MaxedOutMama
Sunday, March 06, 2005
Fee-Based Usury
Well, I read the bankruptcy bill pending in Congress. I have some questions about it. Here's a post up at Dean Esmay on the issue, especially as it relates to credit-card debt (WaPo article). This bill is strongly supported by banks and creditors of all kinds, not just credit-card issuers. However, I think it is time that consumers got more general debt-related protections before such a bill is passed.
I have no sympathy whatsoever for those who simply don't pay their debts, but it is true that the practice of slapping on high late fees and high default interest charges has ballooned over the last few years, with dire results for consumers. If you call in to make a payment by phone, most of these outfits will charge you for an electronic payment too. Well, consumers can't control the mail, which is often very erratic, and there are no local offices at which consumers can make payments. From the WaPo article:
The banks I work with don't indulge in these practices, but I can tell you it is getting harder and harder to argue for responsible practices when a few bad apples make so much money and the board of directors is under pressure to increase profits. Sometimes consumer protection legislation protects ethical businessmen and women themselves, and I believe we have reached that point. Ironically, escalating credit-card debt and the resultant bankruptcies often mean that responsible lenders such as my community banks get stiffed in bankruptcy proceedings. Unless we get additional consumer protection legislation, I don't think the new bankruptcy law will help them much.
For all of these reasons, I am asking you to contact your Senator and request that this bill not be passed until the following list of reforms is included in the bill or passed under separate cover:
I have no sympathy whatsoever for those who simply don't pay their debts, but it is true that the practice of slapping on high late fees and high default interest charges has ballooned over the last few years, with dire results for consumers. If you call in to make a payment by phone, most of these outfits will charge you for an electronic payment too. Well, consumers can't control the mail, which is often very erratic, and there are no local offices at which consumers can make payments. From the WaPo article:
The Senate is to vote as soon as this week on a bill that would make it harder for individuals to wipe out debt through bankruptcy. The Senate last week voted down several amendments intended to curb excessive fees and other practices that critics of the industry say are abusive. House leaders say they will act soon after that, and President Bush has said he supports the bill.I think credit-card issuers should be required to accept phone payments at no cost or a fee such as $1.00. I think "default" interest rates should only be triggered by being delinquent for three months in a row or four months within one year, and I think late charges should be capped at $10.00 or 5% of the amount unpaid, whichever is more. Overlimit fees should only be allowed to be imposed when consumers have charged new debt instead of as a result of compounding interest and other fees. These industry practices have cascaded out of control with bad results for consumers trying to be responsible:
For more than two years, special-education teacher Fatemeh Hosseini worked a second job to keep up with the $2,000 in monthly payments she collectively sent to five banks to try to pay $25,000 in credit card debt.If she were late on her payments in any particular month, she probably incurred somewhere around $150 -$175 in late payment charges that month. Then you add in overlimit fees and 30% interest - well, it's easy to see what happened. It is time for some additions to the FTC, and it's time to curb some of these practices.
Even though she had not used the cards to buy anything more, her debt had nearly doubled to $49,574 by the time the Sunnyvale, Calif., resident filed for bankruptcy last June. That is because Hosseini's payments sometimes were tardy, triggering late fees ranging from $25 to $50 and doubling interest rates to nearly 30 percent. When the additional costs pushed her balance over her credit limit, the credit card companies added more penalties.
The banks I work with don't indulge in these practices, but I can tell you it is getting harder and harder to argue for responsible practices when a few bad apples make so much money and the board of directors is under pressure to increase profits. Sometimes consumer protection legislation protects ethical businessmen and women themselves, and I believe we have reached that point. Ironically, escalating credit-card debt and the resultant bankruptcies often mean that responsible lenders such as my community banks get stiffed in bankruptcy proceedings. Unless we get additional consumer protection legislation, I don't think the new bankruptcy law will help them much.
For all of these reasons, I am asking you to contact your Senator and request that this bill not be passed until the following list of reforms is included in the bill or passed under separate cover:
- If payments aren't accepted at a local office, phone payments must be accepted by the credit-card issuer at no or nominal cost ($1.00 maximum).
- Late charges for payments must be capped at $10.00 or 5% of the unpaid amount, whichever is greater.
- A default interest rate may only be imposed as the result of delinquent payments for 3 consecutive months or 4 months out of one 12 month period.
- Overlimit charges may only be imposed as a result of a consumer charging new debt, not as a result of the consumer's balance increasing due to accrued interest or other fees.
Comments:
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I agree that the bill is a bunch of crap designed by financial lobbyists. The fees and penalties are ways to get around usury laws that cap the interest rate you can charge someone at 24.9% (otherwise, you are a "loan shark").
The problems to this issue are numerous. First, like most everything else in life, the system is stacked against poorer Americans. The people who are charged the highest interest rates are those who can lest afford it. It does not matter how good your credit score is, someone making $25,000 a year is going to pay a higher interest rate than someone who has the same score, but makes $100,000.
