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And the Responsible Get Punished

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May 21, 2009 – Comments (19)

Are you generally a financially responsible Fool?

If so, the United States Congress, and President Obama, are looking to punish you -- all in the name of keeping 'evil' credit card companies from 'taking advantage' of your poor, unsuspecting, less financially responsible fellow citizens.

Recently, congress passed  a bill that, "... fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk.”

Let me repeat:  restricts the ability to price credit for risk.

Want to make an unsecured loan?  Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.  Never mind that it's a fundamental concept behind all borrowing -- and the reason why my home state of California is having trouble finding people to buy it's short-term revenue anticipation bonds at a reasonable interest rate.

No, you've been evil and bad by charging financially irresponsible people (okay, some people get into trouble through no fault of their own due to sudden catastrophic medical bills, for example -- but I'm talking about the financially irresponsible here) higher interest rates than those of us who always pay all of their contractual debt obligations on time.

Think about this a second.  I have an acquaintence who recently purchased a new car (his prior vehicle was totalled in an accident - fortunately nobody was injured).  This person has always been in financial trouble, has constantly lived above his means, and has a credit score in the 500's to prove it.  When he told me what interest rate he was being charged on his new car I almost fell out of my chair...  but then again, I understand it.  The fact is, the lender sees my acquaintence as a greater risk than the lender would see me, for example -- and priced the loan accordingly.

With credit cards, that's about to change.

What this means for financially responsible people is that the money the credit card companies used to charge high-risk borrowers will have to be made-up somewhere (you guessed it, likely in the form of higher interest rates and fees for those of us who represent lower default risks).  Of course the other option is for credit card companies to simply deny credit to people who they used to offer credit to (at higher rates) -- but my guess is we'll likely see some of both.

I have to admit, the credit cards I have in my wallet have been a pretty sweet deal.  On one, I get a rebate whenever I purchase gasoline.  On another I get some small percentage of all my purchases returned to me via a check at the end of the year.  Maybe some of you get airline miles, or some other goodies.  None of the cards in my wallet has an annual fee, and I always pay my entire balances on the due date, and have for years, so while the interest rates on the cards in my wallet are lower than some, it hardly matters since I never pay any interest.

And thanks to this congress who doesn't seem to understand the basic financial principle that risk and return should go hand-in-hand, my 'sweet deal' may soon change.

Make no mistake, I think credit card companies can and should do a better job than they have been at being transparent and informing borrowers in clear, plain English exactly what all the fees are, and give them adequate notice if any changes in terms or fees (I mean who really reads all that fine print?).  I have no problem at all with the privision of the bill that requires statements to be mailed three weeks before the payment due date (one department store card my wife had years ago was notorious for mailing the statement so late it was difficult to pay the bill on time, even if we mailed the check the day after we received the statement -- we've long since closed that account).

But prohibiting lenders from pricing loans based on risk?  I can't think of a more profound intrusion into free capital markets.

Credit cards have been a great convenience for me, and I've loved those 'freebies', and it irks me that this may change as the result of this congressional stupidity.

Make no mistake, I'll certainly shop around if the companies whose names appear on the pieces of plastic in my wallet try to change the deal on me -- and you should too.  I may even eschew credit cards altogether if I have to -- perhaps keeping one and only one for emergencies and using my check card for everything else.  No, it won't be as convenient -- and I might not get as many freebies, but I guess that's the price that the financially responsible among us have to pay in order to protect the financially irresponsible from themselves.

I guess with the bailouts of AIG (and everyone else) I should have seen this coming.  It's not like rewarding financial irresponsibility is anything new to our government, is it?

Regards,

Russell (a.k.a. TMFEldrehad)

19 Comments – Post Your Own

#1) On May 21, 2009 at 1:02 PM, JakilaTheHun (99.94) wrote:

Spectular blog, Eldrehad!

I'm in total agreement.  I've been infuriated about this, as well. 

It irks me on a personal level, too, because I dislike debit cards a lot.  They are a complete scam and consumers have virtually no protections with them.  Whereas, you have all kinds of consumer protections with credit cards.  This bill basically favors debit cards over credit cards, especially for young adults (who in most cases don't have credit lines more than $500 anyway!).

