Stupid Banker Tricks

I have a really great guy in our library that takes care of the business college that digs up some of the most interesting reports and

http://www.mcclatchydc.com/politics/story/66795.html

sends out the links. It’s kind’ve like having my graduate assistant back but on a different level. He doesn’t do grades, but he keeps me current on things I used to follow when I spent more time at my desk and less time in my car driving across bayous and lakes.

I became aware of all the issues surrounding the unbanked, predatory lending practices, check cashing companies, and abusive credit card fees when I spent 5 weeks in Omaha right after Hurricane Katrina.  A very old friend of mine–a math teacher at the community college I once taught at for a few years when my eldest was a toddler–took me to a seminar filled with social workers who were complaining how many of their clientele were being gamed by fraudulent lending practices.  I returned to New Orleans to spend a lot of time researching things and predicted it was one big house of cards that would bring down the economy eventually.  The research was interesting but turned out to not be ‘glamorous’ enough for publication.  The other thing was I was basically told my assertions that these practices would bring down the economy part was over the top because, well you know, financial innovation is such a handy dandy thing and these sweethearts were just offering up much needed services to under-served consumers. Yeah, right.

So, this study from the Center for Responsible Lending showed up in my email this morning. I admit to having spent a huge amount of time looking at their studies about 4 years ago, but was told to quit the line of research by my peers. I switched to something more marketable. This report is very useful and it outlines a lot of the new tricks that credit card issuers are using to get around credit card reform. Banks are taking steps to ensure we continue our indentured servant status.  I’ve now torn up all by two credit cards and I’m on the verge of just saying no to all loans and credit cards; big or small. Here is a list of ways they’re getting around new legislation to curb their excesses. The name of the report is Dodging Reform and you should at least read the Executive Summary and check out the charts. (Yes, I like nifty charts as well as nifty graphs.) Here’s the stated purpose of the study.

Faced with pending and proposed reforms designed to protect consumers from a series of unfair charges, credit card issuers have established or expanded the use of at least eight hidden charges across more than four hundred million accounts. The May 2009 Credit CARD Act addressed the hidden and deceptive pricing strategies that had been the most costly to credit card users. However, some issuers appear to be working to compensate for part of this lost revenue by instituting or accelerating new practices that increase hidden costs on consumers. Some of the tactics discussed here are not well known, while others are known.

Since the FIRE Lobby has us all in a state of borrower beware, I’d like to outline some of the worst of these new abusive practices for you. These are hidden charges that will cause your credit card balance to compound and keep you paying them forever.

The first practice is called “pick-a-rate” and impacts around 117 million accounts according to the study. This is basically a practice that puts you on a variable interest rate. Since the FED has signaled their willingness to return to higher interest rates within a the year, do not get on one of these plans! Your rate is bound to increase if it hasn’t already. The trick though, is that the APR actually is computed in a way to be higher than the rate you pick and the details about the rate are buried in the fine print. These are the problems according to the study.

• Hidden “pick-a-rate” pricing charges consumers APRs 0.3 percentage points higher ona verage than traditional pricing.
• Pick-a-rate results in a total cost to consumers of $720 million per year and may reach $2.5 billion per year if the practice becomes the industry standard.

There are a lot of nifty graphs that show the impact of interest rate changes on the pick-a-rate plans. These things will get incredibly more expensive as we return to a more normal set of interest rates and monetary policy.

A second practice is that of using Minimum Finance Charges. This practice is aimed at the people who partially pay off their balances every month.

In 2001, the minimum finance charge for 7 of the Top 8 issuers was $0.50. By 2009, most issuers charged a dollar or more as their minimum finance charge, with the highest being $2.00. Currently, they average $1.28.6 Borrowers pay more than $430 million annually as a result of minimum finance charges and that figure is rising as these charges are increased.

Again, the graphs in the study will say everything you need to know here. These charges are expected to skyrocket this year for the top 8 issuers. As this market gets more concentrated into the hands of those eight top issuers, their practices are becoming more in sync with each other in keeping with the game theory model of rivalry. (The McClatchy graph up top will show you exactly how concentrated this market is becoming.) You’ll not be able to avoid these if you EVER take a cash advance on your credit card so DO NOT DO THIS.

These minimum finance charges take effect when a consumer borrows money—a cash advance—on their credit card, but the amount borrowed is low enough (or the interest rate is low enough) that the finance charge would normally be below the minimum. For example, if a consumer charged $50 on their credit card, had an interest rate of 12% and did not pay the balance in full, they would normally owe 50 cents in finance charges. But if the issuer had a minimum finance charge of $1.50, they would instead be required to pay this amount

Variable rate floors are the third practice to worry about. Basically, your issuer will tell you that your interest rate is “variable,” but it only goes up from its starting value and never down. Again, in a situation where interest rates are probably going to increase, this is a bad situation. Don’t get a card with these terms.

Other practices to watch include compression of balances categories into tiered late fees. This practices applies the highest late fee amounts to smaller balances and is predicted to cause in 9 in 10 consumers to pay the highest fee. Inactivity Fees are now being instigated which charge you an annual fee if you do not use a card. They are aware that closing an account impacts your credit card rating so many folks just keep them open for that reason or for precautionary purposes. You’ll now pay for that privilege.

They are also a series of fees being planned for balance transfers, cash advances, and international transactions. The deal is that none of these practices were addressed by the Credit Card Act of 2009 which effectively makes the new law behind the times already. The proposed Consumer Financial Protection Agency would have the ability to identify these practices and control them. I’m not sure if you remember me mentioning recently in the news that Senator Dodd is now actively considering dropping the clause in the proposed financial reform that would create this entity. This is really bad news.

Senate banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) has discussed jettisoning plans for a standalone Consumer Financial Protection Agency, as part of an effort to secure bipartisan support for legislation to reform financial regulation, said people familiar with the matter.

One possibility raised during recent talks between Dodd’s staff and Republican counterparts would be to assign new consumer protection powers to another agency. Such a compromise might offer an opportunity for Dodd to preserve the goal of expanding safeguards while appeasing Republicans who have chafed at any suggestion of a new agency.

“If there’s a bipartisan deal, that’s likely how it’s going to come out,” said one Democratic aide, who was not authorized to speak on the record about the discussions.

President Obama proposed last June the creation of an agency to protect consumers against abuses in mortgages, credit cards and other forms of lending.

It remains unclear if the President will fight to keep the agency in the legislation. I shudder every time I see the the words “secure bipartisan support” because that usually means that congressional Democrats will cave to their Republican counterparts at the first sign of disagreement. The banking industry appears to have both parties captured.

“This is the litmus test about whether Congress is serious in their efforts to overall financial regulation,” said Travis Plunkett, legislative director for the Consumer Federation of America. “If they can’t take consumer protection out of the hands of regulators who failed” at that task before, he added, “then they’re not really serious about doing things differently than in the past.”

Heather Booth, executive director of Americans for Financial Reform, a coalition of nearly 200 consumer, labor and civil rights organizations, on Friday urged Dodd “not to cave to the big banks and their armies of lobbyists.”

Given my take that they’ll cave under the least bit of pressure, it is definitely a borrower beware environment. Again, find out what opportunities you may have with a credit union in your area that is mutually owned by its depositors and see what arrangements it has made with a credit card provider if you must have credit cards. Check out this report and be sure to look for these things in the fine print. You can’t afford not to examine these details because you’ll be indentured to these jerks for a long period of time if you miss the imposition of these terms and fees.