Bill gives industry too much credit

By ROBERT TRIGAUX, Times Business Columnist
Published April 15, 2005

Here's how the new bankruptcy legislation approved Thursday by Congress really should have been crafted.

In exchange for banks, credit card companies and retailers getting a tough law that will force more consumers to pay more of their debts in bankruptcy, lenders should have agreed to a cap on the insane volume of direct-mail credit card solicitations they dump on consumers.

Somehow, that idea was never considered. But it seems only fair. If President Bush signs another probusiness piece of legislation to plump credit card industry profits, then the card business should stop supersaturating American households swimming in debt.

Don't e-mail me arguing that "if people were more personally responsible they would not be overwhelmed with debt." I agree, to a point. But Congress ignored the facts that more people get into credit trouble because of lost jobs, huge medical bills and other hard-to-anticipate problems than do people who just can't stop spending at the mall.

A study conducted by doctors at Harvard Medical School and published in the February issue of Health Affairs found that half of bankruptcies, involving 700,000 American households and affecting more than 2-million people annually, are attributable to illness or medical debt.

It's really a two-way street. If consumers need to show more discipline, so do the providers of credit. That's why this biggest rewrite of the bankruptcy code in 25 years is so one-sided and flawed.

How fitting this matter should fall on April 15, our national deadline to pay taxes. A survey by the Cambridge Consumer Credit Index finds that 11 percent of Americans this year will borrow money on their credit cards to pay their tax bill. That's up from 3 percent who used credit cards in 2004.

The credit card industry's aggressive strategy over the past 20 years was to give everyone multiple credit cards. It's a big reason U.S. consumers became hooked on consumption and completely lost the ability to save.

Credit card solicitations have doubled to 5-billion a year. That's about 18 credit card solicitations for every man, woman and child in the United States. And the solicitations are getting bolder in pursuit of the vulnerable.

Seniors, including those who learned to shun debt in the Depression, are a rapidly expanding market for credit cards. The big lure? Paying for expensive prescription drugs on credit.

Minors younger than 18, with no incomes and no credit history, are targeted as an emerging market for the credit industry. College-age students, besieged with credit offers and high tuition bills, on average leave school (often without a job offer) with $18,900 in student loans and an average $3,262 in credit card debt.

The plastic barrage is impressive. At the end of 2004, Americans carried 657-million bank credit cards, 228-million debit cards and 550-million retail credit cards.

That means each household boasts 6.3 bank credit cards, 2.2 debit cards and 6.4 retail credit cards, according to CardData. In 1990, each household had 3.4 bank credit cards, 0.1 debit cards and 4.1 retail credit cards.

Look for 1.5-trillion payment cards in the United States by the end of this year.

When was the last time you applied for a credit card and were turned down? What the industry has created is a dependency on easy credit.

The parallel to drug addiction is not farfetched. Now hooked, more consumers can be squeezed for more money. Even in bankruptcy.

The new bankruptcy legislation is not all bad. It probably will catch some perennial deadbeats in its wide filters. But it will hurt many more consumers with legitimate need of bankruptcy protection along the way.

Professor Elizabeth Warren teaches bankruptcy law at Harvard Law School and has written extensively about the rising financial, social and political pressures undermining the U.S. middle class.

She points out that a million men and women each year turn to bankruptcy in the aftermath of a serious medical problem, even though 75 percent of them have health insurance.

She says a family with children is nearly three times more likely to file for bankruptcy than an individual or couple with no children.

She notes that more children live through their parents' bankruptcy than through their parents' divorce.

And Warren warns it is women who disproportionately will bear the brunt of higher costs, more restrictions and less protection from the legislation. Women are the largest demographic group in bankruptcy, outnumbering men by about 150,000 per year.

Rep. David Dreier, R-Calif., praised the legislation because it would allegedly save American families an average $400 a year in higher interest rates now charged to consumers to recoup losses from those who abuse bankruptcy proceedings.

That's laughable.

Sure, there might be some modest amount of money saved from fewer bankruptcies. But who really believes the kindhearted credit card industry will take those savings and, in place of higher profits, return it to consumers in the form of lower interest rates?

Fed considering revisions to credit card term disclosures

By Tony Pugh
Knight Ridder Newspapers

WASHINGTON - Growing consumer unease with credit card practices is fueling a call for action as lawmakers and regulators debate making changes.

For the first time since 1980, the Federal Reserve Board is considering major revisions to the clarity and content of credit card disclosures so consumers can better understand the terms of their cards and make more informed decisions about using them.

The Fed also is reviewing the effectiveness of consumer protections against unfair card practices and inaccurate billing in the wake of unprecedented growth in credit card usage and public outcry over rising interest rates and penalties along with costly, abrupt changes in card agreements.