Second, the reason that banks charge a higher interest rates for higher credit risk customers is valid. It is all risk/reward stats. Like life insurance - the better financial health you are in, the better your rate is going to be. But, many of these companies are predatory, feeding credit to high risk customers, knowing that they are going to recover high fees and interests. They know that only one in two customers will ever repay in full. I have no sympathy for them.
Yes, American people need to take responsibility for their own actions, but credit card companies need to take responsibility for their actions also. Credit is way too easily available. Why can't financial institutions do more to protect themselves instead of reforming the bankruptcy law. Its like giving your kid candy and soda all day long and then bitching about how the kid is bouncing off the walls.
What really burns me up that that these financial lobbyists talk about Americans like they declare bankruptcy at the drop of the hat. We all know this is untrue. I have never seen someone declare bankruptcy without being in dire financial situations. The stigma attached to being a "deadbeat" alone drives Americans to repay their debt far beyond what is legitimate (noting your example of paying double or triple the original loan).
I agree with your post. Without numerous consumer protections, this bill is a nightmare to all of us.
The problems to this issue are numerous. First, like most everything else in life, the system is stacked against poorer Americans. The people who are charged the highest interest rates are those who can lest afford it. It does not matter how good your credit score is, someone making $25,000 a year is going to pay a higher interest rate than someone who has the same score, but makes $100,000.
Second, the reason that banks charge a higher interest rates for higher credit risk customers is valid. It is all risk/reward stats. Like life insurance - the better financial health you are in, the better your rate is going to be. But, many of these companies are predatory, feeding credit to high risk customers, knowing that they are going to recover high fees and interests. They know that only one in two customers will ever repay in full. I have no sympathy for them.
Yes, American people need to take responsibility for their own actions, but credit card companies need to take responsibility for their actions also. Credit is way too easily available. Why can't financial institutions do more to protect themselves instead of reforming the bankruptcy law. Its like giving your kid candy and soda all day long and then bitching about how the kid is bouncing off the walls.
What really burns me up that that these financial lobbyists talk about Americans like they declare bankruptcy at the drop of the hat. We all know this is untrue. I have never seen someone declare bankruptcy without being in dire financial situations. The stigma attached to being a "deadbeat" alone drives Americans to repay their debt far beyond what is legitimate (noting your example of paying double or triple the original loan).
I agree with your post. Without numerous consumer protections, this bill is a nightmare to all of us.
Dingo,
WELL SAID!!! Predatory lending is exactly what this is. If anything ever called for a blogswarm this does.
And your point about preying on the little guy is dead on. These current credit-card practices victimize the people on the margin the most, and the most honest people the most. It's terrible for the economy.
As for repaying in full, yes. The credit card companies are sucking the blood out of the consumers who are honest to make up for the losses they expect to incur in bankruptcy proceedings. Now you have people repaying huge amounts on a relatively small debt. This has gone to far and is creating the problem, not offsetting it.
This bankruptcy bill was written largely before the huge growth in these practices, and it should not be passed now.
To anyone reading this, please pass this on. WE REALLY DO NEED LAW CHANGES ON THIS ISSUE.
Marty, thanks for that link. I have gone to look at it.
WELL SAID!!! Predatory lending is exactly what this is. If anything ever called for a blogswarm this does.
And your point about preying on the little guy is dead on. These current credit-card practices victimize the people on the margin the most, and the most honest people the most. It's terrible for the economy.
As for repaying in full, yes. The credit card companies are sucking the blood out of the consumers who are honest to make up for the losses they expect to incur in bankruptcy proceedings. Now you have people repaying huge amounts on a relatively small debt. This has gone to far and is creating the problem, not offsetting it.
This bankruptcy bill was written largely before the huge growth in these practices, and it should not be passed now.
To anyone reading this, please pass this on. WE REALLY DO NEED LAW CHANGES ON THIS ISSUE.
Marty, thanks for that link. I have gone to look at it.
You get the feeling that if you are above the "median income" and you have any credit card debt, even if you are current on it, that you are about to get nailed for 30% because these S.O.B.'s think you would rather just let the balances mount up rather than go Chapter 13?
You get the feeling that if you are above the "median income" and you have any credit card debt, even if you are current on it, that you are about to get nailed for 30% because these S.O.B.'s think you would rather just let the balances mount up rather than go Chapter 13?
Axinar, those companies sometimes actively pursue people who are just coming out of bankruptcy because they know they can't file again. The profits some of these credit card companies are making are huge, and nothing in this bill will stop it.
I have no horse in this race - I have no credit card debt at all nor will I. I just believe that we are inviting further abuse of the most helpless among us.
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I have no horse in this race - I have no credit card debt at all nor will I. I just believe that we are inviting further abuse of the most helpless among us.
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