Consumer Credit: the road to hell

The upset applecart that is the American economy right now is the number one concern of voters. No surprise – if the economy is in the tank, it affects us all.

President Obama inherited a mess, for sure. And he recognizes that our health insurance/health care reform crisis is one of the biggest issues that he must correct to fix the economy. He’s been working hard on that, and with any luck, we’ll have some improvement in this year’s legislative session (as long as no one falls for the latest insurance industry ploy to threaten outrageous premium increases if we don’t force everyone to buy their products).

But there are other pieces of our economic puzzle. And virtually nothing has been done of any substance on things like consumer credit. There are no doubt people working furiously behind the scenes on new regulations to control the greedy financial industry that brought us the sub-prime mortgage crisis. But we haven’t seen any of that work yet.

Elizabeth Warren, a Harvard professor and member of the Congressional Oversight Panel, says that one of the only tools we have to insure this never happens again is an independent, consumer protection panel, which will have the power to prohibit such predatory practices as we saw over the past 8 years. There is a “muscular program” waiting to be enacted, she says, but lobbyists of the big banks and financial institutions are opposing it, and they are supported by the regulators who were in control, who let them get away with it in the first place.

The Federal Reserve, she maintains, had the power to shut down that shameless exploitation of lower- and middle-class consumers, preventing the disaster we face today. But they did nothing.

There is a bill in Congress right now that needs our support. Led by Barney Frank in the House, and Chris Dodd in the Senate, it would create that independent panel to be the watchdog for consumers, with the power to stop predatory lending practices.

Predictably, Republicans, AND BLUE DOG DEMOCRATS, are dragging their feet on this. Surprised? Not if you’ve been watching the Senate Finance Committee.

And then there is the consumer credit crunch. It’s really hard to get a loan right now. We might argue that that’s a good thing. Those same basic principles that destroyed the mortgage market are also at work in the credit card market.

But while mortgage interest rates are quite low right now, credit card interest rates are soaring. Usury laws – do you even know what that means? An unconscionable or exorbitant rate of interest. At one time, we had state prohibitions against usury. But a Supreme Court decision back in 1978 determined that the rates charged for credit cards would be determined by the state where the card issuer (bank) was chartered, not where the consumer lived.

The fallout of this decision was quick and deadly. Since there was no cap on interest rates in certain states, notably South Dakota and Delaware, the credit card issuers, such as Capital One, Citibank, Wells Fargo, Chase Bank and many others, moved their home base – on paper at least – to states with no cap.

Well, the rest is history. What used to be 7% or 8% interest rose inexorably to 15%, 18% and higher. Oh, they might offer a 0% trial offer, or a nice 4% 6 month rate for transferred balances, but if you ever missed a due date by a day or two, they could, and would, raise your rate… to 20%, or 24%, or even 36%.

What’s more, even if you paid them faithfully, even if you paid more than the minimum, if you missed a payment for some other debt, they could, and would, raise your rate. Doesn’t matter if you felt your other creditor had made a mistake, and you withheld a payment until it was settled. This was all the excuse the card issuer needed to raise your rate.

Talk about a license to print money.

Last year, with significant efforts by Barney Frank again, the Democratic Congress passed a rule that credit card companies had to give 45 days notice on rate increases, not just the 15 that was previously allowed. The new regulations also required them to keep the interest rate on existing balances that was in place when the debt was incurred, and raise them only on new purchases and new cards.

But efforts to change bankruptcy rules were the price we paid. It used to be that unsecured debt, like credit card debt and medical debts, were not protected when the consumer couldn’t pay. Filing bankruptcy could wipe those debts out. Lobbying by bank interests eliminated those exemptions. (Thanks, Joseph Biden – formerly Democratic senator from Delaware. Shame on you. Now that you don’t represent only the people of Delaware who host so many banks with no interest rate caps, now that you're Vice President of us all, we hope you will support the rest of us on future legislation!)

Medical debt was lumped with credit card debt, and you couldn’t just file bankruptcy when you found yourself in a hole.

While we might accept the idea that buying a fur coat and diamonds on your credit card shouldn’t be protected, the overwhelming cases of bankruptcy were related to medical debts – often charged to credit cards.

In May of 2009 Congress had the chance to cap interest rates – Bernie Sanders of Vermont proposed a cap at 15%, but 66 Senators refused. Only 33 signed on. Any of you who are paying 36% on $10,000 of credit card debt should have been crying over that, but it went almost unnoticed.

That 2008 legislation will come into effect in 2010. So what are credit card companies doing in preparation? Trimming overhead costs? Cutting executive salaries and bonuses?

Nah. They’re raising their interest rates, some effective in November, some on December 1st – taking advantage of the holiday season buying spree most Americans engage in every year. They’re going to soak every penny out of us that they can.

Suggesting that people don’t use their cards this Christmas like they usually do has the effect of screwing the retail industry that depends for about half their revenue on this buying season.

Someday, somehow, we have to find a way to return to a sane economy where consumers are not tempted into debt with unrealistic promises and expectations, then screwed into poverty by the very people who made those promises.

The Obama administration has a big challenge. Congress needs all the consumer lobbying we can muster.

JM