One of the reasons I had relatively good credit when I was fairly young was because I got two credit cards at age 18 and used them responsibly.  As I alluded to, I only had a $500 limit on both of them, but it helped me build good credit and I found them more convenient than carrying cash everywhere (plus I got money for using them!)  Congress is basically saying this isn't allowed any more.  You now need to get your parents to cover your debts. 

 

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#2) On May 21, 2009 at 1:39 PM, williamsullivan8 (85.91) wrote:

Want to make an unsecured loan?  Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge. 

What makes you say that?  Is that in the bill?  Because I don't see it in the article.  The article just said the bill put some restrictions on banks raising rates and charging fees, which they can still do, just maybe not as much as before.  It doesn't say they can't look at your credit score when making a loan decision, which would be ridiculous.

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#3) On May 21, 2009 at 1:52 PM, Gemini846 (56.83) wrote:

I respectfully disagree, and here is why.

Want to make an unsecured loan?  Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge. 

What if my credit score is being used against me because it has inacurate data that the credit bureau refuses to remove even though its been proven false? Maybe the banker should look me in the eye and look at my payment history with his bank before deciding that I'm a "credit risk".

CA can't get anyone to buy thier bonds because they can't pay. We know that. Why would I want to buy a bond from CA that will only get paid if CA get's a federal bailout?

Of course the other option is for credit card companies to simply deny credit to people who they used to offer credit to (at higher rates) -- but my guess is we'll likely see some of both.

This is the best option IMO. Whats that you wen't bankrupt 2 years ago? My risk model doesn't allow me to provide you credit? Guess you pay cash rather than getting a 500k mortgage on 20k worth of income? Goodness forbid the BANK have to be responsible.

Make no mistake, I think credit card companies can and should do a better job than they have been at being transparent and informing borrowers in clear, plain English exactly what all the fees are, and give them adequate notice if any changes in terms or fees.

That is what we are trying to do here. I don't think its congressional stupidity at all. Its the ONE thing many many people asked congress to do and they are doing it.

Now comparing the two bills I think the house bill was a bit more normalized, while the senate version was rather punative. In an ideal world I think the federal govt shouldn't be involved in this area either, but when abuses like these banks have been doing is on a grand scale its time to protect the people who vote for you. The only problem with the bill is that it had nothing to restrict the power of credit reporting agencies which need to be taken down a peg or two.

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#4) On May 21, 2009 at 1:52 PM, blake303 (29.30) wrote:

Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.

Maybe I missed it, but where does the bill state this?http://www.govtrack.us/congress/billtext.xpd?bill=s111-235

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#5) On May 21, 2009 at 1:58 PM, blake303 (29.30) wrote:

I have to agree with Gemini. I like most of the provisions in this piece of legislation. The gun add on is absurd though. Credit card companies have not been adequately pricing risk. They have been charging exorbitant fees and interest rates to responsible and irresponsible borrowers alike. Your "freebies" were financed by predatory lending.

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#6) On May 21, 2009 at 2:01 PM, lquadland10 (< 20) wrote:

Oh for the love of pete. Sure. Let the credit card company charge 104 apr. including fees. Chase bank does. SO why can't the rest of the banks do the same. Who cares that the credit card companies make much more money than the mob on their cost. It is said that this plan going through Congres is going to cost the banks 91 billion dollars. Boo for the big bad banks. Yes for the tax payer. Why? Look at the other side of the coin. Now that 91 billion will be pumped back into the eccomony if the form of the poor person not paying fees in intress. They can then use the money going to the banks to get the new pair of shoes or tv or pay off other debts like their ARM reset on the house they couldn't afford. See you are just looking at it one way. Look at how much money that will free up for the 1/3 of the country living poor. It will have to go somewhere so maybe this depression/recession won't be so bad. Why don't we just fix a floating rate of 9% over the prime lending rate. This way you know that if the Fed fixes the rate at .50 then your intress rate will be 9.50%. Just a thought.

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#7) On May 21, 2009 at 2:12 PM, devoish (97.09) wrote:

Russell 

Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, bankruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.

