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Banks Build Better Mousetrap

Posted by Larry Doyle on July 9, 2009 7:54 AM |

Is there truly any reason to trust financial institutions these days?

Developments within the credit card space have exposed the true colors of these institutions . . . not that there was ever any doubt. Recall how consumer outrage at rapidly rising interest rates on credit cards pressured Washington to rein in the usurious business practices of the financial industry.

New legislation was badly needed as banks clearly utilized abusive business practices. The Wall Street Journal highlighted these developments in writing on May 21st, Credit-Card Fees Curbed:

“Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments,” said Senate Banking Committee Chairman Christopher Dodd. “This is a very important industry….We just want it to work better.”

The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards.

Well, while the legislators were in the front room having the photo ops, the bankers were in the back room building a new and better mousetrap, at least from their perspective.

The Los Angeles Times sheds light on how Credit Card Firms Try End Run Around New Federal Rules:

Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.

“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”

That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.

Who are these two major lenders? Bank of America and JP Morgan Chase. Given the size of their operations, watch every other credit card issuer set the same trap.

How exactly does the trap work? The banks try to baffle consumers with bull*%!# while sticking their hands ever deeper into our wallets. The Los Angeles Times highlights:

Los Angeles resident Victoria Afonina received a letter from Bank of America the other day informing her that “as a result of a change in our business practices, your annual percentage rate will use a variable rate formula based on the U.S. prime rate.”

“If the prime rate changes,” it said, “your APR will vary accordingly.”

Afonina, 44, told me she had to read the letter several times to understand what BofA was saying.

She said she’d been a cardholder with the bank for about five years and had enjoyed a relatively low fixed rate of 9.9% any time she carried a balance.

“When I finally understood what they were saying, and that my rate could change every month, I was shocked,” Afonina said. “I’m a good customer. Why are they treating me like that?”

Good question.

“The change from fixed to variable rates allows us to better manage our business as market conditions change,” said Betty Riess, a BofA spokeswoman.

And those new federal rules. . . ?

“Legislative and regulatory changes that limit our ability to re-price for risk were a factor in our decision,” Riess acknowledged.

How could Washington possibly write legislation which allows banks to set these traps and negate the very spirit of the law? Are they that stupid? Are the bank lobbying efforts that strong? Are legislators more concerned with the photo op and headlines than truly protecting consumer interests?

Yes, yes, and yes.

In the meantime, Sense on Cents strongly encourages you to pay down your credit card balances as quickly as possible so you will not be subject to this usury!!


  • Phil

    As long as the consumer knows the formula (prime + X%), moving to a variable rate seems a viable option. Most HELOC rates are computed the same way.

    However, rates should not be allowed to be changed unilaterally. If I signed for a fixed rate initially, I should be able to continue with the fixed rate or agree to renegotiate and sign for the variable rate option.

  • Phil,

    Big assumption on whether the consumers know or not…see Ms. Afonina’s comments about her ability to even understand what BofA was saying.

  • CJ

    Squeeze blood out of a stone is what I will tell them.

  • Dave from NY

    So the banks are going to try to give the American consumer a finance lesson (prime + X%)?

    Let’s give the banks a math lesson: If I pay off my balance and cut up my credit card, and six million others do the same, how much does 6,000,001 times (prime + X%) times zero equal? There you go!

  • coe

    Here’s my take on these developments. First of all, it seems pretty clear that consumer spending is a huge component of the economy, and that the American dream of homeownership is such a strong cornerstone of our culture and frankly of our personal balance sheets that it would be insane for any industry remotely related to the consumer to ignore focusing on how to milk the human kindness from this relationship. As for the card industry, how many solicitations do we all receive from CapitalOne (just one example of many) in the mail – several every week/one a day? The answer to the burning question, “What’s in your wallet?” in this case is simply the greedy hands of bankers looking to create demand and prime the fee pump. Is there really that much of a difference in the behavior of the mortgage originators pushing underqualified borrowers into sub-prime option Arms and the credit card companies spraying offers out to college students, marginal credit risks, and even family pets? Of course there is a legitimate need to adjust fees to compensate them for risks – it’s particularly true as those risks are self-selected and where that demand is manufactured. Second, excess consumer leverage, whether created through teaser mortgage rates or by the expensive liquidity afforded by the credit card industry may be a financial trap that is simply too enticing to ignore – especially in time of stress. It’s shallow to suggest that the credit card business is repricing their real risk as though that risk was an exogenous variable, and when so much of the profitability of these companies hinges on the forecasts and realized fee income related to the expected bill paying behavior of marginal credits. Lastly, can anyone truly say that they even read, let alone understand the legal mumbo-jumbo that accompanies these cards. Let’s make it even simpler…I, the credit card company, have selected you and am offering you two paths to follow – the first is an intelligent way to increase your marginal liquidity and improve your financial management flexibilities if you have the discipline to act prudently; the second path, and frankly one I am hoping many follow, is a way to encourage you to reduce savings, overspend, and get into financial trouble. The more you do that, the more I will charge you…I will transfer your money to my bank – pay (overpay) my management team, maybe kick in a bit for the shareholders, possibly even pay back some of what I owe to the government WITH YOUR MONEY…Please take liberal advantage of this proposal…and if and when the law of large numbers forces many of you to scream for help, I will simply and thoughtfully point you toward the contractual disclosure language, say I told you so, write you off as a bad credit, apply for more federal aid, and restoke the leverage machinery yet again.. congratulations, your credit limit has been raised to $25,000!

    At the end of the debate, it’s hard to enact consumer legislation that meets the objectives of a system where equilibrium is an ideal, but more often there are winners and losers. It’s a variation on the “Guns don’t kill people, it’s the person shooting the gun that is the killer” – and so it is with the credit cards – it’s not the manufacturer, it’s the abuser…on some levels – absolutely true, on others – so disingenuous!

    Need to break away and buy some stuff via my 12 credit cards on-line…nice work, LD

  • Larry Doyle

    Coe….I appreciate your professional perspectives and lighthearted manner. We need lots of both now and in the future.

    Thanks for advancing the conversation.

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