Credit Card Debt Law

Credit card companies may have been printing money for the past few years, but their access to the profit train may be limited in the near future. Despite Discover’s second quarter profit announcement, CNN Money has an indepth article on the increasing loan loss provisions, charge off rates, and potential deterioration of profits in the industry. It also points to the fact that prospective buyers are reportedly backing away from the auction of General Electrics $30 billion dollar credit card business.

Only time will tell if the credit crisis will force credit card companies to engage in writedowns similar to the billions in investment write offs in the investment banking industry do to the repricing of mortgage backed securities.  You can read more about the deteriorating profits of the credit card industry at this article at Marketwatch.

In its effort to save itself from the credit crisis, Citibank is risking alienating the majority of its customers and federal legislators and regulators as well.  Citibank started with a controversial new student loan policy announced after the Federal Reserve proposed regulations that would prohibit the announced practices.

Now, Citibank feels comfortable reconsidering promises made to consumers and legislators last year that it would stop increasing interest rates at any time for any reason.  Citibank ended the use of universal default clauses and limited interest rate increases to every two years - on renewal of the credit card or late payments (as well as a few other reasons).

Apparently, it’s promise that “a deal is a deal” to consumers and legislators is as flexible as a fixed rate credit card.  The entire story is well covered in the New York Times.

Although Citigroup is claiming that the policy didn’t attract consumers to its credit cards and thus wasn’t profitable, it could be that this is an effort by Citigroup to increase interest rates on risky customers before it is tougher to do because of credit card reforms by Congress or the Federal Reserve.

Congress held hearings last week examining marketing practices of credit card companies to college students in conjunction with its consideration of credit card reform.  Here are a few of the articles from the past week covering the issue:

• Taking Charge - Student Credit Card Issuers Under Investigation.

• Washington Post - Too Young to Handle Credit?

• Center for American Progress - Students Need Help Combating Credit Card Debt

• Business and Media Institute - ABC Links Credit Card Companies to College Suicides

• A New York consumer is facing a lawsuit from Citibank to recover an interest rate of 56 percent on cash advances, according to WCBS.

• A Las Vegas consumer owes ~ $1,200 on a credit card that she never used, according to the Herald-Leader.

New York’s Court of Appeals last week reversed a lower court decision that claimed that the Federal Truth-in-Lending laws preempted the state’s consumer protection legislation in a victory for consumers (read the Forbes article for more information).

Banks, including Capital One and probably others - have been trying to jump on the federalism bandwagon to have a myriad of state investigations and laws preempted by federal legislation and regulation.  While the New York decision certainly won’t end the debate about the extent that national banks and credit card issuers should have to comply with the diverse regulations of the fifty states, it is a good sign that the pro-consumer sentiment of the Federal Reserve and Congress may be making its way into the courts.

“We had a credit party …”

A report from CNBC indicates that 15 million Americans are either receiving phone calls from creditors are are considering filing for bankruptcy.  And, according to the article, it’s not only the low income that are at the credit party.  Even high income households can get in trouble with credit card debt if they don’t manage their spending.

• The Washington Post interviewed Obama on consumer debt and the housing crisis.

• A Taking Charge article revealed that while the McCains pay zero percent interest on the American Express credit cards with the majority of their $200,000+ credit card debt, they pay a 25.99 percent interest rate on their Chase credit card - ten percentage points above the average interest rate on a credit card in 2007.

Even though the decision of the Federal Reserve not to increase interest rates last week should mean that consumers are safe from credit card interest rate increases (read more at Taking Charge), Pioneer Press reports that “[n]ervous banks are raising interest rates for almost any reason.”

Disclosures for lobbying spending in the first quarter of 2008 have been in for a couple months now - the data has been compiled and sifted and here are a few of the spending figures from credit card issuers and credit card payment processors:

• Citigroup - $1.45 million (over a range of issues).
• Visa spent $860,000 (according to Forbes).
• American Express spent $770,000 (according to the Associated Press).
• Consumer Bankers Association, which opposes credit card reform, spent $768,000.
• Mastercard spent $720,000 (according to CNN).
• Washington Mutual, the nation’s largest savings and loan, spent $270,000 (according to CNBC).
• Discover spent $160,000 lobbying.

It’s rampant speculation on my part, but I would imagine that if the American public invested a small percentage of the money that they will pay to credit card companies in interest rates and fees over the next year, the lobby for the american public could easily outspend the credit card industry and save money by eliminating a portion of the unfair and misleading practices of the credit card provider.

An Orlando Sentinel article tells consumers not to hold their breath for credit card reform from either the Federal Reserve or from Congress.  It’s an election year and the credit card industry is putting strong pressure on Congress and the Federal Reserve to weaken reforms.