Where does the bill say that?  

You are taking Ed Yingling's word that this bill prevents CC companies from pricing risk.  Isn't that like trusting Lawrence Yun or David Lereah concerning homebuying?

You say you have no problem with plainer language, fee change notification, and prompt statement mailings. What about the provision that prevents the CC company from charging me a late fee and increased interest, if my payment arrives to them on time but they don't process it for two days, and then consider it late? What do you think it says about the character of these companies if that has to go into the bill? If I was the Attorney General I wouldn't be making them stop, I'd be making them go to jail for that one. You paid for your "points" by their promise in the contract you signed with the CC company. They owe you those points you have earned, watch they try to take them back, or increase the number of points to get that b-ball hoop you've been saving for in the catalogue. If they take back your already earned points or reduce what they are worth, is that stealing, like inflation? The article says their introductory rates have to last 6 months, CC companies can price the risk in that.

Second,

Who's been paying for your sweet deal? You don't pay fees, or interest because you are responsible, so who pays the CC company to process your spending, who pays for your "points" and "air mileage"? Who pays for your purchase guarantees?

The higher rates and fees charged to "risky" borrowers. Send them a thank you note this Xmas, and tell them you are sorry to see them not paying your perks in perpetuity.

Does this mean there will be less credit cards sent out? Maybe. Maybe it means your giveaways at their expense will end. Maybe they'll just be reduced.

Is someone going to see their ability to get credit ended. In most cases hopefully. The number of people who will lose their credit and have to default just as they were about to climb out from under a mountain of debt, if only they could have gotten another months extension at higher rates, to tide them over, is probably two in the whole Country.

But there is nothing that says the CC companies cannot price risk except their own history. The risk factors changed, thats all, and unlike the borrowers interest rate, it is not retroactive.

The riskiest thing to the bankers in this bill is the possibility of promoting "Take a Banker Camping" days.

You write excellent articles and posts, but I think you've taken the banana boat on this one.

Regards,

devoish

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#8) On May 21, 2009 at 2:13 PM, dudemonkey (37.36) wrote:

Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, banruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.

 

Where did you see this?  I didn't see it in the article at all.

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#9) On May 21, 2009 at 2:26 PM, Wharrgarbl (50.68) wrote:

Banks won't be able to charge the rates they want to risky borrowers, therefore risky borrowers will not be given any credit at all.  Long term positive for the country.

Banks will charge higher rates to responsible borrowers.  Responsible borrowers will stop using as much credit.  Long term positive for the country.

It wasn't all that long ago that we saved for our purchases or used layaway, guess we may need to start being responsible again.  Darn.

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#10) On May 21, 2009 at 2:45 PM, TMFEldrehad (99.99) wrote:

Since I've gotten a few questions on this:

Sorry, Mr. Banker, you're not allowed to look at that borrower's credit score, history of defaults, bankruptcies, or anything else that might tell you how risky a borrower that person is when deciding what interest rate to charge.

Where does the bill say that?  

For those that missed it:  restricts the ability to price credit for risk.

That's what the above sentence means.  'Pricing' loans = interest rate.  If it restricts the ability to price credit for risk, it restricts the ability of the lenders to charge different interest rates (prices) based on different risk.

Another link here uses pretty much the same language:

Banks under the legislation will be prevented from pricing for risk, said Edward Yingling, president and chief executive officer of the American Bankers Association, said in a statement.

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#11) On May 21, 2009 at 2:52 PM, Rehydrogenated (32.23) wrote:

I have to disagree. If anything this financial catastrophy has taught us that it is foolish to offer credit to people who are uncreditworthy, even if you charge them a higher rate. Some people just won't make correct decisions. If you have to charge people sub-prime rates for loans, THEN YOU SHOULDN'T BE GIVING THEM A LOAN! The same goes for credit cards. Banks will still seek out, and offer the most competitive rates to the safest borrowers. Mostly what Obama's plan will do is force banks to not give credit cards to customers who are riskier than the maximum limits. Hopefully this will prevent massive amounts of credit card defaults which would result in an exponentially bigger financial catastrophy. As people take on more and more credit to deal with the tough times I see this legislation as even more of a necessity.

