed mortgage/credit card/insurance/mutual fund expert to run the agency it may be more effective than the 15 agencies or so that were in charge of regulating Wall Street and the banking sector that sort of missed the whole credit crisis and allowed our entire economy become a ponzi scheme.

Finally, in a drastic regulatory overhaul, the administration is weighing stripping the SEC of much of its power. As an avid SEC-hater and wonderer of what it is exactly that those clowns do all day because they certainly aren’t rooting out financial fraud and regulating Wall Street, I cheer this move. Of course, the administration aims to give some of the power to the Fed. So a bunch of lawyers can’t get the job done, but a bunch of economists somehow are going to do a better job. In any event, regulatory change is afoot, moving us into a much heavier regulated environment that will probably overshoot in its restrictiveness. But one can only hope that if the new regulators manage to unearth the next Madoff ponzi scheme while in its infancy, before it morphs into a $65 billion debacle, then we’re better off.

1 comment:

g said...

After all these regulations and detailed changes of credit cards pass, who will actually enforce the credit card companies when they don't abide by those rules? What are the punishments that those companies will receive if they continue to punish the consumer? Where will the consumer turn to if indeed they take the time out to find out that their overpayment does not extend to the highest interest portion of their balance?

Who in the hell has time to check that (if indeed you do keep a balance)? My guess is that people who are keeping high balances are so ignorant anyways, that these changes, assuming the card companies actually abide by them, won't do a damn thing.

Loan sharking is loan sharking and to give a loan shark a rule is to give the shark another rule to break.