The Fed recently sought public comment on a number of issues, including whether to make card disclosures more consistent so comparison shopping is easier, the costly trend of allowing borrowers to be over their credit limits for multiple billing cycles, whether minimum monthly payments should be raised so consumers would pay off their card debt more quickly and whether cards should provide more information about the cost of making only the minimum payments.

According to CardWeb, an online research firm, average household credit-card debt has more than tripled, from $2,966 in 1990 to $9,312 in 2004. If a family made the minimum 2 percent payment on that $9,312 at a 16 percent interest rate, it would take more than 43 years to pay off the balance - at a total cost of $27,265.44. Of that amount, nearly $18,000 is interest.

Possible recommendations by the Fed, which could include calls for congressional action, aren't expected until next year. It's unclear in what direction the agency might go.

"Trying to guess what they'll do is like trying to figure out who the College of Cardinals is going to pick as pope. It's virtually impossible," said Travis Plunkett, the legislative director for the Consumer Federation of America.

Nessa Feddis, senior counsel for the American Bankers Association, said the card industry was getting a bad rap from a small group of "vociferous" cardholders and consumer advocates: "Everybody likes to pick on credit cards because they're such a successful product."

Most cardholders, 55 percent, pay off their balances at the end of each month, Feddis said. More than 90 percent make their payments on time, she added, noting that those who complain about tough card terms have only themselves to blame for managing their money poorly.

Based on consumers' comments to the Fed, it's clear that many consumers think credit card companies are taking advantage of borrowers who don't fully understand the terms of their cards and feel powerless to contest changes when they're made.

"The people who are getting ripped off can't even understand what the hell is being written on the back of their statements. They should just have it in the clearest possible language and not in a complicated chain of words," said Brad Hoffman, a 25-year-old mortgage loan officer from Philadelphia who wrote to federal regulators urging them to address the problem.

Others, such as Derek Addams of Providence, R.I., told regulators of high fees on one of his cards and said the interest rate on another jumped from 17 percent to 28 percent in two months despite a "flawless payment history."

William Ridlon of Portland, Maine, complained about getting unsolicited credit card checks "sometimes two or three times a month."

"It's almost as bad as cocaine dealers trying to get you hooked, but on credit instead of drugs," Ridlon wrote. "We're not treated as valued customers, we're treated as money sponges that the credit card companies find new ways to squeeze every few months."

Those concerns found a sympathetic ear in Congress recently when several members of the Senate Committee on Banking, Housing and Urban Affairs said they also had trouble understanding their card disclosure forms.

"A magnifying glass and an attorney should not be necessary to understand a credit card agreement," Sen. Elizabeth Dole, R-N.C., testified at the hearing May 17.

Credit card industry officials, who have long complained of too many regulations, say the disclosures are fine as they are.

"We're not talking about a complicated product," said Feddis of the bankers' association. "There may be ways to improve it, but the basic model is very good. What we really need to do is some better consumer education," so that people know what to look for and where, she said.

Nevertheless, Sen. Christopher Dodd, D-Conn., the committee's ranking minority member, said high-interest credit cards were "nothing less than wallet-sized predatory loans" and warned that sentiment for congressional action was "building and building."

But Plunkett said the Republican-controlled Congress was unlikely this year to pass proposals by Dodd or Sen. Dianne Feinstein, D-Calif., that addressed complaints about credit cards.

He said committee Chairman Richard Shelby, R-Ala., kept his promise to conduct the hearing, which he made earlier this year during debate on bankruptcy legislation. It was the second oversight hearing on possible credit card abuses that he could recall in his six years of working on the issue.

Plunkett agreed sentiment for congressional action is growing but said it might take several years to build bipartisan support for meaningful legislation.

In the meantime, the Fed's possible call for change appears to be the most immediate source for revisions. But the industry is resisting.

A frustrated Donald L. Nightengale, the senior vice president for retail banking at First National Bank, North Platte, Neb., gave the Fed a tongue-lashing for even considering more credit card regulations.

"Did it ever occur to you nincompoops that the part (consumers) don't understand is the thousands of words of regu-babble you so ridiculously refer to as disclosures?

"A Ph.D. would have a hard time understanding the overcomplicated idiotic procedures you have forced on the banking industry in your usual misguided and pathetic attempt to legislate illegality out of existence."

Clearly, Nightengale had second thoughts afterward.

In a later note to the Fed, he apologized for the "tone and style" of his earlier comments, noting that they were "personal" and didn't represent the perspective of his employer.

He wrote: "I deeply regret the embarrassment I have caused those organizations and the fine people they employ."