Discover frets about credit card reforms…
A mysterious finance charge popped up on my last credit card statement. Even if I manage to get it waived, there’s little doubt that those evil masterminds at the issuing bank are free to smack me with any absurd charge or penalty they can dream up. In the credit card industry the customer is never right (and even if she is, she’s stuck with the mandatory arbitration clause buried somewhere in her cardholder “agreement”).
The balance of power between cardholders and banks could shift, at least a bit, if the Federal Reserve Board finalizes rule changes it proposed in May to end some of the games lenders play with credit cards. Among the creative practices the Fed is targeting are: suddenly upping the interest rate on outstanding balances, allocating payments to the portion of the balance with the lowest interest rate, and so-called “double cycle” billing (which, as far as I can understand it, slaps interest charges on money that’s already been repaid).
Apparently such lending practices are more than just fun and games for Discover Financial Services, which issues the Discover Card (and also just bought Diners Club from Citi).
The company’s second quarter 10-Q, filed yesterday, includes a new risk factor inspired by the Fed’s proposal to tighten its rules on “unfair or deceptive acts or practices” and “truth in lending.” The disclosure says that “if the amendments are adopted as proposed, the amendments would have a material adverse effect on our results of operations.”
So Discover is telling us that this Fed crackdown on “unfair practices” would cause a material hit to its results. That seems like a pretty distasteful piece of information. And if the Fed makes the changes by year-end, as some predict, the folks at Discover may have to discover new revenue sources to replace what they’re now raking in from Joe and Jane Consumer.
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July 11th, 2008 at 3:42 pm
Well, since they just bought the dead (or near dead) Diners Club, I would not be surprised if they started trying to collect old charged off accounts from Diner’s Club. One of their questionable ethics practices is to send out charged off accounts that are way past any Statute of Limitations to bottom feeder collection agencies. If these characters can coerce some stupid alleged debtors to pony up so much as one dollar, that could revive the debt and start the SOL rolling again. Maybe they need to get their CEO hauled before another Congressional hearing to explain their dubious business strategy.
July 12th, 2008 at 9:28 am
Discover is not the only one, here is a public comment posted on the Federal Reserve website regarding Regulation AA - Unfair or Deceptive Acts or Practices [R-1314 ] by credit card industry reps. See the second to last bullet, “The proposal would adversely affect issuers’ profits.”:
http://tinyurl.com/69bp5q - the pdf file
Docket No. R-1314
Meeting at the Federal Reserve Board on May 6, 2008
On May 6, 2008, several credit card industry representatives met with Governor Randall Kroszner and members of the Board’s staff to discuss the Board’s recently proposed rules under the Federal Trade Commission Act (Regulation A A), which address unfair or deceptive acts or practices in connection with credit card accounts.
The meeting was attended by Ken Clayton (American Bankers Association), Nessa Feddis (American Bankers Association), Oliver Ireland (Morrison & Foerster), Andy Navarette (Capital One), Greg Baer (Bank of America), and John Carey (Citibank). Also in attendance were Sandra Braunstein, Director of the Board’s Division of Consumer and Community Affairs, and several members of her staff.
The discussion focused on the Board’s proposal to restrict banks’ ability to increase the interest rate on cardholders’ existing balances. Industry representatives made the following points during the meeting:
• The proposal would prevent card issuers from adjusting the rate on the existing balance to reflect increased risk of consumer default. Because initial underwriting cannot identify the 5% of consumers who will eventually default on their accounts, issuers must continue to reevaluate the risk over time by, for example, looking at credit scores. Increasing the interest rate for these consumers does not lead to higher defaults; instead, some consumers charge less and pay off faster. When the interest rate is increased due to increased risk, additional revenue is earned from the majority who do not default, which is used to offset losses on the smaller number of accounts that go into default and will be charged-off.
• Allowing issuers to increase the rate only on new transactions is not sufficient because the greatest risk is on funds already extended. The proposed exception for accounts that are 30 days delinquent does not offer sufficient flexibility to tailor risk-based pricing to consumer characteristics. The majority of consumers who default are never 30 days late; instead, they make minimum payments for a period of time and then default.
• The proposal would lead issuers to raise rates and reduce available credit for all consumers rather than the small subset who present the greatest risk of default.
• Currently, card issuers can offer consumers the benefit of having a rate that is fixed for a period of time (possibly two or three years) because the issuer knows it has the ability to increase that rate after that period of time to achieve the expected return when there are market changes. The proposal would drive issuers to offer only variable rates, which would deny consumers the security of knowing their rate and payments will not increase for a set period.
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• Rather than prohibiting rate increases on existing balances, the final rule should permit such increases if consumers also have the ability to opt-out of the increase by closing the account. If a rate increase accurately reflects the available market rates for that consumer, it is rational for a consumer to accept the increase and not opt-out because, if they close that account, the consumer may not be able to get a lower rate with another card issuer. The proposed rule assumes consumers cannot understand the opt-out, yet the Board’s proposed T I L A rules assume consumers will understand a 45-day notice of a rate increase on future transactions.
• Consumers have alternatives to accepting a rate increase – for example, ceasing to use the card or transferring the balance to another card.
• Card issuers fund their operations with securitizations backed by the credit card accounts. The proposal would affect securities that were issued based on the expectation that rates on existing balances could be increased. The proposal may also reduce investor confidence in future offerings, which will lead to less available credit.
• The proposal would adversely affect issuers’ profits.
• The proposal could create liability under state laws.
Gov. Kroszner requested the industry representatives to provide any data that is available to support the points made during the meeting.
July 12th, 2008 at 2:42 pm
@ Bob: Interesting about the statute of limitations. I was under the belief (based on a somewhat different personal situation) that there was no SOL when it comes to certain debts. In 1994, I lived in Stamford, Ct. for exactly four months and earlier this year, Stamford (see this for more details though the original article that these comments are based on seems to have disappeared from the web) sent me a notice for the back taxes and 14 years of penalties, even though they had never notified me of the debt in the first place. When I told the debt collector assigned to this that I was a journalist and considered everything he said to me to be “on the record”, he continued to try to intimidate me by quoting some Connecticut statute on SOL. After a considerable amount of negative attention in the Stamford Advocate, the city seems to have stopped their efforts.
July 12th, 2008 at 2:43 pm
@ Maggie: Thanks for posting that. Just another reminder that there’s lots of interesting federal regulatory sites that are ripe for mining. I happen to focus on a part of the SEC, but there’s equally interesting stuff on lots of other government sites, including the Fed, the NIH, the FDA and others.