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#12) On May 21, 2009 at 3:26 PM, blake303 (29.30) wrote:

If it restricts the ability to price credit for risk, it restricts the ability of the lenders to charge different interest rates (prices) based on different risk.

The bill does not make any restrictions on charging different interest rates to borrowers with different risk profiles.

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#13) On May 21, 2009 at 3:27 PM, blake303 (29.30) wrote:

You also should never take the words of a lobbyist as fact. They are politicians without term limits.

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#14) On May 21, 2009 at 3:49 PM, devoish (97.09) wrote:

Russell,

Your second link talks about prohibiting "universal default," the pratice of raising a cardholders interest based upon a reported missed payment of another debt, with a seperate lender.

Prohibiting that practice changes the risk assessment, but still allows the lender to "price risk" when they issue the card knowing the restriction. Once again it is not retroactive. If the work is too hard let them go into floor sweeping. It is what they did fifteen years ago, before they had electronic information so quickly.

So here's your issue: If someone misses a payment should the CC company be allowed to asess that onto pre-existing balances immediately, or in 30 or 60 or 90 days? Or only new borrowing from that date forward? What if the missed payment is one you refused because it was incorrect? Should that cost you on an outstanding balance of $4000. on a different card before the first payment was due?

Now there is a law to follow. Price risk accordingly.

In fact this was not about "pricing risk" at all. This was about charging for losses and avoiding the need to have "risk pricing" competence.

Your second article also points out that CC lenders have cut back 11bil of lending, 5.7%. The AmEx president is concerned this law will cause lending to be cut. This law will require them to actually "price risk". If they cannot do it, oh well for them.

And as a responsible cash paying consumer, I will be happy to not compete to buy big screen TV's at higher financed induced prices. It has been at least 6 years since walking in and "paying cash" made an automobile dealer happy. They wanted to earn money selling loans more.

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#15) On May 21, 2009 at 3:50 PM, mode7 (79.81) wrote:

Don't forget that credit card companies generally make between 2 - 3% from the merchant accepting the card every time there is a transaction, so don't think the only income from these companies is through high interest rate pay-offs.

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#16) On May 21, 2009 at 4:20 PM, hall9999 (99.30) wrote:

  #7 - Devoish said pretty much everything I wanted to say. 

  #10 - Eldrehad, to paraphrase what you said, "Because the CEO of the American Banker Association said so."  That is not proof that the ability to price risk will be restricted.  And even if it were, it's still far from saying banks will be unable to look at your credit score, etc.

 

BTW, nobody has mentioned one of the possible side effects of this legislation.  People may end up closing credit card accounts or being forced to close them by the lenders.  That could negatively affect their credit score.

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#17) On May 21, 2009 at 5:02 PM, tonylogan1 (28.24) wrote:

devoish - "Take a Banker Camping" ... too funny.

I thought the gun part was totally unrelated, but now I see there is a connection.

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#18) On May 21, 2009 at 5:07 PM, davejh23 (< 20) wrote:

The credit card companies would make loads of money even if every consumer paid off their bill in full every month.  The merchants are charged fees for every transaction.  So, for those that believe all these "freebies" are paid for by the credit card companies taking advantage of people, you're wrong.  If you can't use a credit card responsibly, you shouldn't have one.  The default rate on credit card debts is already quite high and is increasing.  The $91 billion that was mentioned will not be saved by consumers and spent on other things...this is all coming from interest and fees to irresponsible borrowers...and their limits are sure to be cut, so they won't be spending anything.

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#19) On May 22, 2009 at 2:32 AM, AlessandroMachi (< 20) wrote:

Lets not talk about the consumer credit card default rate if we are not intelligent enough to acknowledge that for every percentage point the credit card industry raises their interest rates, there is a corresponding consumer credit card default rate increase of at least one percent.

 It makes the whole issue of credit card defaults a strawman discussion.

 When do we discuss using credit card incentives to reduce overall consumer debt, rather than punitive racketeering interest rates that reach 30 percent and higher. 

 http://www.Daily-Protest.com 

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